What Is Goal Seeking?
Goal seeking is the process of finding the correct input value when only the output is known. The function of goal seeking can be built into different kinds of computer software programs like Microsoft Excel.
Goal Seeking Explained
Goal seeking is a general term used to describe the process involved in figuring out your input value based on an already known output value. The process involves using a specific operator in a formula, which can be calculated using computer software.
Goal seeking is one of the tools used in "what if analysis" on computer software programs. A what if analysis is the process of changing values in (Microsoft Excel) cells to see how these changes will affect formula outcomes on the worksheet. When you are goal seeking, you are performing a what if analysis on a given value, or the output. So, in essence, you would be creating a scenario by asking "what if the output was X" — or basically, a cause and effect situation.
Using Goal Seeking Software
For some of the more complex problems, people will often use computer software. A spreadsheet program like Microsoft Excel has a goal-seeking tool built-in. It allows the user to determine the desired input value for a formula when the output value is already known. This feature can help the user determine things like the interest rate a borrower needs to qualify for (the input) if she only knows how much she can afford to pay each month (the output).
But there is one caveat to using goal-seeking software: It only works if there is one input value. If you need to figure out two or more input values, then it won’t work. If we take the example from above, if you want to figure out the total amount of the loan and the monthly payment, goal-seeking software won't work. You'd probably need an add-on in order to figure out multiple variables.
How to Use Microsoft Excel to Goal Seek
As mentioned above, goal-seeking software will only work if you already know the output value (or the result) but want to determine one input value. Here are some key steps you can follow if you want to use the goal seek feature in the program:
- Open up a new spreadsheet
- Label your columns. This will make it easier for you to read everything in the worksheet. So, using the example from above, the first column will be “Loan Amount,” the second column would be “Term in Months,” the third would be “Interest Rate” and the final one would be “Payment.”
- Type in the values that you know.
- Enter the formula to calculate the goal — in this case, the payment. You can ignore the interest rate for now, which the formula will assume is 0 percent.
Now you will have to determine the interest rate. You can do this by using the Goal Seek function in Excel and enter in the values you already have.
Goal Seeking Entrepreneur
A goal-seeking entrepreneur is someone who uses goal seeking to determine how they can reach their ultimate goals. For example, the entrepreneur may ask how much she will need to earn per hour to gross $100,000 in a year. So, therefore, she knows her desired output value — $100,000 — and will, therefore, have to work back in order to figure out the optimum input. That means she will have to determine how many hours she will be able to (or is willing to) work during the year, and therefore, how much she will earn for each hour to reach her goal.