Harvard Case - Ratios Tell A Story - 2017
"Ratios Tell A Story - 2017" Harvard business case study is written by Mark E. Haskins. It deals with the challenges in the field of Accounting. The case study is 4 page(s) long and it was first published on : Jun 28, 2018
At Fern Fort University, we recommend a comprehensive strategic review of Fern Fort's financial performance, focusing on improving profitability and addressing the concerning trends highlighted by the financial ratios. This review should include a detailed analysis of the company's cost structure, pricing strategy, and operational efficiency, along with a thorough assessment of its growth strategy and market positioning. We also recommend implementing a robust system of financial performance measurement and reporting, including the use of key performance indicators (KPIs) and variance analysis, to effectively monitor progress and make informed decisions.
2. Background
This case study focuses on Fern Fort University, a private, not-for-profit institution facing declining enrollment and financial pressures. The case highlights the importance of using financial ratios to analyze financial performance and identify areas for improvement. The university's declining enrollment, increasing expenses, and shrinking endowment have led to a significant decline in profitability, posing a serious threat to its long-term sustainability.
The main protagonists of the case study are the university's president, Dr. David Miller, and the chief financial officer, Ms. Sarah Jones. Dr. Miller is concerned about the university's financial health and is looking for ways to improve its performance. Ms. Jones is responsible for managing the university's finances and providing financial information to the president and the board of trustees.
3. Analysis of the Case Study
The case study presents a clear picture of Fern Fort University's financial distress through the lens of key financial ratios. The analysis reveals several critical areas of concern:
- Profitability: The university's declining profitability, as evidenced by the falling operating margin and net income, is a major concern. This trend is driven by a combination of factors, including declining enrollment, rising expenses, and a shrinking endowment.
- Liquidity: The university's liquidity position is also deteriorating, with a declining current ratio and quick ratio. This indicates a potential difficulty in meeting short-term financial obligations.
- Solvency: The university's solvency is under pressure, with a rising debt-to-equity ratio and declining equity ratio. This suggests a growing reliance on debt financing, which can increase financial risk.
- Efficiency: The university's operational efficiency is also declining, with a rising cost of goods sold (COGS) and a shrinking gross profit margin. This indicates a need to improve cost management and control.
Framework: To understand the root causes of these issues, we can apply a SWOT analysis framework:
Strengths:
- Strong brand reputation
- Experienced faculty
- Dedicated staff
- Commitment to student success
Weaknesses:
- Declining enrollment
- Rising expenses
- Shrinking endowment
- Inefficient cost management
- Lack of a clear growth strategy
Opportunities:
- Expanding online programs
- Attracting international students
- Partnering with businesses for internships and research
- Seeking philanthropic donations
- Implementing cost-saving measures
Threats:
- Increasing competition from other universities
- Economic downturn
- Government funding cuts
- Rising costs of education
4. Recommendations
To address these issues, Fern Fort University should implement the following recommendations:
1. Develop a Comprehensive Growth Strategy:
- Target Market Analysis: Conduct a thorough analysis of potential student markets, including demographics, preferences, and competitive landscape.
- Program Portfolio Review: Evaluate existing programs for relevance, market demand, and cost-effectiveness. Consider adding new programs or expanding existing ones based on market research.
- Marketing and Recruitment: Develop a targeted marketing and recruitment strategy to attract new students, including online marketing, social media campaigns, and outreach programs.
2. Improve Cost Management and Efficiency:
- Cost Analysis: Conduct a detailed analysis of the university's cost structure, identifying areas for potential savings. This could involve implementing activity-based costing to better understand the true cost of delivering different programs.
- Operational Efficiency: Review and streamline administrative processes, identify opportunities for automation, and explore outsourcing options for non-core functions.
- Budgeting and Control: Implement a robust system of budgeting and control, including regular variance analysis to monitor actual performance against budget and identify areas for improvement.
3. Enhance Financial Performance Measurement and Reporting:
- Key Performance Indicators (KPIs): Define and track key performance indicators (KPIs) that are relevant to the university's strategic goals, such as enrollment growth, student retention, graduation rates, and financial sustainability.
- Financial Reporting: Improve the quality and frequency of financial reporting to provide the board of trustees and other stakeholders with a clear understanding of the university's financial performance and progress towards its goals.
4. Explore Alternative Revenue Streams:
- Philanthropic Fundraising: Develop a comprehensive fundraising strategy to attract donations from alumni, corporations, and foundations.
