Top Q&A in Financial Planning and Analysis (FP&A)

The Financial Planning and Analysis (FP&A) team provides strategic inputs and forecasts to the top management, including the profit and loss statement, budgeting, and financial modeling of projects. This article discusses the top 10 FP&A Interview Questions and answers that will guide you to prepare well and crack the interview you will face shortly.

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#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.read more 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 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.read more 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.

#2 – 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 liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more. The Rate of return is more than the cost of capital (think about the weighted average cost of capitalWeighted Average Cost Of CapitalThe weighted average cost of capital (WACC) is the average rate of return a company is expected to pay to all shareholders, including debt holders, equity shareholders, and preferred equity shareholders. WACC Formula = [Cost of Equity * % of Equity] + [Cost of Debt * % of Debt * (1-Tax Rate)]read more, 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.read more 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.read more). 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 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. read more by lowering the equity and enhancing the Debt, or maybe I need to take care of the company’s current liabilitiesCompany’s Current LiabilitiesCurrent 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.read more. Depending on whether the firm is struggling, I will strategize and solve the problem.

#3 – How vital are three financial statements? 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.read more 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 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.read more 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.read more talks about the total assets and total liabilities and how total assets are equal to total liabilities and shareholders’ equity. Finally, 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.read more 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.read more 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.

#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 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.

#6 – 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 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.read more, I found that the company could take more Debt since the company’s 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. read more 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.

#7 – 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 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.read more.

#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.read more 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.

#9 – How would you do modeling for working capital?

#10 – 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-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. read more 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 incomeNet IncomeNet income for individuals and businesses refers to the amount of money left after subtracting direct and indirect expenses, taxes, and other deductions from their gross income. The income statement typically mentions it as the last line item, reflecting the profits made by an entity.read more in the income statement 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. read more or separately. The written-down amount would be added back to the 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.read more in the cash flow statement 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.read more.

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