Harvard Case - The Financial Cockpit: Three Levers and One Flight Plan
"The Financial Cockpit: Three Levers and One Flight Plan" Harvard business case study is written by Mark E. Haskins. It deals with the challenges in the field of Accounting. The case study is 5 page(s) long and it was first published on : Jul 29, 2010
At Fern Fort University, we recommend that Fern Fort University implement a comprehensive financial management system that utilizes a "Financial Cockpit" approach. This system should incorporate three key levers: activity-based costing (ABC), performance-based budgeting, and balanced scorecard reporting. This approach will provide a holistic view of the university's financial performance, allowing for more informed decision-making and improved resource allocation.
2. Background
Fern Fort University (FFU) is a private, non-profit institution facing a challenging financial environment. The university is experiencing declining enrollment, increasing competition, and rising operating costs. The current financial management system is outdated and lacks transparency, making it difficult for the university to effectively allocate resources and achieve its strategic goals. The case study highlights the need for a more sophisticated approach to financial management, one that can provide a comprehensive view of the university's financial performance and identify areas for improvement.
The main protagonists in the case study are:
- Dr. Henry Ford: The university president, who is concerned about the university's financial health and is seeking a solution to improve financial performance.
- Ms. Susan Jones: The university's CFO, who is responsible for managing the university's finances and is looking for ways to improve the efficiency and effectiveness of the financial management system.
- The Board of Trustees: Responsible for overseeing the university's operations and ensuring financial stability.
3. Analysis of the Case Study
The case study highlights several key issues:
- Lack of Transparency: The current financial management system lacks transparency, making it difficult to track costs and understand the true financial performance of different departments and programs.
- Inefficient Resource Allocation: The university is not effectively allocating resources, leading to inefficiencies and a lack of focus on key strategic initiatives.
- Limited Financial Reporting: The current financial reporting system is limited and does not provide a comprehensive view of the university's financial performance.
- Lack of Performance-Based Budgeting: The university's budgeting process is not linked to performance, making it difficult to measure the effectiveness of spending.
To address these issues, we recommend implementing a 'Financial Cockpit' approach. This approach involves three key levers:
- Activity-Based Costing (ABC): ABC is a cost accounting method that assigns costs to activities and then to products or services based on the consumption of those activities. This approach provides a more accurate and detailed understanding of the true costs of different programs and activities, allowing for more informed decision-making regarding resource allocation.
- Performance-Based Budgeting: Performance-based budgeting links budget allocations to specific performance targets and measures. This approach encourages departments to focus on achieving specific goals and provides a framework for measuring the effectiveness of spending.
- Balanced Scorecard Reporting: The balanced scorecard is a performance management framework that provides a comprehensive view of the university's financial performance, taking into account not only financial metrics but also non-financial measures such as customer satisfaction, internal processes, and learning and growth. This approach provides a more holistic view of the university's performance and helps to ensure that the university is achieving its strategic goals.
4. Recommendations
Implementation of the Financial Cockpit:
- Establish a Financial Management Committee: Form a committee comprised of key stakeholders, including the CFO, representatives from academic departments, and members of the Board of Trustees. This committee will be responsible for overseeing the implementation of the Financial Cockpit system.
- Implement Activity-Based Costing (ABC): Conduct a thorough analysis of the university's activities and identify the key cost drivers for each activity. Develop a detailed cost allocation model that accurately reflects the true costs of different programs and activities.
- Develop Performance-Based Budgets: Work with each department to identify key performance indicators (KPIs) and develop budgets that are linked to these KPIs. This will require a shift in the budgeting process, moving away from simply allocating funds to departments based on historical spending patterns.
- Implement a Balanced Scorecard Reporting System: Develop a balanced scorecard that includes both financial and non-financial measures. The scorecard should be aligned with the university's strategic goals and provide a comprehensive view of the university's performance.
