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Week 5 – Strategic Financial Analysis

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: advance 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 of 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, the vision.

Based on the provided scenario, create a 3–4 page business memorandum to Linda Hoff, Stanford’s CFO.?For guidance on writing a memo, take a look at this

Sample Memo [DOCX]

.

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 its 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]

. 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 investigating and justify both with evidence from the three- year period. Specify 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 their 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.

This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course. Check with your professor for any additional instructions.

The specific learning outcome associated with this assignment is:

Audit financial statements and expenditures for alignment with organizational strategic priorities.?

HSA525
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:
TO:
FROM:
March 13, 2020
Martha Glamour, CEO Stylish Living Magazine
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
© 2020 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary information and may not
be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of Strayer University.
Page 1 of 2
HSA525
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).
© 2020 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary information and may not
be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of Strayer University.
Page 2 of 2
St
Consolidated Statement
Years Ending Aug
Assets
Current assets:
Cash and cash equivalents
Short term investments
Patient accounts receivable, net of allowance for doubtful accounts
Other receivables
Inventories
Prepaid expenses and other
Total current assets
Investments
Investments at equity
Investments in company managed pools
Assets limited as to use, held by trustee
Property and equipment, net
Other assets
Total assets
Liabalities and net assets
Current liabilities:
Accounts payable and accrued liabilities
Accrued salaries and related benefits
Due to related parties
Third-party payor settlements
Current portion of long-term debt
Revolving line of credit
Debt subject to short-term remarketing arrangements
Self-insurance reserves and other
Total current liabilities
Self-insurance reserves and others, net of current portion
Swap liability
Other long-term liabilities
Pension liability
Long-term debt, net of current portion
% of Change
between 2018
& 2017
-8%
68%
2%
11%
4%
24%
8%
357%
22%
9%
-100%
14%
-23%
16%
% of Change
between 2018
& 2017
46%
-18%
39%
90%
9%
-100%
0%
20%
1%
7%
-26%
292%
-87%
44%
2018 ($)
652,256
391,314
623,077
79,036
58,884
52,886
1,857,453
509,781
80,989
1,400,839
3,279,048
86,739
7,214,849
2018
449,192
209,490
98,942
34,474
14,505
228,200
54,933
1,089,736
139,841
182,527
122,944
6,650
1,711,967
Total liabilities
Net assets:
Unrestricted:
Stanford Health Care
Nonconrolling interests
Total unrestricted
Temporarily restricted
Permanently restricted
Total net assets
Total liabilities and net assets
19%
3,253,665
14%
-15%
14%
8%
1%
13%
16%
3,285,398
18,727
3,304,125
648,826
8,233
3,961,184
7,214,849
Stanford Health Care
dated Statements of Operations and Changes in Net Assets
Years Ending August 31, 2015, 2016, 2017, and 2018
Common Size Balance She
