What is a circular reference in Excel?
A circular reference occurs when a formula refers back to its own cell, either directly or indirectly, creating an infinite loop. This can cause your spreadsheet to slow down significantly as Excel struggles to calculate the value. Circular references are usually unintended and can be tricky to spot, but understanding them is key to keeping your formulas running smoothly.
Example of a circular reference
In the example below, cell B7 calculates the total sales by summing the values in cells B2 through B6. This is a perfectly normal calculation, and everything works as expected:
However, if we accidentally change the cell range to B3:B7 instead of B2:B6, we create a circular reference. In this case, the formula in B7 will attempt to calculate the sum of the values in B2 to B7, which includes the result from B7 itself. This leads to an endless loop and an incorrect calculation:
This isn’t possible, of course. Excel detects the circular reference and warns us with a pop-up message:
After clicking ‘OK’ on the notification pop-up, Excel will display a value of ‘0’ in cell B7:
Manual detection of circular references in Excel
Imagine receiving a spreadsheet from a co-worker and needing to ensure there are no circular references. To check for them, go to the ‘Formulas’ tab, select ‘Error Checking,’ and then click on ‘Circular References.’ Excel will pinpoint the exact cell(s) where circular references are found.
Different types of Circular References in Excel
Most circular references are unintentional mistakes, and Excel makes it easy to trace these errors and correct them.
Intended circular references
Sometimes, experienced Excel users intentionally create circular references to perform iterative calculations. For example, this method can be useful for calculating things like loan repayments, interest, or amortization schedules where each value depends on the result of the previous calculation. While these calculations are intentional, they must be carefully managed to avoid errors.
Hidden circular references
Finally, hidden circular references are especially dangerous. These are hard to detect because their operation might depend on the value of another cell, which makes them tricky to find and fix. Hidden circular references can cause Excel to keep recalculating in the background, leading to performance issues or incorrect results.
The good news is that PerfectXL Risk Finder can detect hidden circular references with ease. Unlike manual methods of searching through complex spreadsheets, PerfectXL automatically finds hidden circular references, helping you catch these potentially damaging issues before they affect your data accuracy and performance.
Circular References in Excel: 10 Common Problems & Fixes
Circular references (when a formula refers to itself) can trigger warnings, slow down models, or even cause crashes. Below, we answer 9 frequently asked questions (FAQ’s):
My model crashes because it contains too many circular references.
When Excel crashes due to excessive circular references, first try enabling iterative calculation (File > Options > Formulas) with conservative iteration limits (e.g., 50-100). For structural fixes, use PerfectXL Risk Finder to locate all circularities, then eliminate unnecessary ones by restructuring formulas or using helper columns. For unavoidable circular logic (e.g., interest calculations), consider moving those components to VBA or Power Query to isolate the computational load. Always save backup versions before troubleshooting, as crash-prone files may become unstable during editing.
How do I locate a hidden circular reference?
You can use Excel’s built-in tool (Formulas > Error Checking > Circular References) to identify basic circular references, though it’s limited to active references; for hidden or complex circularities that evade detection, manually tracing cells becomes a time-consuming and error-prone process, whereas PerfectXL Risk Finder instantly locates all circular references – including nested and indirect ones – saving you hours of tedious debugging.
Help! I accidentally created a circular reference in a large financial model
If you’ve accidentally created a circular reference in a large financial model, first use Excel’s built-in tool (Formulas > Error Checking > Circular References) to locate simple cases—but for hidden or complex circularities (like indirect or nested references), manually tracing cells is inefficient. Instead, PerfectXL Risk Finder instantly detects all circular references, saving hours of debugging. For intentional circularities (e.g., iterative calculations), enable iterative mode, but for audited models, restructure formulas or use helper columns to avoid compliance risks. Always scan models with PerfectXL pre-emptively to catch issues early and maintain clean, audit-ready files.
I want a circular reference for an iterative calculation (e.g., interest-on-interest), but Excel blocks this
To use circular references for iterative calculations like interest-on-interest, enable Excel’s iterative mode via File > Options > Formulas, Enable iterative calculation, then set maximum iterations (e.g., 100) and tolerance (e.g., 0.001). While this solves the immediate blocking issue, be aware that overuse can slow down models and raise audit concerns. For cleaner models, consider alternatives like helper columns, Power Query, or breaking the circularity with VBA.
Excel becomes extremely slow due to circular references. How do I optimize this?
Use PerfectXL Risk Finder to identify hidden circularities draining performance, and audit intentional ones with manual documentation. When intended circular references slow down Excel, first try enabling iterative calculation (File > Options > Formulas > Enable iterative calculations) and limit iterations (e.g., 100) to reduce recalculations. For complex models, replace circular logic with helper columns or Power Query where possible. For mission-critical models, consider transitioning iterative calculations to VBA or Python scripts to maintain accuracy without compromising speed.
Can circular references break IFRS 16 lease accounting models?
Yes, circular references can break IFRS 16 lease accounting models when the ‘interest on lease liability’ calculation creates a self-referential loop (e.g., liability depends on interest, which depends on liability). While Excel’s iterative calculation can force a solution, this often causes instability, crashes, or audit compliance issues. For reliable IFRS 16 compliance, either: (1) restructure the model to break the circularity using a helper column for the opening/closing liability balance, or (2) use PerfectXL Risk Finder to identify and document all circular references for controlled implementation. In extreme cases, transition the logic to Power Query or VBA for stable iterative calculations without Excel’s volatility.
How do I document circular references for auditors?
To document circular references for auditors, first use PerfectXL Risk Finder to generate a full report of all circularities (including locations and dependencies), then explicitly list each one in a “Model Notes” sheet with its purpose (e.g., “revolver interest calculation”) and justification. Follow PerfectXL’s documentation guidelines, color-code intentional circularities, note iteration settings (if enabled), and cross-reference compliance policies (e.g., IFRS 16). For audit readiness, include version history (using PerfectXL Compare) and test alternative structures to prove necessity.
How do I avoid circular references in an LBO model?
To prevent circular references in LBO models, structure your debt schedules to avoid feedback loops between interest calculations and EBITDA/cash flow. Use a ‘revolving door’ approach with separate opening/closing debt balances, or implement a switcher (IF/CHOOSE) to toggle between initial and iterative calculations. For the circular cash sweep, consider a manual override or modular debt waterfalls built in Power Query. Tools like PerfectXL Risk Finder can help detect accidental circularities during model audits, while intentional circular logic (e.g., for sponsor IRR) should be clearly documented and tested with iteration limits (File > Options > Formulas > Enable iterative calculations).
Alternatives to circular references for complex financial models?
For complex financial models, replace circular references with safer alternatives like helper columns (e.g., separate opening/closing balance columns), Excel’s Data Tables (for sensitivity analysis), or Power Query/Power Pivot (to handle iterative logic externally). For LBO cash sweeps or IFRS 16 leases, use modular debt waterfalls or manual overrides to break circular dependencies. Tools like PerfectXL Risk Finder can identify hidden circularities during model reviews, while VBA scripts offer precision for unavoidable iterative calculations. Always document intentional circularities and test alternatives to ensure audit compliance and stability.
How do I compare two Excel versions to find new circular references?
First use PerfectXL Compare to identify all formula differences between files, then run PerfectXL Risk Finder on both versions to detect circular references—focusing on newly added/changed formulas flagged by PerfectXL Compare. This two-step workflow isolates where circularities were introduced (e.g., in a debt schedule update) while avoiding manual cell-by-cell checks. For audit trails, export both reports and document intentional circularities with purpose/justification (e.g., “Added revolver interest loop in v2.1 per LBO standard”).