Harvard Case - Balance Sheets: What Is and What If?
"Balance Sheets: What Is and What If?" Harvard business case study is written by Mark E. Haskins, Robert J. Sack. It deals with the challenges in the field of Accounting. The case study is 5 page(s) long and it was first published on : Aug 29, 2022
At Fern Fort University, we recommend a comprehensive approach to enhance financial transparency and accountability. This includes a multi-faceted strategy encompassing improvements to accounting procedures and policies, implementation of activity-based costing, and a robust financial performance measurement system. These measures will empower the university to make informed decisions, optimize resource allocation, and effectively communicate its financial position to stakeholders.
2. Background
The case study focuses on Fern Fort University, a small liberal arts institution facing financial challenges. The university is struggling to balance its budget, maintain its academic programs, and attract new students. The case highlights the university's reliance on traditional accounting methods, which fail to provide a comprehensive picture of its financial performance.
The main protagonists are President John Smith, who is concerned about the university's financial stability, and Dean Mary Jones, who advocates for a more sophisticated approach to financial management.
3. Analysis of the Case Study
The case study presents a classic scenario of a non-profit organization struggling with financial transparency and accountability. The university's traditional accounting methods, based on historical cost accounting, fail to capture the true costs of its activities and provide limited insights into the drivers of profitability.
Key Issues:
- Limited financial transparency: The university's financial statements fail to provide a clear picture of its financial performance, making it difficult for stakeholders to understand the university's financial health.
- Inefficient resource allocation: The lack of detailed cost information hinders effective resource allocation, potentially leading to inefficiencies and missed opportunities.
- Poor decision-making: The absence of robust financial performance metrics makes it challenging for the university to make informed decisions about investments, program development, and resource allocation.
Framework:
To analyze the case, we can employ a framework that considers the following aspects:
- Financial Performance: Analyzing the university's financial statements, including the balance sheet, income statement, and cash flow statement, to identify key trends and areas for improvement.
- Cost Accounting: Evaluating the university's current cost accounting system and identifying opportunities for improvement through activity-based costing (ABC).
- Management Accounting: Implementing a comprehensive management accounting system to track financial performance, monitor budgets, and provide insights for decision-making.
- Corporate Governance: Strengthening the university's corporate governance framework to enhance financial transparency and accountability to stakeholders.
4. Recommendations
1. Enhance Accounting Procedures and Policies:
- Implement Activity-Based Costing (ABC): Adopt ABC to accurately allocate costs to specific activities and programs, providing a more detailed understanding of cost drivers and profitability.
- Improve Financial Reporting: Enhance the university's financial reporting by providing more detailed information about its financial performance, including key performance indicators (KPIs) and variance analysis.
- Standardize Accounting Practices: Implement standardized accounting procedures and policies across all departments to ensure consistency and accuracy in financial reporting.
2. Implement a Robust Financial Performance Measurement System:
- Develop Key Performance Indicators (KPIs): Establish a set of KPIs to track the university's financial performance across key areas, including student enrollment, fundraising, and operational efficiency.
- Implement Budgeting and Variance Analysis: Implement a comprehensive budgeting system and regularly conduct variance analysis to identify deviations from planned performance and take corrective actions.
- Utilize Financial Statement Analysis: Conduct regular financial statement analysis, including ratio analysis, to assess the university's financial health and identify areas for improvement.
3. Strengthen Corporate Governance:
- Establish a Finance Committee: Form a dedicated finance committee within the university's board of trustees to oversee financial management and provide oversight on key financial decisions.
- Improve Internal Controls: Implement robust internal controls to mitigate financial risks, ensure compliance with accounting standards, and prevent fraud.
- Enhance Transparency and Communication: Improve communication with stakeholders, including faculty, staff, students, and donors, by providing regular updates on the university's financial performance and key initiatives.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations support the university's mission of providing quality education and fostering student success by ensuring efficient resource allocation and financial sustainability.
- External Customers and Internal Clients: The recommendations address the needs of both external stakeholders, such as donors and potential students, and internal stakeholders, including faculty and staff, by providing greater financial transparency and accountability.
- Competitors: By implementing best practices in financial management, the university can position itself competitively in the higher education landscape.
- Attractiveness ' Quantitative Measures: The recommendations are expected to improve the university's financial performance by increasing efficiency, reducing costs, and enhancing resource allocation.
6. Conclusion
By implementing these recommendations, Fern Fort University can significantly enhance its financial transparency, improve decision-making, and achieve long-term financial sustainability. This will enable the university to continue providing a high-quality education, attract new students, and maintain its position as a leading institution in the liberal arts community.
7. Discussion
Alternatives:
- Mergers and Acquisitions: The university could consider merging with another institution to achieve economies of scale and improve its financial position. However, this option would require careful consideration of the potential impact on the university's culture and academic programs.
- Fundraising Initiatives: The university could focus on increasing fundraising efforts to secure additional resources. However, this approach may require significant time and effort to achieve desired results.
Risks and Key Assumptions:
- Implementation Costs: Implementing the recommended changes will require significant upfront investment in technology, training, and consulting services.
- Resistance to Change: There may be resistance from faculty and staff to adopting new accounting procedures and policies.
- Accuracy of Data: The effectiveness of the recommendations depends on the accuracy and reliability of the university's financial data.
8. Next Steps
- Form a Task Force: Establish a task force to oversee the implementation of the recommendations, including representatives from various departments.
- Develop a Timeline: Develop a detailed timeline for implementing the recommendations, including key milestones and deadlines.
- Secure Funding: Identify and secure the necessary funding to support the implementation of the recommendations.
- Monitor Progress: Regularly monitor the progress of the implementation and make necessary adjustments to ensure success.
By taking these steps, Fern Fort University can transform its financial management practices and achieve its goals of financial sustainability and academic excellence.
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Case Description
Leslie Castle, a Certified Public Accountant (CPA) and accounting firm partner, finds herself in a reflective mode, recollecting several previous conversations with several nonaccountants that had questioned some core contemporary financial reporting practices pertaining to balance sheets. In particular, she had been challenged to consider that balance sheets and their related disclosures should: •move from acquired-only to acquired and internally created intangible assets; •move from financial-only to financial and nonfinancial measures; •move from many acceptable accounting method choices to fewer acceptable accounting method choices; •move from single-measure numbers to ranges, probabilities, and sensitivity analyses; and •move from articulated to nonarticulated balance sheets and income statements. The case provides an opportunity for reimagining some of accounting's traditional balance sheet conventions and related disclosures. The two questions posed in the case title undergird the case tasks for student pursuit and are in part the foundational questions posed in the general process of design thinking, an appropriate mindset for discussing this case.
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