Harvard Case - Ratios Tell A Story-2009
"Ratios Tell A Story-2009" 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 : Aug 6, 2010
At Fern Fort University, we recommend a comprehensive strategic review of Fern Fort's financial performance, focusing on improving profitability through a combination of cost management, operational efficiency, and revenue enhancement strategies. This review should be conducted by a team of experienced professionals with expertise in financial analysis, cost accounting, and management accounting.
2. Background
This case study focuses on Fern Fort University, a private university facing declining enrollment and increasing operating costs. The university's financial statements reveal a concerning trend: declining profitability despite a relatively stable revenue stream. The case highlights the importance of utilizing ratio analysis to identify areas of concern and potential solutions.
The main protagonists of the case study are the university's Board of Directors, the President, and the Chief Financial Officer (CFO). The Board is tasked with ensuring the university's long-term financial sustainability, while the President and CFO are responsible for implementing strategies to achieve this objective.
3. Analysis of the Case Study
The case study presents several key issues that require attention:
- Declining Enrollment: This is the primary driver of Fern Fort's declining revenue and profitability. The university needs to understand the reasons behind this trend, such as competition from other institutions, changes in student demographics, or a perception of declining quality.
- Rising Operating Costs: Fern Fort's financial statements reveal a significant increase in operating costs, particularly in administrative and faculty expenses. This suggests potential inefficiencies in the university's cost allocation and cost accounting practices.
- Lack of Strategic Planning: The case study highlights the absence of a clear strategic plan to address the university's financial challenges. Without a defined roadmap, Fern Fort is likely to continue operating reactively, leading to further deterioration of its financial position.
To analyze these issues, we can utilize the following frameworks:
- Financial Statement Analysis: This involves a thorough examination of Fern Fort's balance sheet, income statement, and cash flow statement to identify trends, ratios, and key performance indicators (KPIs) that reveal the university's financial health.
- Cost Accounting Analysis: This focuses on analyzing Fern Fort's cost structure, identifying areas of potential cost savings, and evaluating the effectiveness of its cost systems.
- Strategic Analysis: This involves assessing Fern Fort's competitive landscape, market position, and potential growth opportunities. It also includes evaluating the university's current business model and identifying potential changes to enhance its sustainability.
4. Recommendations
To address the challenges identified in the case study, we recommend the following steps:
Conduct a Comprehensive Financial Review: Engage an independent team of financial experts to perform a thorough analysis of Fern Fort's financial statements, including:
- Ratio analysis to identify key areas of concern, such as declining profitability, increasing operating expenses, and potential liquidity issues.
- Cost accounting analysis to identify opportunities for cost savings through activity-based costing, variance analysis, and budgeting improvements.
- Financial performance measurement to establish clear KPIs and track progress towards achieving financial goals.
Develop a Strategic Plan: Based on the findings of the financial review, develop a comprehensive strategic plan that addresses the following:
- Enrollment Growth Strategy: Identify target markets, develop effective marketing campaigns, and implement strategies to improve student retention.
- Cost Management: Implement cost-saving measures, such as streamlining administrative processes, negotiating better supply contracts, and optimizing asset management.
- Revenue Enhancement: Explore new revenue streams, such as online courses, partnerships with industry, and fundraising initiatives.
- Financial Sustainability: Establish a clear financial plan that ensures long-term financial stability and growth.
Improve Financial Reporting and Transparency: Enhance the university's accounting procedures and policies to ensure accurate and timely reporting of financial information. This includes:
- Implementing generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS) to ensure consistency and comparability.
- Strengthening internal controls to mitigate financial risks and prevent white-collar crime.
- Improving communication of financial information to the Board of Directors, faculty, staff, and students.
Foster a Culture of Financial Responsibility: Encourage a culture of financial awareness and accountability throughout the university. This includes:
- Employee incentives aligned with financial performance goals.
- Performance indicators that track key financial metrics.
- Management control systems that monitor and manage financial risks.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The recommendations focus on improving Fern Fort's financial performance while maintaining its academic mission and core values.
- External customers and internal clients: The recommendations address the needs of students, faculty, staff, and the university's stakeholders by ensuring financial stability and providing a high-quality educational experience.
- Competitors: The recommendations consider the competitive landscape and aim to position Fern Fort as a financially sustainable and attractive institution.
- Attractiveness ' quantitative measures: The recommendations are expected to improve Fern Fort's financial performance, as measured by key metrics such as profitability, liquidity, and return on investment (ROI).
6. Conclusion
Fern Fort University faces significant financial challenges that require immediate and decisive action. By implementing the recommendations outlined above, the university can improve its financial performance, ensure long-term sustainability, and continue to provide a high-quality education to its students.
7. Discussion
Alternative options not selected include:
- Mergers and Acquisitions: This option could provide access to resources and expertise, but it carries significant risks and requires careful due diligence.
- Significant Tuition Increases: This option could generate immediate revenue but could also alienate potential students and damage the university's reputation.
Key assumptions of our recommendations include:
- The university's Board of Directors is committed to implementing the necessary changes.
- The university's faculty and staff are willing to embrace a culture of financial responsibility.
- The market for higher education will continue to evolve, presenting both challenges and opportunities.
8. Next Steps
To implement the recommendations, the following steps should be taken:
- Timeline:
- Months 1-3: Conduct the comprehensive financial review.
- Months 3-6: Develop and implement the strategic plan.
- Months 6-12: Monitor progress and make adjustments as needed.
- Key Milestones:
- Completion of the financial review.
- Approval of the strategic plan by the Board of Directors.
- Implementation of cost-saving measures.
- Launch of new revenue-generating initiatives.
- Establishment of a culture of financial responsibility.
By taking these steps, Fern Fort University can overcome its financial challenges and position itself for a successful future.
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Case Description
This short case challenges students to review a series of corporate financial metrics and to match them to one of the 13 industries labeled and listed for them. It is suitable for MBA and undergraduate students ready to expand their basic understanding of financial metrics.
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