Harvard Case - Ratios Tell a Story--2011
"Ratios Tell a Story--2011" 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 : Jul 5, 2012
At Fern Fort University, we recommend a comprehensive approach to address the challenges highlighted in the 'Ratios Tell a Story - 2011' case study. This approach involves a combination of financial analysis, management accounting, and strategic planning to improve profitability and sustainability.
2. Background
The case study focuses on Fern Fort University, a private university facing declining enrollment and financial pressures. Despite a strong reputation, the university's financial performance is lagging, reflected in declining student-to-faculty ratios, increasing operating expenses, and stagnant tuition revenue. The case presents the university's financial statements and ratio analysis, highlighting areas of concern.
The main protagonists are the university's president, Dr. Robert 'Bob' Jones, and the vice president of finance, Joan Smith. They are tasked with developing a strategy to improve the university's financial health and ensure its long-term sustainability.
3. Analysis of the Case Study
Financial Analysis:
- Profitability: The university's profitability is declining, indicated by a decreasing operating margin and a declining return on assets. This suggests inefficient resource utilization and potential cost overruns.
- Liquidity: The university's liquidity is stable, but a declining current ratio indicates potential challenges in meeting short-term obligations.
- Solvency: The university's solvency is also stable, but an increasing debt-to-equity ratio suggests a reliance on debt financing, which could pose risks in the long run.
- Efficiency: The university's efficiency is declining, reflected in a declining student-to-faculty ratio and increasing operating expenses. This suggests potential inefficiencies in resource allocation and management.
Management Accounting:
- Cost Accounting: The university lacks a robust cost accounting system to accurately track and allocate costs. This makes it difficult to identify areas of inefficiency and make informed decisions about resource allocation.
- Activity-Based Costing (ABC): Implementing ABC could provide a more accurate view of costs by tracing them to specific activities and identifying cost drivers. This would enable the university to better understand the cost of providing different programs and services.
- Budgeting: The university's budgeting process needs improvement. A more comprehensive and dynamic budgeting system would allow for better planning and forecasting of future financial performance.
Strategic Planning:
- Market Analysis: The university needs to conduct a thorough market analysis to understand the changing demographics and preferences of potential students. This analysis should identify key competitors and market trends.
- Growth Strategy: The university should develop a clear growth strategy that aligns with its mission and resources. This strategy should consider potential new programs, expansion of online learning, and partnerships with other institutions.
- Innovation: The university should invest in innovation to enhance the student experience and attract new students. This could include developing new teaching methods, incorporating technology into the curriculum, and offering unique programs.
4. Recommendations
- Implement Activity-Based Costing (ABC): The university should implement ABC to gain a better understanding of the cost of providing different programs and services. This will enable more accurate cost allocation and identification of areas for cost reduction.
- Develop a Comprehensive Budgeting System: The university should develop a more dynamic and comprehensive budgeting system that incorporates performance indicators and allows for scenario planning. This will improve financial forecasting and control.
- Conduct a Market Analysis and Develop a Growth Strategy: The university should conduct a thorough market analysis to identify target student segments, key competitors, and market trends. Based on this analysis, the university should develop a growth strategy that aligns with its resources and mission.
- Invest in Innovation: The university should invest in innovation to enhance the student experience and attract new students. This could include developing new teaching methods, incorporating technology into the curriculum, and offering unique programs.
- Review and Optimize Financial Procedures and Policies: The university should review its accounting procedures and policies to identify areas for improvement and streamline processes. This could include implementing new software or technology solutions to enhance efficiency.
- Improve Communication and Transparency: The university should improve communication and transparency with stakeholders, including faculty, staff, students, and donors. This will build trust and support for the university's strategic initiatives.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations focus on strengthening the university's core competencies in teaching and research while aligning with its mission of providing a high-quality education.
- External Customers and Internal Clients: The recommendations consider the needs of external customers (students) and internal clients (faculty and staff) by focusing on enhancing the student experience, improving resource allocation, and fostering a collaborative environment.
- Competitors: The recommendations acknowledge the competitive landscape and emphasize the need for innovation, market analysis, and strategic planning to attract and retain students.
- Attractiveness: The recommendations are expected to improve the university's financial performance, as measured by profitability, liquidity, and solvency. Implementing ABC, improving budgeting, and developing a growth strategy will contribute to a more efficient and sustainable financial model.
6. Conclusion
By implementing these recommendations, Fern Fort University can address its financial challenges, improve its profitability, and ensure its long-term sustainability. The university needs to embrace a data-driven approach to decision making, invest in innovation, and adapt to the changing needs of students and the higher education landscape.
7. Discussion
Alternative approaches could include:
- Mergers and Acquisitions: The university could consider merging with another institution or acquiring a smaller college to expand its reach and resources. However, this option carries significant risks and requires careful due diligence.
- Cost Reduction: The university could implement a series of cost-cutting measures, such as reducing staff, eliminating programs, or increasing class sizes. However, such measures could negatively impact the quality of education and student satisfaction.
The key assumptions of these recommendations include:
- The university's leadership is committed to implementing change and making the necessary investments in technology and innovation.
- The university's faculty and staff are willing to adapt to new teaching methods and technologies.
- The market for higher education remains strong, and the university can attract new students through its innovative programs and services.
8. Next Steps
The university should establish a task force to oversee the implementation of these recommendations. This task force should include representatives from finance, academics, and other relevant departments. The task force should develop a timeline with key milestones, including:
- Phase 1 (Short-term): Implement ABC, develop a comprehensive budgeting system, and conduct a market analysis. (3-6 months)
- Phase 2 (Mid-term): Develop a growth strategy, invest in innovation, and review and optimize financial procedures and policies. (6-12 months)
- Phase 3 (Long-term): Monitor progress, evaluate the impact of the recommendations, and make adjustments as necessary. (Ongoing)
By taking these steps, Fern Fort University can overcome its financial challenges, improve its performance, and ensure its long-term success.
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Case Description
Financial results and conditions vary among companies for a number of reasons. The differences in industry characteristics, in company policies, in management performance, and in responsiveness to the macroeconomic environment are reflected in the financial statements published by publicly held companies and can be highlighted through the use of financial ratios.
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