Common FP&A

questions in an interview

Compiled By: Hemant Sharma

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 What is budgeting and forecasting ?

Budgeting is a detailed financial plan for a specific period, primarily used for financial control
and performance evaluation, typically prepared annually. Budgeting is primarily focused on
setting financial goals and creating a detailed plan for managing expenses and revenues over a
specific period, typically a fiscal year. It is a roadmap that outlines what a company plans to
achieve financially.

Forecasting is the process of predicting future financial performance based on historical data
and current trends, used for strategic planning and decision-making, with various timeframes
and regular updates.

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 What is the difference between billing and revenue?

Billing is the cash flow that allows companies to keep their doors open and includes all
account receivables (invoices sent to the customer). Once these invoices are paid, the amount
is converted to cash and used to pay bills, employees, etc. Projects are evaluated according to
costs, budget, timeline, and scope.
Revenue is how much is earned on a project and accounts for labor, materials, and
subcontractor costs. You have to spend money on a job (costs) in order to earn money on a
job (profit) – a concept referred to as earned revenue.

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 How do you create a rolling budget or forecast model?

Creating a rolling budget or forecast model involves maintaining a dynamic financial planning
process. This approach, unlike static budgets, demands continuous updates, typically on a
monthly or quarterly basis, to keep financial plans in sync with real-time data and market
trends. Start with a comprehensive baseline for the initial period, utilizing historical data,
market research, and internal insights. Regularly monitor actual financial performance against
this baseline, adjusting assumptions and forecasts based on the analysis. Incorporate scenario
planning to prepare for various outcomes, communicate effectively with stakeholders,
leverage financial software for efficiency, and embrace continuous improvement based on
past experiences to ensure a responsive and informed financial planning tool.

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 How do you model working capital for a company?

Modeling working capital for a company involves forecasting its short-term assets and
liabilities to ensure smooth day-to-day operations. Begin by projecting accounts receivable,
inventory, and accounts payable based on historical data, sales forecasts, and industry trends.
Calculate the net working capital as the difference between current assets and current
liabilities. Regularly update this model to reflect changing business conditions, ensuring
adequate liquidity for ongoing operations. Effective working capital management is crucial for
a company's financial health, as it impacts its ability to meet short-term obligations and invest
in growth opportunities.

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 What is Variance Analysis ?

Variance analysis is a financial management technique used to compare actual financial

performance to budgeted or expected performance. It involves identifying and analyzing the
differences or variances between the two sets of figures. By examining these variances,
organizations can gain insights into what went as planned and what didn't, allowing them to
make informed decisions, take corrective actions, and improve future financial planning and
performance. Variance analysis is a critical tool in financial control, performance evaluation,
and strategic decision-making.

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 IFRS15 – Five step model for Revenue Recognition.

Identify the Contract with the Customer: Determine whether a contract exists, with clear
identification of the parties involved, the rights and payment terms, and the commercial substance.
Identify the Performance Obligations: Identify all the distinct goods or services promised to the
customer within the contract. Each performance obligation should be separately identifiable.
Determine the Transaction Price: Calculate the transaction price, considering variable
consideration, time value of money, non-cash considerations, and any significant financing
components.
Allocate the Transaction Price: Allocate the transaction price to each performance obligation
based on their relative standalone selling prices.
Recognize Revenue as Performance Obligations are Satisfied: Recognize revenue when each
performance obligation is satisfied, either over time (as control is transferred) or at a point in time,
depending on the specific circumstances.

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 How Does GAAP Mandate the Accounting of Revenue?

Generally accepted accounting principles (GAAP) require that revenues are recognized
according to the revenue recognition principle, a feature of accrual accounting. This means
that revenue is recognized on the income statement in the period when realized and earned—
not necessarily when cash is received. The revenue-generating activity must be fully or
essentially complete for it to be included in revenue during the respective accounting period.
Also, there must be a reasonable level of certainty that earned revenue payment will be
received. Lastly, according to the matching principle, the revenue and its associated costs
must be reported in the same accounting period.

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 What is Capital budgeting? Give an example of a capital budgeting decision.

Capital budgeting is the process a business undertakes to evaluate potential major projects or
investments. Construction of a new plant or a big investment in an outside venture are
examples of projects that would require capital budgeting before they are approved or
rejected. As part of capital budgeting, a company might assess a prospective project's lifetime
cash inflows and outflows to determine whether the potential returns that would be
generated meet a sufficient target benchmark. The capital budgeting process is also known as
investment appraisal. Capital budgeting decisions are often associated with choosing to
undertake a new project or not that expands a firm's current operations. Opening a new store
location, for example, would be one such decision.

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 What are the different methods of evaluating a project or investment?

Payback period: The payback period calculates the length of time required to recoup the original
investment. Payback periods are typically used when liquidity presents a major concern.
Internal Rate of Return: The internal rate of return (or expected return on a project) is the discount
rate that would result in a net present value of zero. An IRR which is higher than the weighted
average cost of capital suggests that the capital project is a profitable endeavor and vice versa. The
IRR rule is as follows: ○ IRR > Cost of Capital = Accept Project, IRR < Cost of Capital = Reject Project
Net Present Value: The net present value approach is the most intuitive and accurate valuation
approach to capital budgeting problems. Discounting the after-tax cash flows by the weighted
average cost of capital allows managers to determine whether a project will be profitable or not.

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 How would you value a company?

There are three common valuation methods which are as:

The multiples approach in which you multiply the earnings of a company by the P/E ratio of
the industry in which it competes.
Transactions approach where you compare the company to other companies that have
recently sold/been acquired in that industry.
The Discounted Cash Flow approach, in which you discount the values of future cash flows
back to the present.

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