Entrepreneurs spend thousands on accounting experts so that they can provide a transparent picture of their company’s status for a specific period. The accounting experts and financial analysts spend a lot of time preparing annual reports to give their clients the report they need. This requires a lot of skills in Microsoft Excel. They need to know a lot of formulas to make sure that they prepare an error-free report. So, here are some of the must-know excel formulas that every finance analyst must know:
The first formula that financial analysts should master is XNPV. It determines the valuation of a company’s worth. This formula helps to calculate the company’s Net Present Value for a specific period. It considers various details like different dates for cash flows and the corresponding amount of money that came in and went out during these transactions.
This has a close relation with XNPV. It helps to determine a company’s internal rate of return for different cash flows according to different dates. Finance analysts must use XIRR over regular IRR formula. Most cash flow periods won’t match with IRR. Hence, it is better to use XIRR. Cash flows will be different for different periods, and XIRR provides accurate details about each and every transaction for the specified time.
This formula helps to calculate the cost of borrowing, cash flows, and reinvestment rate. It is another variation of calculating the internal rate of return, which is an essential detail that every entrepreneur needs at the end of the year. Finance analysts use MIRR to calculate and understand the success or failure of investment into another investment.
For example, if the entrepreneur wants to include a part of his/her cash flow into government bonds, the analyst will have to check the returns at the end of the year using this formula.
PMT is one of the most common formulas used by analysts in excel. Accounting experts dealing with real estate financial modeling use this formula to calculate the present value of investments after considering number of periods and rate of interest. It provides total payment, including the interest and principal.
IPMT is slightly different from PMT. It helps to calculate the interest of a specific debt payment. Many analysts use this formula along with PMT to provide a detailed report of all the investments and their expected interest amounts. Once they calculate the interest amount, they can separate the principal amount that the company can use for further investments.
The EFFECT function calculates the annual interest rate of investments for non-annual compound schemes. Finance professionals have to use this formula often, especially if they deal with lots of borrowing or lending schemes. For example, if a company invests in a plan of 20% annual interest rate, it will compound monthly and result in 21.94% interest rate.
So, if anyone wants to become a financial analyst, they should learn these formulas in detail.