hey everyone eric here in this video we're going to discuss finance interview questions and answers
for entry-level roles like internships and analyst positions if you don't know me already
i've worked in finance for the last eight years with startups starting as an intern and
now working in executive roles so i've both been interviewed and interviewed candidates many times
okay let's get started preparing your mindset the reason we prepare for interviews is not to
know the answer to every question in advance it's to think about why we want this role
and what are all the experiences in our lives that led up to this moment these are the answers that
i would give to the following questions but it doesn't mean they're necessarily the best or the
right answers okay first question what is the goal of finance so the core thing that finance does is
that it allocates capital that's whether you're on the investment side like investment banking or
corporate finance like running a company finance people invest capital and so in order to do that
you need to create plans and projections about the future to try to identify the best opportunities
and then what is a good opportunity generally the best opportunities will be good for shareholders
so you'll make money they'll be good for employees and they'll make the customers happy
all of these three things need to happen at the same time or else the whole thing stops working if
employees are unhappy or if customers are unhappy shareholders won't make money so it's all about
allocating capital towards the best opportunities next question can you describe a financial model
and walk through one that you built okay so a financial model predicts the future it predicts
the revenues the expenses and the profitability of an overall company in the future so it's basically
a guess about what will happen but it gives you the opportunity to see it before you do it so that
you can make changes to your plan so one simple financial model i built and i included a link to
this down below it's called how to build a basic financial model really really simple but would
help you understand these concepts so i'll walk through that it was a company that made chairs
and i looked at the total number of chairs that we made and then i multiplied that by price to
get our revenue i looked at the manufacturing cost per chair to get the overall costs
and then i calculated our other expenses so we had payroll we had some marketing so i could
understand our overall operating profit and then finally in the years where we had positive profits
because some years we had negative profits while we were scaling up the company when
we finally did turn a profit i calculated taxes and subtracted that from your operating profit
to get to the net income so that's how i built a basic financial model for this chair company
walk through the main sections of a p&l p&l is income statement by the way so
you have a few main sections on the p&l you start with gross revenue and from gross revenue
that's just the price times all of the everything that you sold you subtract discounts and refunds
that gives you net revenue net revenue is basically all the money that you actually
collected the next section is called cost of goods sold or cost of sales same thing different names
but same thing this is where you put all of your direct costs that are directly related to
making your product so if it's a physical product it's like your materials cost
your manufacturing costs if it's a tech product a lot of times there there aren't a lot of costs um
in terms of the cost of sales there will be some like server costs and some technology stuff but
whatever directly goes into supporting your product and then your net revenue minus your
cost of goods sold is your gross profit which is like the profit margin at the product level
below your gross profit you have your operating expenses these are more of your fixed costs so
you'll have the payroll of the management team you also have marketing goes in your operating
expenses and things like rent consultants insurance all of these kind of things are
in your operating expenses and then your gross profit minus your operating expenses
gives you your operating profit this is also known as earnings before interest and taxes or ebit
um from your ebit you finally have one last section of expenses and that's interest and taxes
so interest is any interest you're paying on any debt that the company has you put it
there on the income statement and taxes you calculate based on your ebit to figure out
okay what percent of your income do you need to pay to the government in taxes and then
you subtract those from your ebit and you get your net income so that's how an income statement works
what are the three main financial statements and what do they show okay the three main financial
statements are the income statement the balance sheet and the cash flow statement the income
statement shows you all the money you made and all the money you spent on your core operations
the balance sheet shows you everything that you own and everything that you owe it's as simple
as that the cash flow statement shows you all of the ways the cash came into the company and
left the company so cash comes in and leaves from operations cash comes in and leaves from investing
so the company investing its own money into say factories or other companies and then the third
way is from financing and that's the situation where outside investors actually invest into
our company so maybe they're lending us money or buying shares of our business so there's three
main ways that the cash comes comes and goes from the company how would you evaluate the financial
health of a company so there isn't like an exact right answer on this one but if i was looking
at a company and i didn't know anything about the company i'd say how much cash does it have
then i'd say how much debt does it have and then i would say you know i would look at how
much revenue it generates but more importantly i would look at if the revenue is increasing
i'd look at the trends over the last couple years to see okay is the company growing
or is the company shrinking if it has a lot of debt but it's growing a lot maybe it'll be easy
to pay that debt off but if it has a lot of debt and it's shrinking then the company is
probably in a terrible position um from there i'd probably just look at the net income to
