When we're adding interest to our income statement, the first thing we need to do is check the sign convention. Here, historically, net interest expense has been shown as a positive number, so I need to be consistent with this in my forecasts. Because we've used average balances for calculating interest, we know that when putting interest into the income statement, we will create a circular reference. So let's do that now. So we'll scroll to the bottom of the model to grab net interest expense, and then I press Enter. When I do that, I can see an error message pops up on the screen. I then click OK and we now have blue arrows showing a circular reference. And the bottom left of my screen, just point that out there, shows an error message from Excel saying we have a circular reference in cell F30. Now, the reason we're getting that error message is because at the moment, my settings in Excel don't allow circular references. So Excel thinks this must be an error. However, this is a legitimate circular reference that I want to create. So I now need to go back into my settings and allow circular references. So Alt + F + T is the shortcut, Choose the Formulas option, and then tick the box for iterative calculations, and then Enter. And the blue arrows disappear and the error message in the bottom left of my screen also disappears. We can then copy our formula over to the right, and everything's looking pretty good. But what happens if I pop some text into my interest rate assumption for cash? So I'm purposefully creating an error in my model here. And when I refresh my calculations, you can see that we have error messages appearing throughout my income statement. And if I then refresh my calculations again, we see that that starts to spread throughout my model. Oh, oh my goodness, my model is now blowing up. Even if I replace that error with a corrected number and I then refresh my calculations, the error still remains, even if I Control + Z and go back to my original input. That error is now stuck in the loop of my circular reference. Unfortunately, the only way to fix this is to scroll down to my interest line and select and delete all of my interest expense. There's a much better way to do this and that is using a circular switch, and I have one of those on my Info tab. And I can see here in the top left of my screen that the cell which would ordinarily be called cell N10 has actually been relabeled, it's been renamed Switch, and that means I can reference that in formulas. Also, this cell is currently showing a zero. When this is showing a zero, I don't want Excel to include interest in the income statement, whereas when this cell is showing a one, I do want Excel to include interest in the income statement. Let's build a formula that can do this, and we're going to use the IF function for this. So we'll start building our IF function.

Now, the IF function in Excel allows us to set a condition, then tell Excel what to do if the condition is met, and then tell Excel what to do if the condition is not met. So our condition is going to be that the switch cell is set to one. And if that switch cell is set to one, we do want interest in the income statement. So we then tell Excel to grab net interest expense from the bottom of our model.

However, if the switch cell is not set to one, so it's set to zero, we just want Excel to show zero for interest in the income statement. So no interest showing. And when we hit Enter, we can see we get a zero, and that's because our switch cell is currently showing a zero. Let's copy that formula over to the right so then we have our IF function across all of our forecasts. And when we do that, you can see that each formula is still referencing our switch cell. Now let's see what happens if we go back to our switch cell on the Info tab and change it to a one. If we go back to our model, we can now see net interest expense showing in all of our forecasts, which is what we would expect. If I now recreate my error from earlier, so I go up and pop a t into my interest rate assumption, let's then refresh our formulas, and we can see we still get the same error messages as we did previously, but in order to fix those error messages, this time I can just fix the error in my formula and then I can go back into my switch, turn switch to zero, press Enter, return the switch to one, and then back in my model, we can see that the error has been fixed. So the switch acts like a circuit breaker, removing my circular reference from my model temporarily, and then returning it when the error has been fixed. So my model is now error-free, and importantly, as long as my switch is set to one, interest is showing in my income statement, and therefore my model is now complete.