Use a circular reference to your advantage!! (Excel Tip)

You can sometimes use a circular reference to your advantage. For example, suppose a company has a policy

of contributing 5 percent of its net profit to charity. The contribution itself, however, is considered an

expense—and is therefore subtracted from the net profit figure. This produces a circular reference (see the

accompanying figure).

The Contributions cell contains the following formula:

=5%*Net_Profit

The Net Profit cell contains the following formula:

=Gross_Income-Expenses-Contributions

These formulas produce a resolvable circular reference. If the Enable Iterative Calculation setting is on, Excel

keeps calculating until the Contributions value is, indeed, 5 percent of Net Profit. In other words, the

result becomes increasingly accurate until it converges on the final solution.