Top Q&A in Financial Planning and Analysis (FP&A)
Financial Planning and Analysis (FP&A) team provides strategic inputs and forecasts to the top management, including that of profit and loss statement, budgeting, and financial modeling of projects. In this article, we talk about the top 10 FP&A Interview Questions and answers that will guide you to prepare well and crack the interview you would face in the near future.
#1 – What’s the difference between budgeting and forecasting?
There are two main differences between budgeting and forecasting.
- BudgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time. is setting up a plan for the future that the income and the expenses would be such. Whereas, forecasting is an estimate of what may actually happen. Forecasting is based on real data, historical inputs, and ascertained by using statistical, survey methods.
- Budgeting is often staticBudgeting Is Often StaticA static budget is one that anticipates all revenue and expenses which will occur during a particular period, with changes in the level of production/sales or any other major factor having no effect on the budgeted data. It is also known as a fixed budget. and not usually updated for a year. Forecasting is not static since it enables a company to understand what may actually happen in the near future. That’s why every once in a quarter, forecasted data is updated.
#2 – Let’s say that you’re a CFO of a company. What would you 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 liquidityLiquidityLiquidity shows the ease of converting the assets or the securities of the company into the cash. Liquidity is the ability of the firm to pay off the current liabilities with the current assets it possesses., and 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 equityCost Of EquityCost of equity is the percentage of returns payable by the company to its equity shareholders on their holdings. It is a parameter for the investors to decide whether an investment is rewarding or not; else, they may shift to other opportunities with higher returns. and the cost of debtCost Of DebtCost of debt is the expected rate of return for the debt holder and is usually calculated as the effective interest rate applicable to a firms liability. It is an integral part of the discounted valuation analysis which calculates the present value of a firm by discounting future cash flows by the expected rate of return to its equity and debt holders.). So, a CFO will work on ensuring the financial well-being of a company.)
The question is subjective. Depending on the financial condition of the company, 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 ratioDebt-equity RatioThe debt to equity ratio is a representation of the company's capital structure that determines the proportion of external liabilities to the shareholders' equity. It helps the investors determine the organization's leverage position and risk level. by lowering the equity and enhancing the debt, or maybe I need to take care of the current liabilities of the companyCurrent Liabilities Of The CompanyCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc.. Depending on what the firm is struggling with, I will strategize and solve the problem.
#3 – How vital three financial statements are? Can you talk briefly about them?
Three financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. are the backbone of a company’s financial health. If you want to know how a company is doing, just have a glance at its three financial statements.
The income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements. talks about the revenues generated and the expenses incurred. The balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. talks about the total assets and total liabilities and how total assets equal to total liabilities and shareholders’ equity. The cash flow statementCash Flow StatementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business. 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.
#4 – 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 modelingFinancial ModelingFinancial modeling refers to the use of excel-based models to reflect a company's projected financial performance. Such models represent the financial situation by taking into account risks and future assumptions, which are critical for making significant decisions in the future, such as raising capital or valuing a business, and interpreting their impact. starts from the products/service, forecasting the average prices and growth rates.
- The top-down approach is the second method where the forecasting model starts with the market share and market size of the company and how these proportions affect the revenue of the company.
- The third method is a year by year approach where last year’s revenue is taken into account, and then with adding/deducting a certain percentage, the model arrives at the estimation for the next year’s revenue.
#5 – 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 layman to look at it and try to understand, would she know what it’s all about? Quite often, the clients you’ll handle 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.
#6 – Can you talk about the three main challenges our company has been facing 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 financial statements of the company, 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 – challenges that are controllable and challenges that are uncontrollable.)
As I have gone through your annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements., I found that the company could take more debt since the financial leverageFinancial LeverageFinancial Leverage Ratio measures the impact of debt on the Company’s overall profitability. Moreover, high & low ratio implies high & low fixed business investment cost, respectively. of the company is too low. Plus, you have been facing a big challenge in the utilization of your assets. These two challenges can be overcome with the right strategy and execution. The external factor that’s most challenging for you in the last few years is the competitors that are eating away your market share.
#7 – How would you become an excellent Financial Planning Analyst?
There are three skills that financial planning analyst 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 key people of the organization 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 has excellent interpersonal skills.
If you have these three skills, you become a master of financial planning and analysisFinancial Planning And AnalysisFinancial planning and analysis (FP&A) is budgeting, analyzing, and forecasting the financial data to align with its financial objectives and support its strategic decisions. It helps investors to know if the company is stable and profitable for investment..
#8 – How would you build a forecast model?
Building a forecast model or a rolling budgetRolling BudgetA rolling budget is a dynamic approach whereby the company's budget is constantly revised for incorporating the new budget period when the ongoing budget period expires. It is also termed as budget rollover. is quite easy. All you need to do is to keep the historical data of the previous month (if it’s monthly forecast model) in front and then create a forecast beyond that. If it’s quarterly, you will take the previous quarter’s historical data.
#9 – How would you do modeling for working capital?
The three crucial components of working capitalComponents Of Working CapitalMajor components of working capital are its current assets and current liabilities, and the difference between them makes up the working capital of a business. The efficient management of these components ensures the company's profitability and provides the smooth running of the business. are – inventories, account receivablesAccount ReceivablesAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. , and accounts payablesAccounts PayablesAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.. These three things are used to find out about the cost of sales, revenuesRevenuesRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions., payments made, etc. By calculating the days of inventory, the day’s sales outstandingDay's Sales OutstandingDays sales outstanding portrays the company's efficiency to recover its credit sales bills from the debtors. The number of days debtors took to make the payment is computed by multiplying the fraction of accounts receivables to net credit sales with 365 days., and the days payable outstandingDays Payable OutstandingDays Payable Outstanding (DPO) is the average number of days taken by a business to settle their payable accounts. DPO basically indicates the credit terms of a business with its creditors. , you would be able to understand the whole cash conversion cycleCash Conversion CycleThe Cash Conversion Cycle (CCC) is a ratio analysis measure to evaluate the number of days or time a company converts its inventory and other inputs into cash. It considers the days inventory outstanding, days sales outstanding and days payable outstanding for computation.. That’s how you would model the working capital of a companyWorking Capital Of A CompanyWorking capital is the amount available to a company for day-to-day expenses. It's a measure of a company's liquidity, efficiency, and financial health, and it's calculated using a simple formula: "current assets (accounts receivables, cash, inventories of unfinished goods and raw materials) MINUS current liabilities (accounts payable, debt due in one year)".
#10 – How an inventory write-down affects the financial statements?
(This is a common question in Financial Planning and Analysis Interview Questions. You need to talk about how the inventory write-downInventory Write-downInventory Write-Down refers to decreasing the value of an inventory due to economic or valuation reasons. When the inventory loses some of its value due to damaged or stolen goods, the management devalues it & reduces the reported value from the Balance Sheet. affects three financial statements.)
In the balance sheet, the asset portion will reduce as the inventory will reduce by the amount of written down. In the income statement, we will see a reduced net income since we need to show forth the written-down effect in COGSCOGSThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. or separately. In the cash flow statement, the written-down amount would be added back to cash flow from operating activitiesOperating ActivitiesOperating activities generate the majority of the company's cash flows since they are directly linked to the company's core business activities such as sales, distribution, and production. since it is a non-cash expenseNon-cash ExpenseNon-cash expenses are those expenses recorded in the firm's income statement for the period under consideration; such costs are not paid or dealt with in cash by the firm. It involves expenses such as depreciation..