Case study interviews are a crucial component of the recruitment process for consulting firms. However, candidates without a business background often grapple with unfamiliar business terms frequently appearing in case studies. This article aims to provide aspiring consultants with a crash course on the most common business terms encountered in case study interviews, and guide them on learning and integrating these terms into their preparation practice.
In short, read this and you will already know 95% of all the terms likely to appear in consulting interviews.
Breakeven refers to the point at which total revenue equals total costs, resulting in zero profit or loss. It helps determine the minimum level of revenue needed to cover expenses.
The breakeven point is calculated using the formula:
Breakeven = Revenues – Cost = Zero profit
- % Change:
% Change calculates the percentage difference between two values. It is often used to assess growth or decline.
The formula for % Change is:
% Change = ((New Value - Old Value) / Old Value) * 100
- Return on Investment (ROI):
ROI measures the profitability of an investment by comparing the gain or loss relative to its cost. A higher ROI indicates better investment performance.
The formula for ROI is:
ROI = (Profit / Investment Cost) * 100
Margin refers to the percentage of profit generated from sales.
Margin is calculated as:
Margin = (Revenue - Cost) / Revenue
Markup represents the amount added to the cost of a product to determine its selling price. It helps businesses set prices to ensure profitability. The formula for markup is:
Markup = (Profit / Cost) * 100
- Market Share:
Market share represents the portion of the total market that a company or product controls. It indicates competitiveness and market position.
It is calculated as:
Market Share = (Company's Sales / Total Market Sales) * 100
- Supply and Demand:
Supply and demand refer to the relationship between the quantity of a product or service available (supply) and the quantity desired by customers (demand). Understanding this dynamic helps assess pricing, market equilibrium and potential shortages or surpluses.
- Cost-Benefit Analysis:
Cost-benefit analysis compares the costs incurred with the expected benefits of a decision or project. It assists in evaluating the feasibility and profitability of potential endeavors.
- Fixed and Variable Costs:
Fixed costs remain constant regardless of production volume, while variable costs change proportionally with production. Understanding cost structure helps in analyzing profitability and breakeven points.
- Competitive Advantage:
Competitive advantage refers to the unique qualities or assets that differentiate a company from its competitors. It can include superior technology, brand recognition, cost efficiency, or exclusive resource access.
- Market Segmentation:
Market segmentation involves dividing a broad market into distinct groups based on characteristics such as demographics, behavior, or preferences. It helps target specific customer segments effectively.
- Value Chain:
The value chain describes the sequence of activities a company performs to create value for its customers. It includes inbound logistics, operations, outbound logistics, marketing and sales, and customer service.
- Opportunity Cost:
Opportunity cost refers to the value of the next best alternative forgone when making a choice. It represents the potential benefits or profits sacrificed by choosing one option over another.
- Economies of Scale / Economies of Scope:
Economies of scale occur when the average cost per unit decreases as production volume increases. Economies of scope refer to cost savings achieved by producing a variety of products using shared resources.
- Balance Sheet:
A balance sheet provides a snapshot of a company's financial position at a specific time. It lists assets, liabilities, and shareholders' equity. It helps assess a company's solvency and liquidity.
- Income Statement:
An income statement, also known as a profit and loss (P&L) statement, summarizes a company's revenues, expenses, and net income over a specific period. It helps evaluate profitability and performance.
- Cash Flow Statement:
A cash flow statement tracks the flow of cash in and out of a company during a specific period. It helps assess the company's ability to generate and manage cash.
- SWOT Analysis:
SWOT analysis evaluates a company's strengths, weaknesses, opportunities, and threats. It provides a comprehensive overview of internal and external factors affecting the organization's strategic position.
- Stakeholder Analysis:
Stakeholder analysis identifies individuals or groups with a vested interest in a company's operations. It helps understand their influence, interests, and potential impact on decision-making.
I spent 5 years in McKinsey, handled financial models that required a special computer, conducted over 500 coaching interviews AND I still do not know most of these formulas by heart, which is why interviewers are unlikely to expect this from you.
I advise reading and practicing them 1–2 times, so you know how they work. If they appear in the interview, tell the interviewer you are familiar with the concept but do not remember the formula by heart. Say that under normal circumstances, you would look it up, but ideally, now they would help you by providing it directly.
That will confirm to the interviewer that you know how to think through the process, have business knowledge and know how to leverage others around you to reach your goals – and that is what matters, not memorizing formulas.
Regardless, here they are:
- CAGR (Compound Annual Growth Rate):
CAGR measures the average annual growth rate over a specific period, smoothing out fluctuations.
The formula for CAGR is:
CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) - 1
- DCF (Discounted Cash Flow):
DCF is a valuation method that estimates the present value of expected future cash flows. It incorporates the time value of money by discounting future cash flows to their present value using a discount rate.