Years Ending August 31, 2015, 201
2018
% of Change
between 2017
& 2016
3%
125%
9%
-24%
13%
17%
12%
-16%
-2%
-75%
19%
-18%
8%
% of Change
between 2018
& 2017
-8%
8%
17%
-21%
-3%
#DIV/0!
0%
6%
14%
10%
#DIV/0!
-91%
-21%
-3%
2017 ($)
710,109
233,533
610,734
71,112
56,559
42,528
1,724,575
111,664
66,255
1,287,193
58,134
2,869,346
112,445
6,229,612
2017
307,899
255,759
71,429
18,149
13,335
135,000
228,200
45,854
1,075,625
130,816
245,966
31,363
51,745
1,189,529
% of Change
between 2016 &
2015
2016 ($)
2015 ($)
45%
2%
2%
23%
16%
2%
20%
3%
690,460
103,627
559,933
92,961
50,016
36,273
1,533,270
132,273
475,677
101,677
550,721
75,427
42,935
35,486
1,281,923
127,860
-9%
-59%
25%
-16%
4%
1,316,489
235,788
2,401,880
137,637
5,757,337
1,440,352
580,701
1,923,465
163,578
5,517,879
2016
2015
335,995
236,819
61,308
22,948
13,756
282,134
202,859
43,324
9,018
13,932
228,200
43,232
942,258
118,994
228,200
34,918
814,385
120,364
355,683
65,463
1,220,789
234,855
51,220
1,237,347
% of Change
between 2018 &
2017
19.1%
16.7%
41.5%
154.5%
-1.3%
#DIV/0!
0.0%
23.8%
15.7%
-1.1%
#DIV/0!
51.4%
27.8%
-1.3%
2018 (%)
9.0%
5.4%
8.6%
1.1%
0.8%
0.7%
25.7%
7.1%
1.1%
19.4%
0.0%
45.4%
1.2%
100.0%
2018
6.2%
2.9%
1.4%
0.5%
0.2%
0.0%
3.2%
0.8%
15.1%
1.9%
2.5%
1.7%
0.1%
23.7%
2017 (%)
11.4%
3.7%
9.8%
1.1%
0.9%
0.7%
27.7%
1.8%
1.1%
20.7%
0.9%
46.1%
1.8%
100.0%
2017
4.9%
4.1%
1.1%
0.3%
0.2%
2.2%
3.7%
0.7%
17.3%
2.1%
3.9%
0.5%
0.8%
19.1%
1%
2,725,044
10.0%
2,703,187
2,458,171
45.1%
43.7%
17%
10%
17%
5%
3%
15%
8%
2,871,113
22,060
2,893,173
603,251
8,144
3,504,568
6,229,612
-0.7%
-12.4%
-0.9%
2.7%
2.6%
-0.2%
4.3%
2,449,037
20,133
2,469,170
577,086
7,894
3,054,150
5,757,337
2,467,393
22,979
2,490,372
561,642
7,694
3,059,708
5,517,879
45.5%
0.3%
45.8%
9.0%
0.1%
54.9%
100.0%
46.1%
0.4%
46.4%
9.7%
0.1%
56.3%
100.0%
mmon Size Balance Sheets
August 31, 2015, 2016, 2017, and
2018
2016 (%)
12.0%
1.8%
9.7%
1.6%
0.9%
0.6%
26.6%
2.3%
0.0%
22.9%
4.1%
41.7%
2.4%
100.0%
2016
5.8%
4.1%
1.1%
0.4%
0.2%
0.0%
4.0%
0.8%
16.4%
2.1%
0.0%
6.2%
1.1%
21.2%
2015 (%)
8.6%
1.8%
10.0%
1.4%
0.8%
0.6%
23.2%
2.3%
0.0%
26.1%
10.5%
34.9%
3.0%
100.0%
2015
5.1%
3.7%
0.8%
0.2%
0.3%
0.0%
4.1%
0.6%
14.8%
2.2%
0.0%
4.3%
0.9%
22.4%
47.0%
44.5%
42.5%
0.3%
42.9%
10.0%
0.1%
53.0%
100.0%
44.7%
0.4%
45.1%
10.2%
0.1%
55.5%
100.0%
Stanf
Consolidated Statements of
Years Ending August
% of Change
between 2018
& 2017
Operating revenues:
Net patient service revenue
Provision for doubtful accounts
Net patient service revenue less provision for doubtful accounts
Premium revenue
Other revenue
Net assets released from restrictions used for operations
Total operating revenues
Operating expenses:
Salaries and benefits
Professioanl services
Supplies
Purchased services
Depreciation and amortization
Interest
Other
Expense recoveries from related parties
Total operating expenses
Income from operations
Interest and investment income
Earnings on equity method investments
Increase in value of company managed pools
Interest rate swaps mark to market adjustments
Swap interest and change in value of swap agreements
Loss on extinguishment of debt
Contribution income from Stanford Health Care-ValleyCare affiliation
Excess of revenues over expenses
Other change in unrestricted net assets:
Tranfer to Stanford University, net
Transfer (to) from Lucile Salter Packard Children’s Hospital
Change in net unrealized gains on investments
Net assets released from restrictions used for:
Purchase of property and equipment
10%
-25%
10%
15%
5%
-56%
10%
#DIV/0!
#DIV/0!
5.3%
7.7%
13.9%
7.1%
14.3%
