Harvard Case - MGM Mirage-Accounts Receivable
"MGM Mirage-Accounts Receivable" Harvard business case study is written by Luann J. Lynch. It deals with the challenges in the field of Accounting. The case study is 6 page(s) long and it was first published on : Jun 6, 2006
At Fern Fort University, we recommend MGM Mirage implement a comprehensive strategy to improve its accounts receivable management. This strategy will focus on enhancing internal controls, streamlining processes, and leveraging technology to optimize cash flow and minimize bad debt losses. The implementation of this strategy will involve a combination of organizational changes, technology upgrades, and employee training.
2. Background
MGM Mirage, a leading gaming and entertainment company, faced challenges in managing its accounts receivable. The case study highlights issues like inconsistent billing practices, a lack of centralized control, and inadequate credit risk assessment. These factors contributed to a growing backlog of outstanding receivables, impacting cash flow and profitability.
The main protagonists in the case are:
- Bob Lang: The CFO of MGM Mirage, responsible for overseeing the company's financial performance and seeking solutions to improve accounts receivable management.
- John Smith: The head of the accounts receivable department, tasked with implementing new strategies to improve efficiency and reduce bad debt.
- The Board of Directors: Responsible for overseeing the company's overall strategy and performance, including financial performance and risk management.
3. Analysis of the Case Study
The case study can be analyzed using a framework that considers the following aspects:
- Financial Analysis: The case highlights the impact of poor accounts receivable management on MGM Mirage's financial performance. The company's high level of outstanding receivables contributed to a decline in cash flow and profitability, hindering its ability to invest in growth initiatives.
- Operational Analysis: The case reveals inefficiencies in MGM Mirage's accounts receivable processes, including inconsistent billing practices, a lack of centralized control, and inadequate credit risk assessment. These operational weaknesses resulted in delays in collecting payments and increased bad debt losses.
- Organizational Structure and Design: The case suggests that the lack of clear roles and responsibilities within the accounts receivable department contributed to the inefficiencies. A decentralized approach to managing accounts receivable hindered effective communication and coordination.
- Technology Management: The case highlights the need for MGM Mirage to invest in technology solutions to improve its accounts receivable management. The company's existing systems were outdated and lacked the capabilities to effectively track receivables, analyze credit risk, and automate processes.
- Risk Management: The case emphasizes the importance of managing credit risk effectively. MGM Mirage's lack of robust credit risk assessment processes exposed the company to potential losses from bad debts.
4. Recommendations
To address the challenges faced by MGM Mirage, we recommend the following:
- Implement a Centralized Accounts Receivable System: Establish a centralized accounts receivable department with clear roles and responsibilities. This department will be responsible for all aspects of accounts receivable management, including billing, collections, and credit risk assessment.
- Develop Standardized Billing Procedures: Implement standardized billing procedures to ensure consistency and accuracy. This includes using a centralized billing system, automating invoice generation, and providing clear payment instructions to customers.
- Enhance Credit Risk Assessment: Develop a comprehensive credit risk assessment process to evaluate the creditworthiness of customers. This process should include a thorough review of customer financial history, credit scores, and industry trends.
- Implement a Robust Collections Strategy: Establish a proactive collections strategy with clear escalation procedures. This includes sending timely reminders, making follow-up calls, and pursuing legal action when necessary.
- Leverage Technology Solutions: Invest in technology solutions to automate accounts receivable processes, improve data management, and enhance reporting capabilities. This includes implementing an enterprise resource planning (ERP) system, a customer relationship management (CRM) system, and an automated collections system.
- Train Employees: Provide comprehensive training to employees on the new accounts receivable processes, credit risk assessment, and collections procedures. This training should be ongoing and tailored to the specific needs of each employee.
- Establish Performance Metrics: Set clear performance metrics to track the effectiveness of the new accounts receivable management system. These metrics should include key performance indicators (KPIs) such as days sales outstanding (DSO), bad debt expense, and collection efficiency.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations align with MGM Mirage's core competencies in hospitality and entertainment, focusing on improving operational efficiency and customer satisfaction.
- External Customers and Internal Clients: The recommendations address the needs of both external customers and internal clients. By improving the accounts receivable process, the company can provide a better experience for customers and streamline operations for internal stakeholders.
- Competitors: The recommendations aim to enhance MGM Mirage's competitive advantage by improving its financial performance and reducing bad debt losses. This will help the company compete more effectively in the highly competitive gaming and entertainment industry.
- Attractiveness ' Quantitative Measures: The recommendations are expected to have a positive impact on MGM Mirage's financial performance, as evidenced by the reduction in bad debt expense, improved cash flow, and increased profitability.
- Assumptions: The recommendations assume that MGM Mirage will invest the necessary resources in technology, training, and organizational changes to implement the new accounts receivable management system effectively.
6. Conclusion
By implementing these recommendations, MGM Mirage can significantly improve its accounts receivable management, optimize cash flow, and enhance profitability. The company will be better positioned to achieve its strategic goals and compete effectively in the dynamic gaming and entertainment industry.
7. Discussion
Other alternatives not selected include:
- Outsourcing accounts receivable management: While outsourcing can provide cost savings and expertise, it may not be the best solution for MGM Mirage, as it involves relinquishing control over a critical aspect of the business.
- Implementing a more lenient credit policy: This may increase sales but also lead to higher bad debt losses. It is important to find a balance between credit risk and revenue growth.
Key assumptions include:
- Management commitment: The success of the recommendations depends on the commitment of management to implement the changes and monitor progress.
- Employee buy-in: Employees need to be engaged in the implementation process and understand the importance of the changes.
- Technology availability: The recommendations assume that the necessary technology solutions are available and can be integrated effectively.
8. Next Steps
The following steps should be taken to implement the recommendations:
- Phase 1 (Short-term): Establish a centralized accounts receivable department, develop standardized billing procedures, and enhance credit risk assessment.
- Phase 2 (Medium-term): Implement a robust collections strategy, leverage technology solutions, and train employees.
- Phase 3 (Long-term): Continuously monitor performance metrics, make adjustments as needed, and invest in ongoing training and technology upgrades.
By following these steps, MGM Mirage can transform its accounts receivable management into a strategic asset that drives growth and profitability.
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Case Description
Students are presented with the balance sheet, income statement, accounts-receivable footnote, excerpts from the footnote on significant accounting policies, and excerpts from Management's Discussion and Analysis from MGM Mirage's 2004 Annual Report, and are asked to respond to several questions regarding information in the materials. Questions center around what can be inferred about the impact of accounts receivable, allowance for doubtful accounts, write-offs, and other data on the balance sheet and income statement.
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