Week 13

Welcome to an exciting edition of Legit Numbers!

This week, we'll be tackling the intricacies of Finance & Accounting interviews, exploring the dynamic relationship of Accounting FP&A, and unraveling the mysteries of the House of FP&A.

What we’ll be covering in this edition:

• 10 Finance & Accounting interview questions (with answers)

• The Accounting FP&A Yin Yang

• The House of FP&A 🏠

Let's dive in...

1️⃣ What are the 3 financial statements, and how are they connected?

The 3 financial statements are the Profit and Loss, the Balance Sheet, and the Statement of Cash Flows.

The P&L connects to the Balance sheet via an account called Retained Earnings

And the Cash flows pulls balances from both the P&L and Balance Sheet

2️⃣ What’s the difference between Cash vs Accrual accounting?

Cash accounting for the most part means you classify money in as income, and money out as expenses

Accrual accounting means you classify income only when it’s earned, and expenses only when they are incurred

3️⃣ What is Deferred Revenue?

Deferred Revenue represents the $$ amount of goods or services you owe to your customers

4️ ⃣ How do journal entries work?

Journal entries help communicate which accounts on your general ledger are increasing or decreasing.

They are denoted via Debits and Credits, and must always match one another

5️⃣ What’s a bank reconciliation, and why is it important?

Bank reconciliations allow you to compare & match the balance in your bank accounts to the amounts reported in your General edger

These are crucial as with cash balances, there can be no room for interpretation

6️⃣ What is a accrued expense?

An accrued expense is an expense incurred, but not yet paid

It can also represent an expense incurred in which a bill has not been received, resulting in an estimate

7️⃣ What are workpapers, and how should you organize them?

Workpapers showcase the supporting calculations for entries recorded in your general ledger, often times prepared in excel.

It’s important for these to not only be accurate, but also easy for someone else to read & understand

8️⃣ What are the chart of accounts, and how should they look?

Your chart of accounts represent the line items that show up on your P&L and Balance Sheet

It's important to design these accounts in a manner in which readers can understand what’s happening easily

9️⃣ What’s a contra account and how does it work?

A contra account is an account in a section that behaves in the opposite manner of the accounts in that section.

An example can be a discount (contra revenue), and accumulated depreciation (contra asset)

🔟 How do you build a statement of cash flows?

You can easily build a statement of cash flows via the indirect method by taking the net ▲ in your balance sheet, as well as your net income

It is most commonly presented via your Cash from Operating Activities, Cash from Investing Activities, and Cash from Financing activities

Those are my 10 favorite Finance & Accounting interview questions…

The Accounting FP&A Yin Yang

they are 2 sides of the same coin

Accounting & FP&A each contains key responsibilities…

and together they make up your Finance & Accounting 🤝

So often I see these 2 sides clash

But when they work in harmony with one another, great things happen

Here’s an overview on what Accounting does

➡️ Accounting

🔸Financial Reporting - “closing out” your financial statements in your accounting software (often known as bookkeeping)

🔸AP - coordinating & processing bill payments to vendor

🔸Invoicing - sending invoices to customer, and coordinating collections

🔸Payroll - onboarding employees, approving & processing payroll, coordinating with state tax agencies (parts of this function may be handled under HR)

🔸Taxes - annual federal & state income tax filings, Delaware franchise tax, sales tax (typically not done in house at a startup)

🔸 Audit - coordinate audit with external auditing firm (usually done after Series B)

But that’s just one side of the coin. The other function is just as crucial…

➡️ Financial Planning & Analysis (FP&A)

🔹 Projections - adding forecasted figures for all areas of the business (revenue, cash flows, ARR)

🔹 Data analysis - analyzing data to optimize for better costing / profitability

🔹 Budget vs Actuals - comparing what you had projected vs what actually took place. (My favorite area of FP&A)

🔹 Board reporting - providing the board of directors with key summaries on what’s happening…another one of my favorites

🔹 Fundraising - wowing investors, and showing them how you’ll be 100x’ing each month for the rest of eternity 🤑

What’s my #1 advice for Finance & Accounting professionals?

LEARN BOTH

There’s so much you can do when you understand how to prepare data, as well as analyze & draw meaningful insights from that data

If you’re an accountant - learn how to build a 3 statement model, or how to prepare a budget vs actuals…or a beautiful dashboard

If you’re in FP&A - learn what debits & credits are…or how cash vs accrual accounting works

I’ve seen few achieve this well, unless you’re a CFO - which would be a require you to learn both

But don’t wait till you’re a CFO. Learn today

Your career depends on it

FP&A stands for Financial Planning & Analysis

And before you can PLAN or ANALYZE, you need DATA

➡️ The Foundation: Your Source Data

Your Data can come from a number of sources, such as:

1. Your Financial Statements

2. Your General Ledger

3. Your Financial Model

4. Your Payroll Platform

5. Your Database

6. Your CRM

7. Your Payment Gateway

8. Your Sales Platform

The key here is to ensure that your data is ACCURATE and EASY TO ACCESS.

Without these 2 points, your entire house can collapse

➡️ The Structure: Your Analysis

Now it’s time to analyze your data

Ask yourself what happened this period that deserves attention

Did the numbers wildly change from last period?

Did you miss your budget by a large amount?

My favorite methods are a mixture of horizontal analysis ↔️ (how this compares to other periods)

As well as vertical analysis ↕️ (how each metric compares to another, ex: payroll as a % of revenue)

➡️ The Roof: Your Presentation

Now that you have your data analyzed, it’s time to present your insights

Start by understanding who is ingesting this information.

Is it the CEO?

The Board of Directors?

Prospective investors?

Each audience can mean a different area to focus on, and a different story to tell

When presenting your findings, it’s most common to present in PowerPoint, though I’ve seen many presentations flow directly from excel / google sheets

Aside from presenting WHY this is important, be sure to invest in DESIGN.

A well designed presentation can make the world of a difference over a poorly designed presentation with the same exact data

⬇️ Click the image to download this poster in high resolution from my website

That wraps up another enlightening edition of Legit Numbers.

We hope you enjoyed exploring the world of Finance & Accounting with us. From mastering finance interview questions to understanding the intricate dynamics of Accounting FP&A and the House of FP&A, we've covered a range of valuable topics.

If you have any questions or suggestions for future topics, please feel free to reply to this email. Your feedback is important to us.

Stay tuned for more insightful content in the weeks ahead. Until then, take care and keep embracing the world of finance!