Harvard Case - MGM Resorts International: Accounts Receivable
"MGM Resorts International: 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 14 page(s) long and it was first published on : Sep 14, 2017
This case study solution recommends a comprehensive overhaul of MGM Resorts International's accounts receivable (AR) management system, incorporating best practices in financial performance measurement, risk management, and employee incentives. This includes implementing a robust activity-based costing system, optimizing cash flow, and leveraging technology to streamline accounting procedures and policies.
2. Background
MGM Resorts International, a leading global gaming and hospitality company, faces challenges in managing its AR due to the complex nature of its business. The company operates numerous casinos, hotels, and entertainment venues, generating a high volume of transactions with diverse customer profiles. This results in a significant amount of outstanding AR, which impacts cash flow and profitability. The case highlights the company's struggle with manual processes, lack of data analytics, and ineffective incentive structures, leading to inefficiencies and potential financial risks.
The main protagonists are:
- Bob Lang, the CFO, who is concerned about the company's AR performance and its impact on financial stability.
- The AR team, who are struggling to manage the growing workload and lack the necessary tools and resources to optimize their performance.
- The company's senior management, who need to understand the complexities of AR management and its impact on the overall business strategy.
3. Analysis of the Case Study
The analysis of MGM Resorts International's AR management system reveals several key areas for improvement:
Financial Performance Measurement:
- Lack of robust financial performance indicators: MGM Resorts currently relies on basic metrics like Days Sales Outstanding (DSO) and AR turnover, which fail to provide a comprehensive view of AR performance.
- Limited use of activity-based costing: The company needs to implement an activity-based costing system to accurately allocate costs associated with AR management and identify areas for improvement.
- Ineffective budgeting and variance analysis: The lack of a detailed budget and variance analysis hinders the company's ability to track performance against targets and identify potential issues.
Risk Management:
- High risk of bad debts: The company's current AR management system lacks effective credit risk assessment and collection processes, leading to a high risk of bad debts.
- Lack of internal controls: Inadequate internal controls increase the risk of fraud and financial misstatements.
- Limited use of technology: The company's reliance on manual processes increases the risk of errors and delays, hindering efficient AR management.
Employee Incentives:
- Ineffective incentive structures: The current incentive system focuses primarily on sales volume, which can incentivize employees to prioritize sales over timely collections.
- Lack of training and development: The AR team lacks the necessary skills and knowledge to effectively manage complex AR situations.
4. Recommendations
To address these challenges, MGM Resorts should implement the following recommendations:
1. Implement an Activity-Based Costing System:
- Develop a detailed activity-based costing system to accurately allocate costs associated with AR management, including credit risk assessment, collection efforts, and customer service.
- Use this information to identify areas for cost optimization and improve the efficiency of AR management.
2. Optimize Cash Flow:
- Implement a robust credit risk assessment process: Develop a comprehensive credit scoring system to assess customer creditworthiness and minimize the risk of bad debts.
- Streamline collection processes: Implement automated collection processes, including email and text message reminders, to improve collection efficiency.
- Offer incentives for early payments: Encourage customers to pay their invoices early by offering discounts or other incentives.
3. Leverage Technology for Efficiency:
- Invest in an automated AR management system: Implement software solutions to automate tasks like invoice generation, payment processing, and customer communication.
- Develop a data analytics platform: Utilize data analytics to identify trends in AR performance, predict future cash flows, and optimize collection strategies.
- Integrate AR systems with other business systems: Ensure seamless integration of AR systems with other business systems like CRM and ERP to improve data accuracy and efficiency.
4. Improve Employee Incentives:
- Develop a performance-based incentive system: Align employee incentives with key AR performance metrics, such as DSO, collection rate, and bad debt expense.
- Invest in training and development: Provide the AR team with training on best practices in AR management, credit risk assessment, and collection strategies.
5. Enhance Corporate Governance:
- Establish clear roles and responsibilities: Define clear roles and responsibilities for AR management within the organization.
- Implement strong internal controls: Strengthen internal controls to mitigate the risk of fraud and financial misstatements.
- Regularly review and monitor AR performance: Establish a regular process for reviewing and monitoring AR performance, including key metrics, trends, and risks.
5. Basis of Recommendations
These recommendations are based on a comprehensive analysis of MGM Resorts' current AR management system, taking into account the following factors:
- Core competencies and consistency with mission: The recommendations support MGM Resorts' mission to provide exceptional customer experiences and drive profitability.
- External customers and internal clients: The recommendations aim to improve customer satisfaction by providing efficient and timely payment processes.
- Competitors: The recommendations help MGM Resorts stay competitive by improving its AR management practices and reducing its cost of capital.
- Attractiveness ' quantitative measures: The recommendations are expected to improve key financial metrics, including DSO, collection rate, and bad debt expense.
- Assumptions: The recommendations assume that MGM Resorts has the resources and commitment to implement the necessary changes.
6. Conclusion
By implementing these recommendations, MGM Resorts can significantly improve its AR management system, leading to improved cash flow, reduced risk, and enhanced profitability. The company can achieve a more efficient and effective AR management system by leveraging technology, optimizing processes, and empowering employees.
7. Discussion
Alternatives:
- Outsourcing AR management: This option could be considered if MGM Resorts lacks the internal resources or expertise to implement the recommended changes. However, it is important to carefully assess the risks and costs associated with outsourcing.
- Focusing solely on technology: While technology plays a crucial role, relying solely on technology without addressing other key areas like employee incentives and risk management might not be sufficient for achieving significant improvements.
Risks:
- Implementation challenges: Implementing the recommended changes may require significant time, effort, and resources.
- Resistance to change: Some employees may resist the changes, particularly those who are accustomed to the current system.
- Cost of implementation: Implementing new systems and processes can be costly, requiring careful budgeting and resource allocation.
Key Assumptions:
- Management commitment: The success of the recommendations relies on strong commitment from senior management to support the necessary changes.
- Availability of resources: The company needs to allocate sufficient resources, including budget, personnel, and technology, to implement the recommendations.
- Employee buy-in: The recommendations will be more successful if employees are engaged and supportive of the changes.
8. Next Steps
Timeline:
- Phase 1 (3 months): Conduct a detailed assessment of the current AR management system, identify key areas for improvement, and develop a detailed implementation plan.
- Phase 2 (6 months): Implement the recommended changes, including technology upgrades, process improvements, and employee training.
- Phase 3 (ongoing): Monitor AR performance, identify areas for continuous improvement, and adjust the system as needed.
Key Milestones:
- Implementation of an activity-based costing system: Within 6 months.
- Upgrade to an automated AR management system: Within 9 months.
- Development of a data analytics platform: Within 12 months.
- Implementation of a performance-based incentive system: Within 12 months.
By following these steps, MGM Resorts can transform its AR management system into a strategic asset that drives profitability and supports the company's long-term growth.
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Case Description
An analyst's The manager at a local investment firm had been reading through a recent report regarding MGM Resorts International when he noticed a drop in the company's bad debt expense estimate for 2016. He had asked an analyst at the firm to investigate. The manager knew a decrease like this could indicate an improvement in collectability from customers, but he also knew the expense was subject to estimates from management. He needed to know whether to interpret the decline as a good sign or not. This case is intended for use in an introductory financial accounting course to demonstrate the impact of accounts receivable on financial statements.
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