How Do You Build Financial Models? | Mastering the FP&A Interview Question #32

FP&A is often misunderstood as mere number crunching.

However, the real essence of FP&A lies in critical thinking and logical decision-making. It’s about your ability to communicate your financial insights clearly. Even without opening an Excel file.

If you’ve ever been asked in an interview, “How do you build financial models?” and felt stuck or overwhelmed, this guide will show you how to answer like a pro.

Drawing on a simple yet powerful example of a lemonade stand and a proven three-part framework, this article will help you master the art of explaining your financial modeling approach with clarity and confidence.

Understanding the Interviewer’s Question

Interviewers may phrase the financial modeling question in many ways, such as:

“Can you walk me through a model you’ve built from scratch?”
“What’s your typical approach to financial modeling?”
“How do you go about structuring a model for a new business case?”
“If I asked you to build a forecast model tomorrow, where would you start?”
“What steps do you follow when building a financial model?”

No matter how the question is phrased, the ask remains the same: Can you think clearly and communicate your approach?

Many candidates stumble not because they lack Excel skills, but because they fail to explain their approach logically. They might list Excel formulas like VLOOKUP or pivot tables, or jump straight to outputs such as dashboards or Profit & Loss statements. But missing the crucial story and flow behind the numbers.

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The IPO Framework: A Simple Shortcut to Explain Financial Modeling

To tackle this common interview challenge, use the IPO Framework, which stands for:

Inputs
Processing (Calculations)
Outputs

This framework mirrors the process of cooking a meal:

First, gather all the ingredients (inputs).
Then, mix and cook them (processing).
Finally, serve the dish (outputs).

By breaking down your model into these three clear parts, you can explain your logic step-by-step, making it easy for interviewers to follow and understand.

Breaking It Down: The Lemonade Stand Example

Imagine your friend wants to start a lemonade stand selling 50 cups per day at $3 each during weekends. There are startup costs like a table, juicer, and signboards. The ingredients—lemons, sugar, and cups—cost around $1.20 per cup, and the rent for the stall is $200 per month. Your friend asks, “Can you build a financial model to see if this business makes money?”

Remember, you’re not just building a spreadsheet—you’re telling the financial story of a real business.

Step 1: Inputs (The Assumptions Tab)

This is the foundation of your model. You list all key assumptions or drivers in a dedicated tab, such as:

Price per cup: $3
Number of cups sold per day: 50
Cost per cup (lemons, sugar, cups): $1.20
Rent per month: $200

Keep these inputs organized separately and color-coded (typically in blue) to distinguish them from calculations. Add comments to clarify assumptions, like “based on last summer’s sales” or “benchmark vs. nearby stands.” This documentation shows how you think and validate your inputs.

Step 2: Processing (Calculations)

This is the engine room of your model, where you link your inputs to formulas and build the logical flow:

Revenue = Number of cups × Price per cup
Cost of Goods Sold (COGS) = Cost per cup × Number of cups
Gross Profit = Revenue − COGS

Every formula should be traceable back to an input. If sales increase, costs should rise accordingly. If the numbers don’t flow logically, it’s a red flag signaling a problem in your model.

Step 3: Outputs (The Summary Tab)

Here, you bring the story together with a clean summary of key metrics such as monthly profit, break-even point, and cash runway. Visual aids like charts, traffic lights, or red flags help highlight important insights—such as when cash balances turn negative.

Including balance checks, for example, ensuring assets equal liabilities plus equity, helps catch errors early and enhances the reliability of your model.

How to Confidently Present Your Approach in an Interview

When asked about your modeling process, structure your answer clearly and confidently using the IPO framework:

Inputs: “I start by defining assumptions like price, volume, and upfront costs, all organized on a separate assumptions tab with clear sources.”
Process: “Next, I build calculations that flow logically from these inputs, projecting revenue, costs, and profit step-by-step.”
Outputs: “Finally, I summarize key outputs such as cash flow and break-even analysis on a clean dashboard designed for easy decision-making.”

You can also add value by mentioning additional best practices you follow, such as including version controls, balance checks, and scenario planning toggles.

Sharing a past mistake and what you learned from it can make your answer stand out. For example:

“I once forgot to link net income to retained earnings in my model. Now, I always build a retained earnings roll forward to catch imbalances early.”

This shows interviewers that you think clearly, learn from your experiences, and continuously improve.

Key Takeaways: Financial Modeling Is About Structure, Not Complexity

FP&A professionals are not judged by how many fancy Excel formulas they know, but by how logically they think and communicate their approach. The best financial models are built one step at a time, using a solid structure:

Inputs: Start with clear, well-documented assumptions.
Process: Build logical, traceable calculations.
Outputs: Present clean, decision-ready summaries.

Mastering this approach will help you ace your FP&A interviews and build models that truly tell the story of a business.

What’s your favorite financial modeling tip? Share your thoughts and experiences in the comments below!

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