Finance Interview Questions

Most common questions (and answers) used to hire for jobs and careers in finance

What are the most common finance interview questions?

We’ve compiled a list of the most common and frequently asked finance interview questions.  If you want to ace your finance interview then make sure you master the answers to these challenging questions below.  This guide is perfect for anyone interviewing for a financial analyst job and is based on real questions asked at global banks to make hiring decisions.

In conjunction with this comprehensive guide to finance interview questions (and answers), you may also want to read our guide on how to be a great financial analyst, where we outline “the Analyst Trifecta“.

 

Finance Interview Questions - Trifecta

 

General Interview Tips

There are two main categories of finance interview questions you will face:

  1. Behavioral/fit questions
  2. Technical questions

 

Behavioral and fit questions relate more to soft skills such as your ability to work with a team, leadership, commitment, creative thinking, and your overall personality type.  Being prepared for these types of questions is critical and the best strategy is to pick 5-7 examples of specific situations from your resume that you can use as examples of: leadership, teamwork, a weakness, hard work, problem-solving, etc. To help you tackle this aspect of the interview we’ve created a sperate guide to behavioral interview questions.

 

Technical questions are related to specific accounting and finance topics.  This guide focuses exclusively on technical finance interview questions.

 

General best-practices for finance interview questions are to:

  • Take a couple of seconds to plan your answer (you buy time by repeating part of the question back at the start of your answer)
  • Use a structured approach to answering each question, this typically means having points 1, 2 and 3 (for example)
  • If you don’t know the exact answer, state the things  you do know that are relevant (and don’t be afraid to say “I don’t know” which is much better than guessing or making stuff up)
  • Demonstrate your line of reasoning (that you have a logical thought process and can solve problems, even  if you don’t know the exact answer)

 

Finance Interview Questions (and answers):

 

Walk me through the 3 financial statements.

The balance sheet shows a company’s assets, its liabilities and shareholders’ equity.  The income statement outlines the company’s revenues and expenses.  The cash flow statement shows the cash flows from operating, investing and financing activities.

 

If I could use only 1 statement to review the overall health of a company, which statement would I use and why?

Cash is king. The cash flow statement gives a true picture of how much cash the company is generating.  Ironically, it often gets the least attention.  You can probably pick a different answer for this question, but you have to have a good justification (i.e. the balance sheet because assets are the true drier of cash flow etc etc.).

 

If it were up to you, what would the budgeting process look like?

This is somewhat subjective.  In my opinion a good budget is one that has buy-in from all departments in the company, is realistic yet strives for achievement, has been risk adjusted to allow for a margin of error, and is tied in to the the company’s overall strategic plan.  In order to achieve this the budget needs to be an iterative process that includes all departments.  It can be zero-based (starting from scratch each time), or building off the previous year, but it depends what type of business you’re running as to which is better.  It’s important to have a good budgeting / planning calendar that everyone can follow. This is an important part of how to be a world class financial analyst.

 

When should a company consider issuing debt instead of equity?

A company should always optimize its capital structure. If it has taxable income it can benefit from the tax shield of issuing debt.  If the firm has immediately steady cash flows and is able to make their interest payments it may make sense to issue debt if it lowers the WACC.

 

How do you calculate the WACC?

WACC (weighted average cost of capital) is calculated by taking the percentage of debt to total capital, multiplied by the debt interest rate, multiplied by one minus the effective tax rate, plus the percentage of equity to capital, multiplied by the required return on equity.

 

Which is cheaper debt or equity?

Debt is cheaper because: it is paid before equity and has collateral backing it. Debt ranks ahead of equity on liquidation.

A company has learned that due to a new accounting rule, it can start capitalizing R&D costs instead of expensing them.

Part a) What is the impact on EBITDA?
Part b) What is the impact on Net Income?
Part c) What is the impact on cash flow?
Part d) What is the impact on valuation?

Answer:
Part a) EBITDA increases by amount capitalized;
Part b) Net Income increases, amount depends on depreciation and tax treatment;
Part c) Cash flow is almost constant – however cash taxes may be different due to depreciation rate and therefore cash flow could be slightly different
Part d) Valuation is constant – except for cash taxes impact / timing on NPV

 

What in your opinion makes a good financial model?

it’s important to have strong financial modeling fundamentals.  Wherever possible model assumptions (inputs) should be in one place and distinctly colored (typically bank models use blue font for model inputs).  Good Excel models also make it easy for users to understand how inputs are translated into outputs.  Good Excel models also include error checks to ensure the model is working correctly (e.g. the balance sheet balances, the cash flow calculations are correct, etc.).  The contain enough detail, but not too much, and they have a dashboard that clearly displays the key outputs with charts and graphs. For more, check out our complete guide to financial modeling.

 

financial model example for finance interview question

 

What happens on the income statement if inventory goes up by $10?

Nothing.  This is a trick question.

 

What is working capital?

Working capital is typically defined as current assets less current liabilities.  In banking, working capital is normally defined more narrowly as current assets (excluding cash) less current liabilities (excluding interest-bearing debt).

 

What does negative working capital mean?

Negative working capital is common in some industries such as grocery retail and the restaurant business.  For a grocery store, customers pay upfront, inventory moves relatively quickly but suppliers often give 30 days (or more) credit.  This means that the company receives cash from customers before it needs the cash to pay suppliers.  Negative working capital is a sign of efficiency in businesses with low inventory and accounts receivable.  In other industries, negative working capital may signal a company is facing financial trouble.

 

When do you capitalize rather than expense a purchase?

If the purchase will be used in the business for more than one year, it is capitalized and depreciated.

 

How do you record PP&E and why is this important?

There are essentially 4 areas to consider when accounting for PP&E on the balance sheet: initial purchase, depreciation, additions (capital expenditures), and dispositions.  In addition to these four, you may also have to consider revaluation.  For many businesses PP&E is the main capital asset that generates revenue, profitability and cash flow.

 

How does an inventory write down affect the three statements?

On the balance sheet the asset account of Inventory is reduced by the amount of the write down, and so is shareholders’ equity. The income statement is hit with an expense in either COGS or a separate line item for the amount of the write down, reducing net income.  On the cash flow statement, the write down is added back to CFO as it’s a non-cash expense but must not be double counted in the changes of non-cash working capital.

 

Why would two companies merge?  What major factors drive mergers and acquisitions?

There are many reasons: to achieve synergies (cost savings), enter new markets, gain new technology, eliminate a competitor, and because it’s “accretive” to financial metrics.

[Note: Social reasons are important too, but you have to be careful about mentioning them depending on who you’re interviewing with. These include: ego, empire building, and to justify higher executive compensation.]

 

If you were CFO of our company, what would keep you up at night?

This is one of the great finance interview questions.  Step back and give a high-level overview of the company’s current financial position, or companies in that industry in general.  Highlight something on each of the three statements.  Income statement: growth, margins, profitability. Balance sheet: liquidity, capital assets, credit metrics, liquidity ratios. Cash flow statement: short-term and long term cash flow profile, any need to raise money or return capital to shareholders.

 

More interview questions and answers

This has been a guide to finance interview questions and answers. We’ve also published numerous other types of interview guides.  The best way to be good at interviews is practice, so we recommend reading the most common questions and answers below to be sure you’re prepared for anything!

Here are our most popular interview guides (questions and answers):