During an interview case study, you may be presented with basic financial accounts (or other financial information) relating to a fictional business’ current year and a few previous years. Where this is the case, you might be expected to compare that financial information to ascertain whether a pattern has emerged that reflects positively or negatively on the relevant business. For example, following such comparison, you might notice that the profitability of a proposed acquisition target has declined over time, in which case you would likely need to give some thought as to why this might be the case. This is where the below framework can come in handy.

This framework provides a breakdown of the key elements that can affect profitability, which can help you in case study interviews to assess and discuss the potential causes of changes in profitability. The framework shows that the two main components of profitability are revenue and costs and that the difference between these two metrics gives you the profit figure. It then shows that revenue equals the price charged per unit, multiplied by the number of units sold. And that costs are comprised of both variable and fixed costs (with variable costs being the cost of producing each unit, multiplied by the number of units produced and sold).

In a case study scenario, if you have identified that there has been a change in profitability, you should try to understand whether this is caused by a change in the company’s revenue, its costs, or both. You should then consider the potential drivers of any changes in revenue and/or costs. For example:

• If the business has experienced a drop in revenue, consider whether this is because the price per unit has changed, or because the business is selling more/fewer units. If the business is selling fewer units, you should also think about why this might be the case. For example, could this indicate that new competitors have entered the market (or that existing competitors have developed a similar or superior product, perhaps at a more favourable price).
• If costs have increased, consider whether this is because of fixed costs or variable costs. If fixed costs have increased, could this be because the business has invested in acquiring assets, for example machinery or factories? If so, perhaps point out that this could increase revenues and improve profitability in the long-term, even if profitability has been negatively impacted in the short-term.
• If variable costs have increased, is this because the cost of producing each unit has increased, or simply because the company is producing more units? If the cost of producing each unit has increased, does this suggest the company has failed to implement effective mechanisms to control costs (in which case think of potential solutions, for renting cheaper office space or seeking out cheaper suppliers). Or has the cost of raw materials increased (e.g. if the company produces apple juice, has the price of apples increased)?