What typically triggers the creation of circularities in financial models?

The creation of circularities in financial models often arises from directly referencing the same cell in calculations, leading to a situation where the output of a formula is dependent on its own input. This results in a loop that can make it impossible for the model to resolve to a single number without iteration. For example, if a revenue figure depends on a growth rate that, in turn, depends on the revenue calculated from the same cell, the model has entered a circular reference.

In financial modeling, it is essential to avoid such references as they can complicate the model's calculations and make it unreliable or difficult to follow. Circularities must be carefully managed or eliminated to ensure the model can provide accurate and meaningful outputs.

While other options, such as using historical data in projections, incorporating interest expense and revenue, or making adjustments for inflation, are important aspects of building financial models, they do not inherently create circularities in the same manner as the direct referencing of the same cell does.