Top Finance Interview Questions and Expert-Recommended Answers

When preparing for a finance job interview, knowing the most frequently asked questions and mastering their answers is crucial for success. Whether you’re applying for a financial analyst position or a broader role within a finance department, understanding both technical and behavioral questions is key. Based on questions asked at top investment banks, this guide will help you navigate your interview and increase your chances of landing the job.

In addition to this guide, it’s helpful to explore resources like “The Analyst Trifecta“, which outlines what makes a great financial analyst, focusing on the combination of analytical, presentation, and soft skills.

General Finance Interview Tips

Finance interviews usually have two primary categories of questions:

1. Behavioral/fit questions
2. Technical questions

Behavioral questions focus on soft skills such as teamwork, leadership, problem-solving, and communication. Preparing for these questions involves selecting 5-7 experiences from your resume that showcase your skills in these areas. Be ready to discuss instances of leadership, handling challenges, or overcoming weaknesses.

Technical questions delve into finance and accounting topics that test your industry knowledge and technical expertise. This guide will focus primarily on the technical questions you might face in a finance interview.

Here are some general tips for answering finance interview questions:

• Take a moment to plan your response, and repeat the question back to the interviewer to buy some time.
• Structure your answer logically, breaking it down into clear points.
• If you don’t know the exact answer, share what you do know and avoid guessing. It’s better to admit uncertainty than to provide incorrect information.
• Always demonstrate your reasoning, showing that you can work through problems logically even if you don’t have a precise answer.

Finance Interview Questions and Sample Answers

1. Walk me through the three financial statements.

The balance sheet outlines a company’s assets, liabilities, and shareholders’ equity, providing a snapshot of its financial health.

The income statement summarizes the company’s revenues, costs, and net income over time.

The cash flow statement breaks down cash inflows and outflows into operating, investing, and financing activities, showing how cash moves within the company.

2. If you could only use one financial statement to evaluate a company’s health, which would you choose?

Many interviewees opt for the cash flow statement since it offers insight into how much cash a company generates and spends, highlighting its liquidity and ability to fund operations. However, you could argue for the balance sheet or income statement, depending on your reasoning.

3. How would you design our company’s budgeting process?

A good budgeting process should have input from all departments, be realistic yet challenging, and align with the company’s strategic goals. It should be iterative, allowing for adjustments, and consider either a zero-based or incremental approach depending on the business type.

4. When should a corporation issue debt rather than equity?

A company should issue debt if it can benefit from the tax shield provided by interest payments. If the firm has steady cash flows and can afford interest payments, debt can be a cost-effective way to optimize capital structure and reduce the weighted average cost of capital (WACC).

5. How do you calculate the WACC?

The Weighted Average Cost of Capital (WACC) is calculated by combining the cost of debt and equity. It considers the proportion of each in the company’s capital structure, adjusting for taxes. 

The formula is:

WACC = (E/V * Re) + ((D/V * Rd) * (1 – Tc))

Where E is equity, D is debt, V is total capital, Re is the cost of equity, Rd is the cost of debt, and Tc is the tax rate.

6. Which is cheaper, debt or equity?

Debt is generally cheaper because it ranks higher in the event of liquidation and often comes with collateral. However, financing decisions should consider the pros and cons of both. For instance, while debt might be cheaper, too much leverage increases financial risk.

7. What happens if a company starts capitalizing R&D costs instead of expensing them?

EBITDA will increase since capitalized expenses aren’t included in operating expenses. Net income may also rise due to delayed depreciation. Cash flow is largely unaffected, though taxes may be impacted. Overall, company valuation remains steady, with minimal impact on cash flow.

8. What makes a good financial model?

A solid financial model follows structured principles, with clearly defined inputs and outputs. Key features include color-coded inputs, error checks, and organized assumptions. It should also balance between detail and simplicity, ensuring users can interpret the data effectively.

9. What is working capital?

Working capital is defined as current assets minus current liabilities, though in finance, it often excludes cash and interest-bearing debt. The measure shows a company’s short-term financial health and its ability to cover immediate obligations.

10. What does negative working capital mean?

Negative working capital can be a sign of efficiency in industries like retail, where companies collect cash from customers before paying suppliers. However, in other contexts, it may signal financial distress if the company struggles to meet current liabilities.

11. When do you capitalize instead of expense a purchase?

If an asset will provide value for over a year, it is capitalized and depreciated over time, rather than being fully expensed in the period it was purchased.

12. How does an inventory write-down affect the financial statements?

The balance sheet reflects a reduction in inventory and shareholders’ equity. The income statement includes an expense, reducing net income. On the cash flow statement, the write-down is added back to operating activities since it is a non-cash expense.

13. Why might two companies merge?

Companies merge for various reasons: to achieve synergies, enter new markets, acquire new technology, or eliminate competition. It can also be accretive to financial metrics, improving the company’s overall financial health.

14. If you were our company’s CFO, what would keep you up at night?

A CFO must monitor several key areas: the income statement (focusing on profitability and growth), the balance sheet (assessing liquidity and debt ratios), and the cash flow statement (ensuring healthy short- and long-term cash flows). External factors such as market conditions and regulatory changes also play a significant role.