The formula for calculating the present value of future cash flows using DCF is as follows:
DCF = CF₁ / (1 + r)¹ + CF₂ / (1 + r)² + ... + CFₙ / (1 + r)ⁿ
- DCF: Discounted Cash Flow
- CF₁, CF₂, ..., CFₙ: Cash flows expected to be generated in each period (e.g., year)
- r: Discount rate, representing the required rate of return or cost of capital
- The discount rate reflects the risk and opportunity cost of investing in the asset or business. It typically considers factors such as the risk-free rate of return, the company's cost of capital and the expected rate of return on similar investments.
- NPV (Net Present Value):
NPV measures the value of an investment by comparing the present value of expected cash flows with the initial investment cost. Positive NPV indicates a profitable investment. NPV can consider growth by using cash flows projected over multiple years.
The formula for NPV is:
NPV = CF0 + (CF1 / (1+r)^1) + (CF2 / (1+r)^2) + ... + (CFn / (1+r)^n)
CF represents cash flow, r is the discount rate, and n is the time period.
- Gross margin:
It represents the profitability of a company's core operations. It indicates the percentage of revenue after deducting the direct costs associated with producing or delivering the goods or services.
Gross Margin = (Revenue - Cost of Goods Sold) / Revenue
- Net margin:
It measures the percentage of revenue a company retains as net income after deducting all expenses, including cost of goods sold, operating expenses, interest, taxes, and other non-operating costs.
Net Margin = (Net Income / Revenue) * 100
- Operating margin:
It represents the percentage of revenue left after deducting all operating expenses, such as cost of goods sold, marketing expenses, salaries, rent, and other overhead costs.
Operating Margin = (Operating Income / Revenue) * 100
- Inventory Turnover:
Inventory turnover measures how efficiently a company manages its inventory by calculating the number of times inventory is sold and replaced within a given period.
The formula for inventory turnover is:
Inventory Turnover = Cost of Goods Sold / Average Inventory
To avoid learning these terms by heart, here are three alternative strategies to consider:
- Organic Learning:
This is the approach I recommend to most candidates. It consists of doing nothing aside from practicing cases.
Active Vocabulary Building:
Whenever a new term shows up, look it up, write it down and make sure you understand it. As you continue practicing, you will soon realize that the terms start repeating themselves. After the first 20–30 cases you practice, you will have already come across 80% of the most common terms. This saves you time from proactively looking up terms you might never need and helps you learn faster through contextualization.
- Research and Study:
One of the most fundamental approaches to learning business terms is through research and study. Start by leveraging reputable online resources, business textbooks, and industry publications to gain a solid foundation of knowledge. Explore materials that provide explanations, examples and practical applications of each term. Consider creating flashcards or summaries for quick reference and review.
Here are some of the sources for learning
- Online Learning Platforms:
Websites like Coursera, edX, and Udemy offer a wide range of business courses that cover various topics, including finance, accounting, strategy, and marketing.
- Business Books:
Reading books written by renowned business authors can provide valuable insights into different aspects of business. Some recommended books include "The Lean Startup" by Eric Ries, "The Innovator's Dilemma" by Clayton M. Christensen, "Thinking, Fast and Slow" by Daniel Kahneman, and "Good to Great" by Jim Collins.
- Case Study Books:
Case study books designed for management consulting interviews can be incredibly helpful. These books typically contain a collection of business cases with detailed explanations and solutions. Classic examples include "Case in Point" by Marc P. Cosentino and "Crack the Case System" by David Ohrvall.
- Business Publications and Journals:
Magazines like Harvard Business Review, Forbes, and The Economist provide insightful articles on various business topics, including strategy, finance, and leadership.
- Seeking Mentorship:
While self-study and practice are crucial, seeking guidance from experts or mentors in the field can provide valuable insights and feedback. Connect with individuals with management consulting experience or a strong business background. They can offer guidance on prioritizing specific terms, provide real-world examples, and share their experiences with case interviews.
Furthermore, if you have the opportunity, attending workshops, seminars, or specialized training programs in consulting can provide structured learning environments to deepen your knowledge of business terms and their application.
Mastering business terms is crucial to excelling in case study interviews for management consulting positions. These terms demonstrate your understanding of fundamental business concepts and enable you to analyze complex situations and propose strategic solutions. Throughout this article, we have explored 25 common business terms that frequently arise in case study interviews, providing clear explanations and formulas where applicable.
This synthesis should provide you with almost all the terms you will likely need. Still, it is essential to remember that consulting interviews do not test for knowledge. They test for skills and mindset. No consultant will fail you because you do not know a formula by heart, but they will do so if you are unable to communicate with them effectively to obtain the formula.
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