By Prof. Dubos J. Masson, Ph.D., CTP, Cert ICM, FP&A
For FP&A professionals without much of a financial background, the financial calculations portion of the FP&A exam can be a real challenge, especially since there are so many formulas you have to learn as part of the study process. My objective in this blog is to help you organize your thoughts, and your studying, for this portion of the exam. The ideas here will work just as well for most of the other formulas in the exam as well.
1. Learn how to do a formula dump.
As a first step, I think it is very important to create a listing of all the formulas for the financial ratios and other calculations, on one page if possible. And don't just "cut and paste" the formulas from the text or other study materials—write them out. The process of writing down the formulas will help to reinforce them in your memory. This may seem like a daunting task, but it really is the best way to get a handle on memorizing the formulas you will need for the exam.
Break it up into small pieces—try to learn a few formulas each day, until you a comfortable with putting them all onto a sheet of paper from memory. It also helps to think of them as a story, rather than just a dry definition. For example, rather than just memorizing the current ratio as current assets divided by current liabilities, think of the how companies use their current assets and they then have to fund those assets with the current liabilities and other sources. This will also help in understanding other working capital issues that arise as part of the analysis.
2. Practice, practice, practice!
If you have the AFP Learning System, there are many practice problems provided and you should run through these as much as you can. If you do not have the Learning System, then I urge you buy an inexpensive financial management textbook online. Most of these are used in college-level finance classes, and they are updated on a regular basis. But guess what? Ratio and financial analysis never really changes—so getting a used textbook that is a couple of editions old will work great for study purposes and it will usually be really cheap. You can also just download annual reports for publicly traded companies and do some ratio and financial analysis on them. Be sure to double check your calculations, or even better—get together with some other exam candidates and check each other's work.
3. Become a test maker—not just a test taker.
Once you have practiced doing some of the financial calculations, try your hand at writing some of your own multiple choice questions based on a sample company. Remember that in most cases, the questions you will see on the exam will not be simple "plug in the numbers" questions. That is, they will not just give you current assets and current liabilities and ask you to calculate the current ratio—where is the fun in that? More likely it will a question in form of: Your company's bank has imposed a covenant requiring a current ratio of 2.5 or better. If you have total current assets of $250,000, what is the maximum level of current liabilities you can have and still meet this requirement? The math here is pretty easy, and you should be able to figure out that the limit on current liabilities will be $100,000. As in the previous section, if you can get together with others taking the test and you can write questions for each other. The more you look at the material and problems and think: "If I were writing a question on this, what it look like?", the more prepared you will be when exam time comes around.
4. Manage your time at the exam.
My recommendations for managing the calculations on the exam are mainly about making the best use of your time. You have a limited amount of time to do the questions, and the more organized your approach, the better your results will be. You will be provided with some whiteboards and markers that you can use for notetaking at the test center. Once you begin the actual exam, I suggest you take a quick pass through the questions. The main value in this is that you will then have a very clear idea of exactly how many calculations you will have (at least in the multiple choice portion) and you can write down the formulas you will need for those problems. You can use this same process when you get to the task-oriented exercises in the second half of the exams. Some students feel they need to write down all of the formulas as soon as they are able to use the white boards, which may work for you—but you will most likely be writing down a lot more than you need for exam if you follow that approach.
Check back for future blogs on this topic for more information and tips!
Prof. Dubos J. Masson, Ph.D., CTP, Cert ICM, FP&A is Clinical Associate Professor of Finance for the Kelley School of Business, Indiana University.