Top 9 Interview Questions and Answers of Financial Modeling

It is important to go through a round of possible questioning and understand the relevant answers to it before you appear for the position of Financial Modeler.

Now, the interview for Financial Modelling course will be based on the job position, however, we have set the top financial modeling questions to make you prepare well for the required position.

An experienced financial modeling expert will conduct the interview basis the following –

• Sample of a work done by interviewee and
• Question-based on the sample work

Questions based on the sample work may vary however we have listed, the general questions which can be asked for the position of financial modeling expert.

Q1: What is your understanding of Financial Modeling and how is it useful?

(Now in this you need to explain what the need for financial modeling is and how it helps in forecasting a company’s financial statements to make prudent financial decisions)

Ans1: Financial Model is the Excel-based tool developed to make a qualitative analysis of a company’s expenses and earnings. In other words, the financial modeling represents all the aspects or major aspects of a company’s operations in numbers and analysis made basis historical performance, and future planning.

In financial modeling, different hypothesis situations are created to ascertain the future of the industry orb an organization. For example – In the Investment Banking sector and Financial Research, Financial modeling implies forecasting the financial statements of a company like cash flows, balance sheets, and Income statements basis on which the company’s valuation is evaluated.

Why Financial Modelling is useful?

Financial modeling can be used to determine the impact of future projects and decisions, and also to compare the business with competitors or estimating the valuation of a company. They are also used in strategic plans out for various situations, to calculate the cost of upcoming projects, set budgets, and allocating the resources of the company prudently.

For this, you can give supporting examples of financials models you have prepared and how it has helped in making considerate financial decisions in a company. However make sure, you pick the model you are confident about and able to handle all questions related to it,  

Q2: How do you build a financial model?

(Here, it is important to talk about the common types of financial model and a quick brief on how it is prepared. You do not have to go into details unless asked. Keep it short, simple and robust.)

Ans2: There are 4 major financial models – DCF, Discounted Cash Flow model, Leveraged Buyout Model, Comparable Company Analysis Model, and Mergers and Acquisitions Model.

How it is built?

When you look at the financial model it seems complex however it is prepared and positioned easily by using smaller and simpler modules. The important factor to keep in mind here is, to connect each smaller module and create the final financial module.

The first and foremost are the core modules which consist of the Cash flows of the company, its balance sheets, and the income statements.

Next comes, the additional modules which are depreciation and working capital schedule, intangibles schedule, shareholder’s equity schedule, other long-term items schedule, debt schedule, etc.

At last, the additional schedules are linked to the core statement upon its completion.

Q3: What are the common financial modeling practices?

Ans 3.(You can mention the best 3 or 4 practices that help to create a suitable financial model for a company. Go through the best 3 we have listed for your reference)

Formatting

Financial Modelling is the way toward making a synopsis of an organization’s costs and income as a bookkeeping page that can be utilized to figure the effect of a future occasion or decision.

Clearly recognize inputs (suppositions) and yields (computations or recipes) utilizing designing shows — blue textual style for information sources and dark textual style for equations, concealing, borders, and so on

Excel Tips and Tricks

It is essential to know the excel formulas and functions for instance VLOOKUP, INDEX MATCH, etc to speed up the process and get the correct figures.

Breaking the complex calculations into simpler ones and increasing the dependency on keyboard shortcuts while working on excel accelerate the process and make you efficient personnel in the field of financial modeling

 Layout the financial modal and Design

It is difficult to layout the structure of a financial model in a simple and logical formal. However, this can be accomplished by building the whole model on a solitary worksheet and sections can be made using the group function.

Above are the most basic and important ones to have a good Financial Model layout. You can add in the practices that make the financial model stands out from the rest like – using unique formula per row which is copied across or extensive use of error checks or a consistent column heading throughout the model, etc.  

Q4: What is the key difference between and NPV and XNPV and which function would you use?             

Ans 4: NPV is based upon the assumption that future payments are made on regular basis with equal time intervals. On the other hand, XPNV assumes that the cash flow of a company does not come in equal time intervals and arrived at Net Present value only.

Which one should be used more often? 

Since the NVP takes into consideration that all the time periods are equal, it is more practical to use XNVP which uses specific dates that correspond to each cash flow being discounted in the series for less than a year. (However, this totally depends upon the structure and nature of the business)  

Q5: Pick any financial model you have built and walk me through it.

Ans 5: This is the most important question of all; not only it will show your technical expertise but also play a crucial role in passing the judgment on your selection.

You need to pick a model which allows you to showcase advanced financial modeling knowledge, but remember to be confident about it and not overconfident.