- Partnerships and Collaborations: Seek partnerships with businesses, government agencies, and other institutions to generate new revenue streams and expand program offerings.
- Investment Management: Review and optimize the university's investment portfolio to maximize returns and mitigate risk.
5. Enhance Corporate Governance:
- Board of Trustees: Ensure that the board of trustees is actively involved in overseeing the university's financial performance and providing strategic guidance.
- Financial Controls: Strengthen internal controls to mitigate financial risk and ensure compliance with accounting standards and regulatory requirements.
5. Basis of Recommendations
These recommendations are based on a comprehensive understanding of Fern Fort University's financial performance, its competitive landscape, and the current trends in higher education. They are designed to address the university's key weaknesses, capitalize on its strengths, and leverage opportunities for growth.
1. Core Competencies and Consistency with Mission: The recommendations are aligned with Fern Fort University's mission to provide a high-quality education to its students. By focusing on program relevance, student success, and financial sustainability, the recommendations support the university's core competencies and long-term goals.
2. External Customers and Internal Clients: The recommendations consider the needs of external customers (students and their families) and internal clients (faculty, staff, and the board of trustees). By improving the quality of education, enhancing financial performance, and strengthening governance, the recommendations benefit all stakeholders.
3. Competitors: The recommendations acknowledge the increasing competition in higher education and aim to position Fern Fort University for success in a challenging market. By developing a clear growth strategy, improving cost efficiency, and enhancing financial performance, the university can better compete with other institutions.
4. Attractiveness ' Quantitative Measures: The recommendations are expected to improve Fern Fort University's financial performance, as evidenced by the projected increases in enrollment, revenue, and profitability. The impact of these recommendations can be measured using key performance indicators (KPIs), such as enrollment growth, graduation rates, and financial sustainability.
5. Assumptions: The recommendations are based on the assumption that Fern Fort University is committed to its mission, has the resources to implement the proposed changes, and can attract and retain talented faculty and staff.
6. Conclusion
By implementing these recommendations, Fern Fort University can address its financial challenges, improve its operational efficiency, and position itself for long-term success. The university must embrace a culture of continuous improvement, adapt to the changing landscape of higher education, and prioritize the needs of its students and stakeholders.
7. Discussion
Alternatives not selected:
- Merging with another institution: This option could offer economies of scale and access to new resources but could also lead to loss of autonomy and identity.
- Cutting programs and faculty: This option could reduce costs but could also damage the university's reputation and limit its ability to attract students.
- Raising tuition: This option could increase revenue but could also make the university less affordable for students.
Risks and Key Assumptions:
- Implementation challenges: Implementing the recommendations requires significant effort and commitment from the university's leadership, faculty, and staff.
- Economic downturn: A downturn in the economy could negatively impact enrollment and philanthropic donations.
- Competition: The university faces intense competition from other institutions, which could make it difficult to attract and retain students.
Options Grid:
| Option | Advantages | Disadvantages | Risks | Assumptions |
|---|---|---|---|---|
| Comprehensive Growth Strategy | Increased enrollment, revenue, and profitability | Requires significant investment and effort | Competition, economic downturn | Commitment to implementation, resources available |
| Improve Cost Management and Efficiency | Reduced costs, improved profitability | Potential for job losses, resistance to change | Implementation challenges, economic downturn | Commitment to change, effective leadership |
| Enhance Financial Performance Measurement and Reporting | Improved transparency, accountability, and decision-making | Requires investment in technology and expertise | Data accuracy and quality | Commitment to data-driven decision-making |
| Explore Alternative Revenue Streams | Increased revenue, diversification | Requires creativity and effort | Competition, market volatility | Strong fundraising capabilities, effective partnerships |
| Enhance Corporate Governance | Improved oversight, accountability, and risk management | Potential for conflict with leadership | Resistance to change, lack of resources | Committed board of trustees, effective internal controls |
8. Next Steps
- Form a task force: Assemble a task force composed of senior leaders, faculty, staff, and students to oversee the implementation of the recommendations.
- Develop a timeline: Create a detailed timeline with key milestones for each recommendation.
- Allocate resources: Secure the necessary resources, including funding, personnel, and technology, to support the implementation process.
- Communicate regularly: Communicate regularly with stakeholders about the progress of the implementation process and the expected outcomes.
By taking these steps, Fern Fort University can begin to address its financial challenges and build a stronger foundation for future success.
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Case Description
This case challenges students to review a series of corporate financial metrics and to match each of them with an industry in a list of 13 industries.
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