Senior Financial Analyst Prep

Key finance terms, concepts, and definitions spanning the FP&A modeling and metrics space.

How would you approach building a revenue forecast model - what inputs would you use, what assumptions would you make, and how would you pressure test it?

1. First I would create a baseline forecast using historical rates of customer volume, purchases frequency, and average order value, adjusted for seasonality. This allows me to see if revenue impacts are driven by order frequency or value.

2. Second I would include assumptions around key drivers such as new customer acquisition, AOV trends, and return rates, informed by input from other teams such as sales/marketing.

3. Finally I would pressure test my model by incorporating scenario/sensitivity analysis to understand the impact of driver changes, and comparing my growth rates against prior years and industry benchmarks.

What are the key metrics you would use to evaluate the health of a business?

I would look at three key categories of metrics:

1. Revenue quality - net revenue, Gross Merchandise value, revenue growth rate, and average order value.

2. Margin performance - Contribution margin to see how much variable costs are eroding profitability (key for e-commerce business - when returns occur, variable costs (buying the product, shipping, fulfillment) already incurred but then revenue is erased, worsening margins). Also gross margin to see how well a business is performing from operations standpoint.

3. Operational efficiency - customer acquisition cost: compare to order value to find out how much you earn for every customer you acquire. Also conversion rate - % of site visitors who purchase.

Gross Merchandise Value (GMV)

The total value of all goods sold, before returns and discounts. The gap between GMV and net revenue shows how much returns/cancellations are eating into profits.

Contribution Margin (CM)

Revenue minus variable costs. Critical for e-commerce business model as when you sell a product you incur variable costs and receive revenue, but if returns occur, which are common in e-commerce, you lose the revenue but still incur the variable costs. Therefore CM indicates how much returns and shipping costs impact profitability. The higher the CM the better.

Customer Acquisition Costs (CAC)

The price of acquiring a new customer. It is total sales and marketing expenses divided by new customers. Can be compare to AOV to determine if you are spending more on getting new customers than the revenue you make from them. The lower the better.

Walk me through how you would think about building a budget for a business unit. What’s your process, what are the key inputs, and how do you handle situations where your numbers conflict with what the business wants?

1. Normalize historical spend by removing one-time expenditures to establish a baseline.

2. Collaborate with department leads on known forward-looking expenses, and apply macro factors like inflation rate.

3. Then, build around key business drivers - headcount, revenue targets (high rev target = more marketing/sales spend) - not just prior year rate plus a percent.

4. Present, iterate, and get formal stakeholder sign-off

5. When numbers conflict - lead with data-driven evidence and transparency. Prioritize accuracy over pleasing (tell personal story).

Walk me through a P&L from top to bottom. For each line item explain what it is, how it's calculated, and what it tells you about the health of the business.

• Gross Revenue — total sales before any deductions

• Less: Returns, discounts, allowances — deductions from gross revenue

• Net Revenue — what the business actually recognized

• Less: COGS — direct costs of producing goods sold

• Gross Profit — net revenue minus COGS. Gross margin percentage tells you how efficiently the core product is produced

• Less: Operating Expenses — SG&A, R&D, D&A. These are the costs of running the business beyond production

• Operating Income / EBIT — gross profit minus operating expenses. Shows core business profitability before financing and taxes

• Less: Non-operating items — interest expense is the main one. Other include interest income earned on cash, gains or losses on asset sales, and foreign exchange gains or losses

• EBT (Earnings Before Tax) — operating income minus non-operating items

• Less: Income tax expense — tax rate applied to EBT

• Net Income — the bottom line. What the company actually earned after everything

How does an increase in depreciation affect the Income Statement (IS)?

1. Operating expenses: increases

2. Pre-tax income: decreases

3. Tax expense: decreases (due to tax shield)

4. Net Income: Decreases

How does an increase in depreciation affect the Statement of Cash Flows (SCF)?

1. Net Income: Starts lower (come from IS)

2. Depreciation Add-back: increase (non-cash expense)

3. Cash from operations: increases (by the amount of tax savings)

   1. Cash from ops explained: since I paid depreciation expense, my pre-tax income was lowered on IS. Therefore I pay less in taxes since my pre-tax income was less than if I didn’t pay depreciation. Then, add back dep. in SCF since its non-cash expense, now my cash has increased compared to if I didn’t have dep. because I paid less in taxes.

How does an increase in depreciation affect the Balance Sheet (BS)?

1. Assets:

   1. Cash: Increases (from tax savings)

   2. PP&E: Decreases

   3. Total Assets: Decreases (The PP&E drop is larger than cash gain)

2. Liabilities & Equity:

   1. Liabilities: No change

   2. Retained Earnings: Decreases (flows through from lower net income)

   3. Result: The BS balances b/c both Total Assets and Total Equity decrease by the same amount

Golden Rule of Depreciation - why does an increase in an expense like depreciation actually lead to a gain in cash?

Because depreciation is a non-cash expense. It lowers your taxable income on paper, meaning you pay less in actual cash to the government in taxes, leaving more cash in the company’s pocket.

What are the pros and cons of DCF vs Comps.?

DCF (intrinsic):

• Pros: Values the company based on its own specific projected cash flows. Not dependent on market moods.

• Cons: Highly sensitive to assumptions (terminal value and WACC) —> small changes lead to wild swings.

Comps (relative):

• Pros: Based on real-time market data and what ppl are actually paying for similar business right now.

• Cons: The market might be wrong (bubbles). It’s hard to find a “perfect” peer company.

If you could only have one financial statement, which would it be and why?

I would choose the Statement of Cash Flows (SCF):

• Not choose the income statement b/c it can be manipulated by accounting assumptions (i.e. absorption) and non-cash items (i.e. depreciation).

• Not choose balance sheet b/c its just a snapshot in time.

• SCF tells the literal “truth” about a company’s liquidity - whether its actually generating cash from its ops or just surviving on debt and asset sales.