see like how profitable is the company and probably some cash flow metrics like maybe
operating cash flow to see how much cash is the business actually generating from its operations
and if i looked at all those things i would have a pretty good idea of this the overall
financial health of a company and i would know sort of from there what to look at next
what is cash versus accrual accounting okay so accrual accounting follows something called the
matching principle and pretty much all accounting is done based on the accrual accounting method
not the cash method not the cash based accounting so accrual based accounting
has this rule and it says you need to match your revenues and your expenses with
the time that you provide your product or service it sounds like it makes sense
right but it's it's more complicated than that and let me explain through an example
let's say that we're a car company that takes a couple months to deliver the car like tesla right
now if you order a tesla you're gonna have to wait a number of months before you can get it because
there's so many orders so let's say you pay tesla in january for the car you send them the money
tesla receives the money in january and they say we can't deliver your car until april the
accrual-based accounting method would say okay you received this money in january tesla you can't
report it as revenue you can't put the revenue on your income statement until you actually deliver
the product or service until you deliver that car so tesla would actually have to wait until april
to put the revenue on their income statement they would collect the cash but they couldn't report it
and they would also correspondingly have to take all those costs associated with the car and report
them in april too even if they spent the money earlier and so that follows the matching principle
you need to match the revenue and the cost with the timing of delivering the product or service
and this is very relevant with other companies like they run events like if you're
like if you were having a concert for instance you'd be selling all these tickets in advance
but you can't actually say that you earned that revenue until you put the concert on so that's the
accrual-based accounting method cash based would just be that you report anything when the cash
actually comes in or leaves the company and so that's used less but you'll see that sometimes
as well what's something interesting that's happened in the capital markets recently
so the only way you can prep for a question like this is to actually follow the capital
markets like you can't have a canned answer because these kinds of things are changing all
the time but i'll give you sort of like uh what i would answer if someone asked me that today
it's december 2020 just as a reference point um but if you're preparing for an interview it'll
be sometime in the future and the situation will be different so um in 2020 right now
the coronavirus pandemic is is going on in the world and something interesting for me
that's happened in the capital markets is we were following all the tech companies and their
market share so a lot of these businesses that do like e-commerce are competing for
in-person customers who usually go in person and they're trying to get them to go online right
and there were projections around what their market share would be in five years or sometimes
even 10 years out from now and we were expecting okay it's going to take 10 years to get you know
four more or ten more percentage points of market share when the pandemic hit we saw many of these
companies take that market share in one month so like jumped 10 years into the future immediately
because all the customers were forced to shop with them and that caused like a
massive massive increase in the valuations of these companies which is fascinating
and it's caused a complete disruption um across financial markets and this split between
winners and losers which is very very dramatic and it reflects the way that the world is actually
functioning and we don't know to what extent the world will return back to something like before
or after the pandemic or people will continue behaving in the same way after the pandemic
so obviously the most interesting thing for me is market share and businesses that have taken
physical infrastructure and made it digital and are distributing their products in a way that's
easier for people to buy things now that they're sort of locked inside and finally
i would recommend that you ask your interviewer a question i always ask interviewers questions
sometimes tough questions and actually a couple times i've asked an interviewer a question and
received an answer that made me really concerned and i've pulled out of the interview process
so it's an opportunity for the company to interview you but also for you to interview
the company because you're going to be spending a lot of your life at this place if they hire you
so you want to make sure that it's the right fit so one thing that i like to ask is what
is the goal of finance at this company that's going to tell you about sort of like how your
department would fit into the ecosystem and sort of what's what's the mission of the team
also i would ask a specific person what's something you've done on the finance team
that you're proud of that'll tell you about the values and sort of the ethics of the person
and if the thing that they say they're proud of you think that's really interesting and great as
well you they would probably be a good mentor for you but if you completely disagree or you
think it's really boring or something like that then you should be skeptical so those
are some example questions but sometimes i also ask questions like do you like your job things
like this are you happy here because sometimes people will give you a really honest answer
so i hope these questions gave you some good background and got you thinking about how to
answer finance interview questions for entry level roles also if you like this video please subscribe
to my channel click the bell and enable the alerts notifications so that you don't miss any of my new
videos when they come out i also included down below in the description some links to some
other videos like how to build a basic financial model as well as some other finance videos that i
recommend that you study and understand before you go into your sort of entry level finance interview
anyway i hope this was helpful for you and see you in the next video