FP&A interview questions
Q1 What’s the difference between budgeting and forecasting?
There are two main differences between budgeting and forecasting.
Budgeting is setting up a plan for the future that the income and the expenses would be such. At the same time, forecasting is an estimate of what may happen. Forecasting is based on real data, historical inputs and ascertained using statistical survey methods.
Budgeting is often static and not usually updated for a year. Forecasting is not static since it enables a company to understand what may happen shortly. That’s why every once in a quarter, forecasted data is updated.
Q2 Let’s say that you’re a CFO of a company. What would keep you awake at night?
(To answer this question, first, you need to think of what a CFO does for a company. A CFO ensures that the company has enough liquidity. The Rate of return is more than the cost of capital (think about the weighted average cost of capital, which we can calculate by using the cost of equity and the cost of debt). So, a CFO will work on ensuring the financial well-being of a company.)
The question is subjective. Depending on the company’s financial condition, I may find that I need to reduce the overall cost of capital of the company. That’s why I may increase the debt-equity ratio by lowering the equity and enhancing the Debt, or maybe I need to take care of the company’s current liabilities. Depending on whether the firm is struggling, I will strategize and solve the problem.
Q3 How vital are three financial statements? Can you talk briefly about them?
Three financial statements are the backbone of a company’s financial health. So if you want to know how a company is doing, glance at its three financial statements.
The income statement talks about the revenues generated and the expenses incurred. The balance sheet talks about the total assets and total liabilities and how total assets are equal to total liabilities and shareholders’ equity. Finally, the cash flow statement ascertains the net cash inflow/cash outflow from the operating, investing, and finance activities.
Every investor should look at these three financial statements before making an investment decision.
Q4 How to forecast revenues for a company?
There are usually three forecast models a company uses to forecast its revenue.
The bottom-up approach is the first method where financial modeling starts from the products/services, forecasting the average prices and growth rates.
The top-down approach is the second method where the forecasting model starts with the company’s market share and market size and how these proportions affect the company’s revenue.
A third method is a year-by-year approach where last year’s revenue is considered. Then by adding/deducting a certain percentage, the model arrives at the estimation for the next year’s revenue.
Q5 How do you know that an excel model is quite good?
The most crucial ingredient of a good excel model is how user-friendly the excel model is. If you ask a layperson to look at it and try to understand, would she know what it’s all about? The clients you’ll handle often may not know anything about excel modeling. Your job is to create such user-friendly excel models that anyone can understand. If you need to do the error check regularly, you must do it to ensure that all the figures and calculations in the balance sheet in the cash flow statement are accurate.
Q6 Can you talk about the three main challenges our company has faced for a while?
(To answer this question, it’s vital that you thoroughly research the company and look at its annual report for the last year. If you go through all the company’s financial statements, you will get ideas about what’s working well for the company and what’s not working. And try to include both internal and external challenges – controllable challenges and challenges that are uncontrollable.)
As I have gone through your annual report, I found that the company could take more Debt since the company’s financial leverage is too low. Plus, you have been facing a big challenge in utilizing your assets. These two challenges can be overcome with the right strategy and execution. The external factor that is most challenging for you in the last few years is the competitors eating away at your market share.
Q7 How would you become an excellent Financial Planning Analyst?
There are three skills that financial planning analysts should master.
The first skill is the skill of analytics. As you can understand, an advanced level of knowledge and application is necessary to master this skill.
The second skill is the art of presentation. It’s not enough to interpret data. You also need to present it to the organization’s key people so that critical decisions can be made at the right time.
The third skill is a soft skill. It is the ability to say things clearly and excellent interpersonal skills.
If you have these three skills, you become a master of financial planning and analysis.
Q8 How would you build a forecast model?
Building a forecast model or a rolling budget is quite easy. All you need to do is to keep the historical data of the previous month (if it’s a monthly forecast model) in front and then create a forecast beyond that. You will take the previous quarter’s historical data if it’s quarterly.
Q9 How would you do modeling for working capital?
The three crucial components of working capital are – inventories, account receivables, and accounts payables. These three things are used to determine the cost of sales, revenues, payments made, etc. By calculating the days of inventory, the day’s sales outstanding, and the days payable outstanding, you would understand the whole cash conversion cycle. That’s how you would model the working capital of a company.
Q10 How does an inventory write-down affect the financial statements?
(This is a common question in Financial Planning and Analysis Interview Questions. It would help if you talked about how the inventory write-down affects three financial statements.)
The asset portion will reduce in the balance sheet as the inventory will reduce by the amount written down. We will see a reduced net income in the income statement since we need to show forth the written-down effect in COGS or separately. The written-down amount would be added back to the cash flow from operating activities in the cash flow statement since it is a non-cash expense.