The purpose of this assignment: to familiarize you with financial statements, the need to align the financials and the strategic direction of the firm, and the process of performing horizontal and vertical analyses of a company's balance sheets and income statements.
You will be provided with a scenario and a variances analysis. You will use the information in both to create a memo in which you demonstrate your audit financial statements and expenditures based on organizational priorities.
Instructions
Scenario
You're a healthcare administration fellow at the prestigious Stanford Healthcare. You have been rotating through the various departments over the past nine months and now you have the honor of working under the mentorship of Chief Financial Officer Linda Hoff.
Stanford Medicine includes Stanford Healthcare, Stanford Children's Hospital, and Lucile Packard Children's Hospital Stanford. This organization uses an integrated approach to strategic planning, which incorporates jointly agreed-upon strategic priorities from its various entities. It also ensures a high degree of congruence in strategic focus by each entity.
Before outlining the strategic priorities for Stanford Medicine, it is important to note that a firm's directional strategy comprises three discrete yet interwoven components: vision, mission, and goals (or, in this case, priorities). Armed with this knowledge, you have familiarized yourself with the vision, mission, and priorities of Stanford Medicine. Below is what you found.
When examining a company's financials, it is prudent to keep the directional strategy of the company in mind. After all, in order to advance many strategic priorities, which include fulfilling the mission and positioning the organization to achieve its vision for the future, proper management of the firm's scarce resources is vital. Failure to properly manage the financial performance of the organization can compromise the company's ability to maintain a competitive advantage in the marketplace.
Our Vision
Precision Health: Predict. Prevent. Cure. Precisely.
We will heal humanity through science and compassion by leading the biomedical revolution in precision health.
Our Mission
Improving Human Health Through Discovery and Care.
Through innovative discovery and the translation of new knowledge, Stanford Medicine improves human health locally and globally. We serve our community by providing outstanding and compassionate care. We inspire and prepare the future leaders of science and medicine.
Strategic Priorities
A collaborative endeavor involving the entire community, the Stanford Medicine integrated strategic planning process yielded a framework that is human-centered and discovery-led, focused on three overarching priorities for our enterprise.
By enhancing our strengths and achieving our goals in these priority areas, we will amplify our preeminence and remain uniquely positioned to lead the biomedical revolution in precision health, ensuring our continued ability to guide healthcare through significant global changes.
Value Focused
Provide a highly personalized patient experience.
Ensure a seamless Stanford Medicine experience.
Digitally Driven
Amplify the impact of Stanford innovation globally.
Deliver human-centered, high-tech, high-touch care and revolutionize biomedical discovery.
Lead in population health and data science.
Uniquely Stanford
Accelerate discovery in and knowledge of human biology.
Discovered here, used everywhere: advanced fundamental human knowledge, translational medicine, and global health.
Ensure preeminence across all our mission areas.
Variance Analyses
Normally, managers are expected to examine positive and negative variances, and then speculate as to possible explanations for the observed variances. Following this initial assessment, managers would be expected to dig deeper into those variances of greatest concern to the organization to uncover the actual causes for the variances, and then implement necessary corrective actions. Digging into all variances would be costly and, quite frankly, a misuse of time and energy.
The CFO asked one of her financial analysts to conduct a variance analysis of the company's consolidated balance sheets and income statements for fiscal years 2015, 2016, 2017, and 2018, which has been completed. The analyst determined the variances for each account (line item) captured in the financials. Now that this first step has been accomplished, the CFO would like you to pay particular attention to the negative variances contained in the spreadsheet and focus on those variances you believe to be potentially the most impactful to Stanford.
The financial analyst completed your variance analysis over time, which is referred to as a horizontal analysis, and then proceeded to create a common-size balance sheet and income statement for each of the four fiscal years (2015-2018). The common-sized financials are captured in the provided spreadsheet.
Financial Management and Strategic Direction
Once you've completed your horizontal and vertical analyses of the financial statements, you should be able to get a sense of how well management has managed the financial resources of the company in support of its strategic direction. In business, the strategic direction should be evident in its vision and mission statements, and strategic priorities. The strategic priorities should support the company's mission, and the mission should help advance the firm's vision for the future. Failure to effectively manage the company's financial resources can seriously compromise the firm's ability to fulfill its mission and, subsequently, its vision.
Submission
Based on the provided scenario, create a 3-4 page business memorandum to Linda Hoff, Stanford's CFO. For guidance on writing a memo, see attached doc.