Make sure you are thorough with all the steps to make a correct and effective financial model.

What you can do to answer this question without any hurdles is to build few financial models ahead of the interview, so that at the time of demonstration the models come in handy and you can handle the question without any apprehensions.

Q6: How would you forecast revenue?

Ans 6: There are two approaches to build the financial model – realistic and practical or simple and strong.

The first approach pinpoints varied methods to model revenues with accuracy and the highest degree of detail. Also, one has to take into consideration, the industry-specific details.

For example – if you need to forecast the revenue of the retail industry, you will forecast derive income per square meter and the expansion rate.

In the case of the service industry, the headcounts and income per employee are estimated.

On the other hand, the second approach, which is a simple and quick approach touches on how you can model revenues in a more direct way that is not complex to understand and easy to use. In this approach, you forecast the revenue or future growth basis historical trends and figures.

Q7: How are 3 financial statements linked?

 (The key point to remember while answering this question is to outline the main points instead of giving details at length)

Ans7: Here are the main points to draw your attention to-

• Net income from the income statement flowing to the balance sheet and cash flow statement
• Depreciation is added back and CapEx is deducted on the cash flow statement, which determines PP&E on the balance sheet
• The majority of financing activities affect the balance sheet and cash from finalizing, except for interest, which is present on the income statement.
• The sum of the last period’s closing cash plus this period’s cash from operations, investing, and financing is the closing cash balance on the balance sheet.

Q8: Tell me about a Financial Model you have built which was weak in nature?

(Well, as you have read and understood, it is the trickiest question to answer. Treat this as same as when you are asked about your weaknesses. Do not highlight your failures but show it as learning)

Ans8: Do not straight away jump to a failed financial model you have made in past, try to draw a comparison between two; one which you could not get it right and the other one which was a success. So be tactful and highlight your strength more.

Q9: How would you perform Sensitivity Analysis in Excel?

Ans 9: Sensitivity Analysis is used as a tool in financial modeling to analyze different values of a set variable impact dependent variable under definite conditions.

For instance, a financial analyst wants to study how a company’s profit margin may be impacted when variables such as cost of goods manufactured and cost of labour change. In this case, sensitivity analysis will come in the role to examine different variables sets of different values and analyze how the profit margin changes in accordance with variables.

Also, talk about the function of the Data table which is the most essential tool in Excel for performing sensitivity analysis, wherein the output sensitivity can be shown by changing up to two independent variables.

Scope of Financial Modeling and Financial Modeler

Financial modeling is based on quantitative analysis to forecast and make projections that help to make prudent financial decisions in an organization. It is majorly used in corporate finance and asset valuation.

In the field of financial research and investment banking, financial modeling projects and forecast the financial statements of the company. The financial modeling is built on historical figures and realistic hypothetical situations to analyze the company’s finance and value.  

Hence, the scope of the financial modeler is bright and broad as models are essential for making a wide range of decisions – including those related to investment, mergers, raising capital, forecast, valuation an investment. 

About Financial Modeling Course

We know enough, how important it is for a financial modeler to keep the skill and knowledge up to date to survive in the competitive world.

There are many institutes worldwide that provide financial modeling courses online and offline as well. Henry Harvin’s Education is one of the known and established names to give in-detailed education on Financial Modeling.  

The certificate given by Henry Harvin after the completion of the Financial Modeling course has an affiliation with the Government of India and MSME.

The Financial Modelling course is well designed by the subject matter experts in a manner to make you an ‘industry expert’. The trainers at Henry Harvin have more than 18+ years of industry experience and possess the subject expertise and teaching experience, globally.  

Henry Harvin’s financial modeling course consists of hands-on training on excel workbooks and case studies. It also provides major career benefits like-

• Placement assistance after the completion of the course, opening the work opportunities Equity Research, Investment Banking,Credit Ranking Analysis, Financial Analysis, Business Analysis, Project Finance, Fund Management, and Commercial Banking.
• Henry Harvin is partnered with big brands like Amazon, JP Morgan, and Google that hire certified financial modeling professionals. This will help to open greater job prospects and a boost in a career.
• Get updated on current demand skills and techniques that make your job profile stands out.
• Earn Gratifying Certification from Henry Harvin to have a highly paid freelance career or taker the opportunity to work as a full-time professional.
• Internship to get practical experience of the learning along with complete assistance in placement for 1 year post completion of the course.

So, we hope that the above-mentioned interview questions and answers helped you to have a more clear understanding of how the interview could be conducted and will prepare you to crack the position as a Financial Modeler.

What is Financial Modeling | Basic Introduction

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