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