In your memo, codify your findings and interpretations from the horizontal and vertical analyses and the level of alignment in the company's fiscal management and strategic direction. Include the provided Excel spreadsheet you used to complete your analysis as an attachment to the memo. In this memo, you will:
- Review the year-over-year variances contained in the audited Stanford balance sheets and income statements for fiscal years 2015-2018 in the Week 5 Assignment Spreadsheet [XLSX] Download Week 5 Assignment Spreadsheet [XLSX]. You'll be expected to pay particular attention to the negative variances (color-coded in red) that you believe to be potentially the most impactful to Stanford and provide a rationale for that belief.
- Hypothesize as to the reasons for the negative variances. Be sure the hypothesis is supported by evidence from the scenario, the balance sheets, and income statements.
- Explain the proportional changes in the common size results over the four fiscal year time frame and identify notable changes in the ratios. Also include a hypothesis, supported by a rationale, to suggest why these anomalies may exist.
- Identify notable patterns and variances that warrant further investigation and justify both with evidence from the three-year period. Specify the potential consequences of the variances to justify the need to examine these variances further.
- Assess whether the vision, mission, and goals of the organization are aligned with its current financial position and provide an explanation of why it does or does not align. Provides specifics from the variance analysis to support the assessment.
SAMPLE BUSINESS MEMORANDUM
(The business memo format is best suited for presenting analysis and results of an issue that requires no more than 2-3 pages of text and a couple of tables and exhibits. Anything longer should use a business report format with a very short transmittal memo).
DATE: March 13, 2020
TO: Martha Glamour, CEO Stylish Living Magazine
FROM: Simpson and Lee Consulting Associates (This tells the reader your role as writer – e.g. consultant, analyst to reporting to manager, etc.)
Thomas Simpson (Principal Writer) Richard Lee (Principal Editor). (The words principal writer and editor do not appear in a real business memo; they are here for grading purposes only. In the real world you would substitute the titles of the authors, e.g. Partner or Senior Manager).
RE: Analysis of existing cost system and desirability of switching to ABC.
Thank you for allowing us the opportunity to work with your company (simple courtesy and positive start). As requested, we have evaluated the strengths and weaknesses of your company’s existing cost system and evaluated the desirability of switching from the existing cost system to an activity based cost system ABC). (This sentence should clearly state the “big” issue in the case. It should also help to remind the intended audience of the purpose of this memo). Our analysis uses Products X and Y as test cases to understand how the existing and proposed ABC systems would compute product costs. Based on our study, we have reached the following conclusions:
1. The cost of Product X is higher than Product Y under the current system; the cost Product X is lower than Product Y under the ABC system.
2. The existing cost system has several weaknesses that make the data unreliable and misleading.
3. We recommend that the company should abandon the existing system and replace it with an activity based cost system as it will provide better product cost information for decision making.
(The three points above are what the writing guide refers to as “headlines”. They state the major conclusions of your memo and should (like a newspaper headline) grab the reader’s attention. Note a headline does not contain detailed results such as cost of Product X is $3.45 per unit.).
The rest of this memo explains the basis of our conclusions. We will present our analysis in four parts. The first part deals with product cost under the existing system. This is followed by . . . The next section
. . . The last section . . .
(The purpose of these sentences is to give the reader a road map to follow your discussion. Note that the four parts probably correspond to the detailed questions at the back of the case. These questions typically lead you to address the big issue in the case. If the memo is longer than 2 pages, you may have to use subheadings to avoid long bodies of texts).
Product Cost Analysis
Our analysis begins by computing the costs of the two products, X and Y, using the current cost system. Exhibit 1 shows the manufacturing cost of the two products under the existing cost system. As row 5 shows, product X has a cost of $25.45 per unit. (Note the reader is being pointed to the data and not left to find it for him or herself). Also, as column 3 of the Exhibit shows, most of this cost, approximately 65 percent, is indirect manufacturing overhead. The last row of the Exhibit shows that . . . (Rest of the details omitted intentionally).
Exhibit 1
Costs of Manufacturing Product X and Product Y
Insert table here
(Note that EXCEL tables and PowerPoint flowcharts can be pasted directly into your document. Make sure that EXCEL tables fit the width of your page and PowerPoint flowcharts should be pasted as pictures(use the Paste Special command).
Weakness of Existing Cost System
The current system of assigning overhead to products using direct labor hours does not represent a fair measure of resources used by the products. Your company produces a large variety of products in low volume with highly automated operations. Direct labor accounts for only 3% of the total cost of manufacturing (See Exhibit 1). In your production environment, most of the indirect manufacturing costs are driven by cost drivers that have little or no relationship to the amount of direct content of each product. The relevant cost drivers in your situation are . . . (Rest of the details omitted intentionally).
Conclusion and Recommendations (Not you are reiterating what you said up front one more time). .
We recommend that the company abandon its current cost system and replace it with . . . (Rest of the details omitted intentionally). This will allow you to better measure the resources consumed by each product and lead to better pricing and product mix decisions . . . (Rest of the details omitted intentionally).
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