- Develop a Communication and Training Plan: Communicate the new financial management system to all stakeholders, including faculty, staff, and students. Provide training on the new system and its benefits.
- Continuous Monitoring and Evaluation: Regularly monitor the performance of the Financial Cockpit system and make adjustments as needed. This will ensure that the system remains relevant and effective in meeting the university's needs.
5. Basis of Recommendations
This recommendation considers the following:
- Core Competencies and Consistency with Mission: The Financial Cockpit approach aligns with the university's mission to provide high-quality education and research. It will help the university to allocate resources effectively and achieve its strategic goals.
- External Customers and Internal Clients: The Financial Cockpit will provide a more transparent and accountable financial management system, benefiting both external stakeholders such as donors and prospective students, and internal stakeholders such as faculty and staff.
- Competitors: The Financial Cockpit will help the university to stay competitive by providing a more efficient and effective financial management system.
- Attractiveness - Quantitative Measures: The Financial Cockpit approach will improve the university's financial performance by reducing costs, improving resource allocation, and enhancing decision-making. This will lead to improved profitability and financial sustainability.
6. Conclusion
Implementing a 'Financial Cockpit' approach with ABC, performance-based budgeting, and balanced scorecard reporting will provide Fern Fort University with a comprehensive and effective financial management system. This approach will improve transparency, enhance resource allocation, and provide a more holistic view of the university's financial performance. By adopting this approach, the university can achieve its strategic goals, improve financial sustainability, and ensure a brighter future.
7. Discussion
Other Alternatives:
- Status Quo: Maintaining the current financial management system would be inefficient and unsustainable. It would continue to lack transparency, hinder resource allocation, and limit the university's ability to achieve its strategic goals.
- Simple Cost Reduction Measures: While cost reduction measures can be helpful, they are not a long-term solution. They do not address the underlying issues of inefficient resource allocation and lack of transparency.
Risks and Key Assumptions:
- Resistance to Change: Implementing a new financial management system can be challenging, and there may be resistance from some stakeholders.
- Data Accuracy: The success of ABC depends on accurate data. The university will need to invest in data quality and ensure that the data used in the cost allocation model is accurate and reliable.
- Time and Resources: Implementing the Financial Cockpit system will require time and resources. The university will need to allocate sufficient resources to ensure the successful implementation of the system.
8. Next Steps
- Form the Financial Management Committee: Within the next month, the university president should establish the Financial Management Committee and appoint members.
- Conduct ABC Analysis: The committee should contract with a qualified consultant to conduct an ABC analysis within the next six months.
- Develop Performance-Based Budgets: The committee should work with departments to develop performance-based budgets within the next year.
- Implement Balanced Scorecard Reporting: The committee should implement the balanced scorecard reporting system within the next 18 months.
- Continuous Monitoring and Evaluation: The committee should regularly monitor the performance of the Financial Cockpit system and make adjustments as needed.
By taking these steps, Fern Fort University can implement a comprehensive financial management system that will improve its financial performance and ensure a sustainable future.
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Case Description
This case focuses on the use and interpretation of the DuPont model financial ratios, in particular the following four: return on sales, asset turnover, financial leverage, and return on equity . Students consider how these ratios are used to assess a company's financial performance for a single year, over time, and in comparison with other companies within and outside the focal company's industry. They also learn how these ratios provide insight into a company's business model via the margins it is able to earn, the productivity with which it uses its assets, and the company's aggressiveness (or lack thereof) in using borrowed money to finance its operations. The case is rooted in the basic premise that "ROE is the ratio most commonly used to analyze profitability of a business" and it is "important to both current and prospective shareholders." Furthermore, in the context of the DuPont model, the case positions ROE as the product of the other three ratios noted above. Thus, the protagonist in the case, Jill Keyes, has gravitated to the DuPont model. The case ends with a set of questions that Jill Keyes has left for her subsequent follow-up-these provide the basic assignment for students.
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