Escalation factors

In this course lesson we look at escalation factors in modelling.

Imagine you were working on a big project model perhaps with expenses escalating at inflation and revenues increasing by a contracted annual % growth rate. It would make sense to try and centralise those escalation factors perhaps in two lines at the top of your model, one line containing the “inflation escalator” for each year and another containing the “revenue escalator” each year. Then you could multiply all your expense and revenue items by the escalators at the top of the model.

Imagine your project had attracted debt (that’s a good thing, now you’re playing with someone else’s money and not having to invest so much of your own). Profits and the surplus cash flows for the model were rather thin. Still, that’s OK, because you didn’t have to put much of your own money in and equity returns were great. Imagine in your model you made a tiny little mistake in your escalation factors and they didn’t quite match the reality of how contracts with suppliers and customers were now unfolding. OOOOOppssss!!! Time to run and hide.

Start the financial modelling course on Excel formulas

In this lesson we look at escalation factors: how to get your Excel formulas wrong and how to get them right. Of course we want you to get them right!