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by Finage at August 10, 2021 5 MIN READ

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Guide to Excel for Finance – Functions & Formulas

 

How to become a world-class financial analyst in Excel by learning what we believe are the most important Excel functions for financial professionals are in our blog.

 

Table of Contents

Guide to Excel for Finance 

Functions & Formulas

Top 10 Excel Functions for Finance

 

Excel is a life skill for any finance or accounting professional. I know a lot of people in finance where MS Excel is at the center of everything they do. They probably wouldn't have worked if it wasn't for Excel. In this article, I will highlight some of the most important excel skills you need to know to do your job well and be successful as a finance professional. Although how you use Excel will vary greatly based on your business needs, these are the basic skills required to become a power Excel user.

If you want to learn Excel for finance, you are at the right place. At Finage, we work to help you advance your career as a financial analyst. Being an expert in Excel is a big part of that. In this blog, we've detailed what we believe are the most important Excel functions for financial professionals.

 

Top 10 Excel Functions for Finance

Here are the 10 most important functions and formulas you need to know, plain and simple. Follow this guide and you will be ready to solve any financial problem in Excel. Remember that while each of these formulas and functions is useful independently of each other, they can also be used in combinations that make them even more powerful. We will point to these combinations wherever possible.

 

1. XNPV

 

Formula: =XNPV (discount rate, cashflows, dates)

 

XNPV should definitely is among the number one formulas in Excel for financial professionals. Any valuation analysis aimed at determining what a company is worth will need to determine the Net Present Value (NPV) of a set of cash flows. Unlike the regular NPV function in Excel, XNPV takes into account specific dates for cash flows and is therefore much more convenient and precise.

 

2. XIRR

 

Formula: =XIRR (cash flows, dates)

 

Another important function closely related to XNPV is XIRR, which determines the internal rate of return for a set of cash flows for specific dates.

 

The time intervals between cash flows are unlikely to be exactly the same. That's why XIRR should always be used over the regular IRR formula.

 

3. MIRR

 

Formula: =MIRR (cash flows, borrowing cost, reinvestment rate)

Here is another variation of the internal rate of return that is very important to financial professionals. M stands for modified, and this formula is particularly useful if cash from one investment is invested in a different investment.

For instance, consider that cash flow from a private business is then invested in government bonds. If the business is generating high returns and generating an IRR of 18%, but cash is reinvested in a bond at only 8% along the way, the combined IRR will be much lower than 18%.

 

4. PMT

 

Formula: =PMT (rate, number of periods, current value)

This is a very common function in Excel for financial professionals working with real estate financial modeling. The formula is most easily thought of as a mortgage payment calculator.

 

Given an interest rate and a range of time periods (years, months, etc.) and the total value of the loan (e.g. mortgage), you can easily tell how much the payments will be. Note that this produces the total payment that includes both principal and interest.

 

5. IPMT

 

Formula: = IPMT (rate, current period #, total number of periods, current value)

IPMT calculates the interest portion of a fixed loan payment. This Excel function works very well together with the PMT function above. By separating the interest payments for each period and taking the difference between PMT and IMPT, we can easily access the principal payments in each period.

 

6. EFFECT

 

Formula: = EFFECT  (interest rate, number of periods per year)

This finance function in Excel converts to the effective annual interest rate for non-annual compounding. This is a very important function in Excel for financial professionals, especially those involved in lending or borrowing. For instance, an annual interest rate (APR) of 20.0% compounded monthly is actually an effective annual interest rate of 21.94%.

 

7. DB

 

Formula: =DB (cost, recovery value, life/periods, current period)

This is a great Excel function mostly used by accountants and financial professionals. If you want to avoid creating a large Declining Balance (DB) depreciation schedule, Excel can calculate your depreciation expense in each period with this formula.

 

8. RATE

 

Formula: = RATE (number of periods, coupon payment per period, price of the bond, face value of the bond, type)

The RATE function can be used to calculate a security's Yield to Maturity. This is useful when determining the average annual rate of return from buying bonds.

 

9. FV

 

Formula: =FV (rate, number of periods, pay-outs, initial value, type)

Given the initial balance, regular payments, and compound interest rate, you should definitely take a look at this function if you want to know how much money you will have in the future. Let's give an example. Let's say it grows 4.5% annually for 30 years and gets $1 million a year in addition to the total balance, and you'll see what happens to $25 million. The result is $154.6 million.

 

10. SLOPE

 

Formula: =SLOPE (dependent variable, independent variable)

Finance professionals often have to calculate a stock's Beta (volatility) when performing valuation analysis and financial modeling. While you can get a Beta of stock from Bloomberg or CapIQ, it's generally best practice to generate the analysis yourself in Excel.

The slope function in Excel allows you to easily calculate the Beta given the weekly returns for a stock and the index you want to compare it to.

 

We hope that this blog post will be beneficial for you. We will continue to create useful works in order to get inspired by everyone. We are sure that we will achieve splendid things altogether. Keep on following Finage for the best and more.  

 


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