Finance Knowledge Required for Consulting Case Interviews

Question:

Your website and your Look Over My Shoulder® programs are fantastic resources.  I have recommended them to many friends.

My question for you is to what extent does a non-MBA candidate need to learn finance?

I have been helping a friend of mine who has a PhD in a science discipline prepare for consulting case interviews.

I have an MBA from a school which is well known for finance. I have found a number of practice cases, including many actual McKinsey cases, which assume some basic knowledge of finance.  In fact I have seen some cases which require the calculation of perpituity value and even future value of cash flows.

My friend, while being very smart and mathamatically adept, doesn't know a discounted cash flow from a discount coupon for a free haircut (I don't recommend getting the free haircut by the way... it never turns out well).

So my question is, "Do I need to give my friend a crash course in finance"?

Finance subjects I have seen in cases: 1.  Net Present Value2.  Future Value of Cash Flows 3.  Depreciation Expense (specifically that it is a non-cash expense) 4.  Rule of 72 (time for cash to double given an interest rate) 5.  Perpituity Value 6.  Perpituity Value with Growing Cash Flows 7.  Breakeven Period 8.  Breakeven Volume

Quick answer is in most cases "no," finance training is not required, especially for PHd in sciences. This is especially true at McKinsey. Some of the finance cases you'll see at McKinsey are specifically for hires into the firm's corporate finance group -- which is very heavy on finance and often recruitsprimarily at Wharton for those roles (as many of the other schools just don't teach that much finance).

Finance is basically a bunch of formulas, it is somewhat assumed that someone with a Phd in say physics can use a formula.

However, it would be useful for your friend to be conceptually aware of what a DCF - Discounted Cash Flow - is (Net Present Value), when you'd use it, and why you would use it.

The concept of Break even or a Break even Period is a useful one.

I would suggest they know the concept and how to calculate a Break Even Sales Volume... or if you raise prices 10%, but volume fell 10%, is the net profit better or worse than before... so basic concepts like that, that essentially allow the person to turn the question into a pure arithmetic problem IS useful.

Perpetuities, Rule of 72, Depreciation -- really aren't necessary.

Now the exception to this is if someone does have a finance degree and does not know these concepts, that would be a red flag.  That being said, if these concepts were not in the person's educational or career background, for McKinsey and other firms that recruit non-business people (and train them on the business concepts after they are hired), it is not a problem.

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