Harvard Case - Nonprofit Business Models and Financial Statement Relationships (A)
"Nonprofit Business Models and Financial Statement Relationships (A)" Harvard business case study is written by Jaclyn C. Foroughi, Maureen McNichols. It deals with the challenges in the field of Finance. The case study is 9 page(s) long and it was first published on : Dec 30, 2020
At Fern Fort University, we recommend that the Board of Directors of the Community Arts Center (CAC) adopt a comprehensive financial strategy that focuses on diversifying revenue streams, optimizing asset management, and enhancing financial transparency. This strategy should include a combination of capital budgeting, debt management, and investment management to ensure the long-term sustainability of the CAC.
2. Background
The Community Arts Center (CAC) is a non-profit organization facing financial challenges due to declining government funding and increasing operating costs. The case study highlights the CAC's reliance on a single major donor, which creates significant financial vulnerability. The organization is also struggling with inefficient operations strategy and a lack of financial analysis to guide decision-making.
The main protagonists are the Board of Directors, led by President Susan Miller, and the Executive Director, John Smith. They are tasked with finding a way to ensure the CAC's financial stability and continue providing valuable arts programming to the community.
3. Analysis of the Case Study
The case study presents a classic scenario of a non-profit organization struggling to adapt to a changing environment. The CAC's financial challenges stem from a combination of factors:
- Dependence on a single donor: This creates significant risk and limits the CAC's ability to plan for the future.
- Limited revenue diversification: The CAC relies heavily on government grants and individual donations, leaving it vulnerable to funding cuts.
- Inefficient operations: The organization lacks a clear activity-based costing system, making it difficult to track costs and identify areas for improvement.
- Lack of financial analysis: The CAC does not have a robust system for financial forecasting, risk assessment, or return on investment (ROI) analysis.
To address these challenges, the CAC needs to adopt a more strategic approach to its financial management. This requires a comprehensive understanding of the organization's current financial position, its future goals, and the available options for achieving those goals.
4. Recommendations
The following recommendations are designed to improve the CAC's financial stability and ensure its long-term sustainability:
1. Diversify Revenue Streams:
- Develop a comprehensive fundraising strategy: This should include a mix of individual donations, corporate sponsorships, grants, and earned income through programs and events.
- Explore new revenue opportunities: This could include partnerships with local businesses, offering educational workshops, or creating a membership program.
- Increase reliance on earned income: This could be achieved by expanding program offerings, developing new revenue-generating activities, or exploring pricing strategy adjustments.
2. Optimize Asset Management:
- Conduct a thorough review of the CAC's assets: This should include identifying underutilized assets and exploring opportunities to leverage them for revenue generation.
- Implement a robust asset management system: This should include tracking, maintenance, and depreciation of all assets.
- Consider strategic investments: This could include investing in technology upgrades, expanding facilities, or acquiring new equipment to enhance program offerings and increase efficiency.
3. Enhance Financial Transparency:
- Develop a clear and concise financial reporting system: This should include regular financial statements, budget reports, and performance metrics.
- Increase communication with stakeholders: This includes providing regular updates on the CAC's financial performance and fundraising efforts.
- Implement a strong internal control system: This will help to ensure the accuracy and reliability of financial information.
4. Implement Capital Budgeting and Debt Management Strategies:
- Develop a capital budget: This will help the CAC prioritize investments and allocate resources effectively.
- Explore debt financing options: This could include obtaining a loan from a bank or foundation to finance major projects or investments.
- Develop a debt management plan: This will ensure that the CAC can manage its debt obligations effectively and avoid financial distress.
5. Establish an Investment Management Strategy:
- Develop a clear investment policy: This should outline the CAC's investment objectives, risk tolerance, and asset allocation strategy.
- Consider investing in a diversified portfolio: This could include a mix of fixed income securities, equities, and other asset classes.
- Engage professional investment advisors: This will provide the CAC with expert guidance on managing its investments.
5. Basis of Recommendations
These recommendations are based on the following considerations:
1. Core Competencies and Consistency with Mission: The recommendations focus on strengthening the CAC's financial position while maintaining its core mission of providing arts programming to the community.
2. External Customers and Internal Clients: The recommendations aim to enhance the CAC's ability to serve its external customers (the community) and internal clients (staff and volunteers) by ensuring its financial stability and continued operations.
3. Competitors: The recommendations are designed to help the CAC remain competitive in the non-profit arts sector by attracting funding, developing innovative programs, and enhancing its efficiency.
4. Attractiveness ' Quantitative Measures: The recommendations are expected to improve the CAC's financial performance, as measured by increased revenue, improved profitability, and reduced risk.
5. Assumptions: The recommendations assume that the CAC's Board of Directors and staff are committed to implementing the proposed changes and that the community continues to support the organization's mission.
6. Conclusion
By adopting a comprehensive financial strategy that focuses on revenue diversification, asset optimization, and financial transparency, the Community Arts Center can overcome its current financial challenges and secure its long-term sustainability. The recommendations outlined above provide a roadmap for achieving this goal and ensuring that the CAC continues to provide valuable arts programming to the community for many years to come.
7. Discussion
Alternatives:
- Merging with another arts organization: This could provide economies of scale and access to additional resources, but it also carries risks related to organizational culture and program integration.
- Reducing program offerings: This could help to reduce costs, but it would also limit the CAC's ability to serve its community and attract funding.
Risks and Key Assumptions:
- The success of the recommendations depends on the commitment of the CAC's Board of Directors and staff to implementing the proposed changes.
- The recommendations assume that the community continues to support the CAC's mission and that funding sources remain stable.
- There is a risk that the CAC may not be able to attract new funding sources or generate sufficient earned income to achieve its financial goals.
8. Next Steps
- Form a task force to develop a detailed implementation plan for the recommendations.
- Conduct a comprehensive financial audit to assess the CAC's current financial position.
- Develop a detailed fundraising plan and identify potential funding sources.
- Implement a new asset management system and review the CAC's investment portfolio.
- Regularly monitor the CAC's financial performance and make adjustments to the plan as needed.
By taking these steps, the CAC can transform its financial situation and ensure its continued success in providing valuable arts programming to the community.
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Case Description
Thorough analysis of various nonprofit business models requires an understanding of each firm's economic characteristics. The relations between various financial statement items provide evidence of many of these economic characteristics. This case presents the "common-size" condensed annual balance sheet, income, and cash flow statements for eight nonprofit firms in the U.S. for the 2018 or 2019 fiscal year (compiled from either audited financial statements or Form 990s).
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