A great understanding of case interview formulas and the business ideas they represent can make all the difference in the case interview process. A solid understanding of these math formulas is important – but even more vital is realizing when and how to apply them and knowing how they relate to broader business ideas.
Not sure where you stand on these formulas or on your case math? Read on to learn about the importance of math and business formulas in case interviews, peruse a list of the most applicable formulas, and access our “cheat sheet’ for easy studying.
How are Math Formulas Used in a Case Interview?
Math formulas are a casing fundamental – knowing them won’t set you apart, but not having a firm understanding of how these business ideas work can set you back. These formulas range from ideas as straightforward as revenue calculation to calculations as complex as contribution margin, CAGR, price elasticity of demand, and net present value. They frequently come up in the quantitative portions of a case interview, but they can appear elsewhere as well. For example, the difference between recommending an investment or not comes down to a net present value, return on investment, or payback period calculation.
A familiarity with these formulas and the ideas they represent is the one big leg up that business and economics students have in the consulting recruiting process. Students from business backgrounds have been studying these formulas for years!
If that’s not you – that’s okay! Even the most prestigious consulting firms recruit heavily from non-business majors and depend on the viewpoints and ideas that students from diverse academic backgrounds bring to the table. A firm understanding of these business concepts, however, is a must for case interview success. Review the case interview formulas below – and, if you need more, see our formulas “cheat sheet,” linked below.
If you come from a non-traditional background and need more help, you may be interested in our Black Belt program. We exist to serve folks like you – we believe that, with the right preparation and right support, anyone can land a top consulting job. And if you do land that offer – and 80% of our Black Belts do – the ROI is off the charts! Find out more here.
List of Case Interview Formulas
Here’s a list of some of the formulas that come up most often in case interviews. Once you have a firm grasp on these, you’ll be able to solve the vast majority of math questions that come your way.
Profit and Loss Formulas
Revenue = Price x Volume (or Quantity). Revenue – the amount of money that a business brings in, or total sales, is equal to the unit price of each good multiplied by the amount of goods sold.
Gross Profit = Revenue – Cost of Goods Sold. Gross profit is the amount of money made by a business after accounting for the cost of the units sold but before accounting for more general expenses like marketing or distribution. It is equal to total sales (revenue) less the cost of the goods sold.
EBITDA = Net Income + Interest + Tax Expense + Depreciation and Amortization. This one is a little tricky and is unlikely to come up outside of technical financial cases. EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortization. To find EBITDA, add interest expense, tax expense, and depreciation and amortization expenses to net income.
EBIT = Net Income + Interest + Tax Expense. EBIT, or operating profit, is the same as the above EBITDA less depreciation and amortization.
Net Profit = Gross Profit – All other cost items. Net profit, or net income, is the total profit of the business – revenue less all business expenses including tax, depreciation, interest, etc.
Profit Margin Formula
Profit Margin = Profit/Revenue. Profit margin is a percentage and measures what amount of total revenue is actually taken home at the end of the day.
Total Cost Formula
]Total Costs = Variable Costs + Fixed Costs. A common framework for cost structure, total costs can be broken down into variable costs (costs that vary linearly with quantity sold) and fixed costs.
Contribution Margin Formula
Contribution Margin = (Revenue – Variable Costs) / Revenue. Contribution margin is a percentage measuring what amount of margin, or profit, a good brings in when only considering variable costs. It is an important component of breakeven calculations.
Market Data Formulas
Market Size Formula
Market Size = Total Revenue Spent in a Market = # of Target Customers x Expected Annual Purchases. The size of a market, in annual terms, is the number of customers multiplied by the amount that they are expected to spend in a year.
Market Share Formula
Market Share = Company Revenue / Total Market Revenue
CAGR = [(Ending Value / Beginning Value) ^ (1/n) – 1] * 100. CAGR, or Compound Annual Growth Rate, shows how fast a company, venture, or market is growing in percentage terms. “N” stands for time and must be in years. Note – CAGR is a fairly sophisticated financial formula, and calculating CAGR rarely comes up in interviews.
Price Elasticity of Demand Formula
Price Elasticity of Demand = (% change in quantity) / (% change in price). An economic formula, price elasticity of demand measures price sensitivity. While good to know, price elasticity is unlikely to come up in most interviews.
Depreciation = (Cost of an asset – Residual Value) / Useful Life of an Asset. Depreciation measures how much value a physical asset – like a tractor – loses over each year of its useful life.
Cost Plus Formula
Cost Plus = Breakeven Price * Profit Margin Goal. Used in “cost plus pricing,” the cost plus formula is a method of figuring out how to price a good to achieve a specific profit margin.
Payback Period Formula
Payback Period = Initial Investment / Generated Annual Profit. Payback period shows how long, in years, an investment will take to pay itself off. Payback period is useful in determining whether or not an investment is a profitable idea and comes up frequently in valuation questions.
Breakeven Point Formula
Breakeven Point = Fixed Costs / Contribution Margin. The Breakeven Point formula shows how many units will need to be sold to break even on a venture and frequently comes up in interviews.
Synergies = NPV + P. This formula can be used to calculate the value of synergies in a merger or acquisition. NPV stands for Net Present Value and P stands for Premium.
Net Present Value Formula
Net Present Value (in perpetuity) = Annual profit / discount rate. Net Present Value is an important concept in valuation and frequently comes up in M&A and new market entry cases. Often, interviewers will invite you to use a perpetuity calculation, meaning that you can calculate the Net Present Value by taking the annual profit stream and dividing it by a discount rate, often 10%.
ROI = Annual Profit / Initial Investment. ROI, or return on investment, measures how profitable an investment opportunity might be.
Cannibalization = [(Lost sales on old product) / (Sales of new product)] x 100. Cannibalization is a percentage measure of how much introducing a new product will cut into sales of your remaining goods. It is frequently relevant in new product and M&A cases.
Case Interview Formulas Cheat Sheet
Learning all these case math formulas – and remembering when to use each one – can be tricky, especially if you don’t come from a business background. We get that, so we’ve put together a formulas “cheat sheet” for you. You can download that here.
In this sheet, you’ll find all the formulas we’ve talked about – and more – broken down by area of applicability. Use this guide to help streamline your studying as you finalize your prep. Need additional help? Join our Black Belt program for 1:1 time with an expert ex-MBB interviewer to fine-tune your business acumen and get you ready to go.
Consulting firms recruit from everywhere (they really do!) and a business background is not a prerequisite. One of the struggles that non-business folks face, however, is a lack of familiarity with the types of business formulas and math questions that can come up in interviews.
Don’t let a few basic case interview formulas stand in the way between you and your MBB offer. Get yourself ready to go with our free formulas “cheat sheet”, and get comfortable with these types of business terminologies. Or, if you want more tailored advice and an expert support system throughout the recruiting process, check out Black Belt – our signature program designed to get you from recruiting newbie to offeree. 80% of Black Belts receive offers!
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