-18.8%
24.3%
7.3%
8.8%
37.1%
103.1%
37.8%
-23.4%
#DIV/0!
-43.7%
#DIV/0!
#DIV/0!
-2.9%
#DIV/0!
41.5%
#DIV/0!
792.1%
#DIV/0!
-76.6%
Change in pension and postretirement liability
Noncontrolling capital distribution, net
(Decrease) increase in unrestricted net assets
Changes in temporary restricted net assets:
Transfer from Stanford University
Contributions and other
Contribution income from Stanford Health Care-ValleyCare affiliation
Investment income
Gains on company managed pools
Net assets released from restrictions used for:
Operations
Purchase of property and equipment
Increase in temporary restricted net assets
Changes in permanently restricted net assets:
Contributions
Increase in permanently restricted net assets
(Decrease) increase in net assets
Net assets, beginning of year
Net assets, end of year
357.4%
-498.7%
-3.1%
#DIV/0!
-20.8%
57.3%
#DIV/0!
-84.7%
71.6%
#DIV/0!
-55.9%
-76.6%
74.2%
#DIV/0!
-64.4%
-64.4%
1.4%
14.7%
13.0%
Stanford Health Care
Consolidated Statements of Operations and Changes in Net Assets
Years Ending August 31, 2015, 2016, 2017, and 2018
Common Size Incom
Years Ending August 31
and 20
2018 ($)
4,735,366.00
(57,437.00)
4,677,929.00
92,654.00
135,597.00
4,366.00
4,910,546.00
2,091,260.00
46,146.00
667,379.00
1,216,992.00
176,742.00
35,434.00
477,661.00
(121,727.00)
4,589,887.00
320,659.00
31,122.00
7,048.00
110,984.00
48,043.00
(47,613.00)
470,243.00
(98,183.00)
2,068.00
9,438.00
309.00
% of Change
between 2017
& 2016
7%
-39%
9%
12%
5%
6%
9%
#DIV/0!
#DIV/0!
7.4%
-14.0%
10.3%
7.4%
13.4%
10.0%
-1.2%
8.1%
6.9%
58.0%
12.4%
#DIV/0!
498.9%
-100.0%
#DIV/0!
#DIV/0!
#DIV/0!
593.1%
#DIV/0!
-22.0%
-100.0%
-15.0%
#DIV/0!
35.7%
2017 ($)
4,311,530.00
(77,004.00)
4,234,526.00
80,647.00
129,324.00
9,904.00
4,454,401.00
1,986,360.00
42,851.00
586,056.00
1,136,020.00
154,686.00
43,643.00
384,354.00
(113,451.00)
4,220,519.00
233,882.00
15,325.00
5,114.00
144,829.00
85,368.00
484,518.00
(69,376.00)
1,058.00
1,320.00
% of Change
between 2016
& 2015
14%
-4%
15%
15%
25%
-40%
15%
#DIV/0!
#DIV/0!
29.6%
4.3%
9.7%
15.9%
24.3%
-2.0%
8.3%
12.1%
20.1%
-47.5%
-13.0%
#DIV/0!
-55.5%
95.2%
#DIV/0!
-100.0%
-100.0%
-82.0%
#DIV/0!
33.8%
-112.4%
-150.9%
#DIV/0!
-57.5%
2016 ($)
2015 ($)
2018 (%)
4,019,285.00
(126,280.00)
3,893,005.00
72,292.00
122,996.00
9,372.00
4,097,665.00
3,525,014.00
(131,601.00)
3,393,413.00
62,893.00
98,718.00
15,663.00
3,570,687.00
96.4%
-1.2%
95.3%
1.9%
2.8%
0.1%
100.0%
1,850,124.00
49,846.00
531,130.00
1,058,182.00
136,442.00
39,661.00
389,199.00
(104,965.00)
3,949,619.00
148,046.00
13,635.00
1,428,100.00
47,801.00
484,036.00
912,886.00
109,735.00
40,485.00
359,368.00
(93,640.00)
3,288,771.00
281,916.00
15,680.00
24,181.00
(115,958.00)
54,309.00
(59,392.00)
42.6%
0.9%
13.6%
24.8%
3.6%
0.7%
9.7%
-2.5%
93.5%
6.5%
0.6%
0.1%
2.3%
1.0%
-1.0%
69,904.00
(35.00)
96,758.00
389,236.00
(88,944.00)
(3,300.00)
1,245.00
(66,477.00)
26,600.00
(2,445.00)
-2.0%
0.0%
0.2%
973.00
2,288.00
0.0%
9.6%
28,277.00
(1,200.00)
410,952.00
2,177.00
44,894.00
712.00
2,467.00
(4,366.00)
(309.00)
45,575.00
89.00
89.00
456,616.00
3,504,568.00
3,961,184.00
-7827.5%
-130.1%
-2099.8%
#DIV/0!
3.9%
37.8%
#DIV/0!
526.6%
-14.6%
#DIV/0!
5.7%
35.7%
69.4%
#DIV/0!
25.0%
25.0%
-8204.0%
-0.2%
14.7%
6,182.00
301.00
424,003.00
2,748.00
28,541.00
4,662.00
1,438.00
(9,904.00)
(1,320.00)
26,165.00
250.00
250.00
450,418.00
3,054,150.00
3,504,568.00
-99.6%
1512.9%
-106.4%
#DIV/0!
-34.9%
-60.4%
-100.0%
-55.4%
-33.7%
#DIV/0!
-40.2%
-57.5%
-63.8%
#DIV/0!
9900.0%
9900.0%
-101.5%
13.9%
-0.2%
(80.00)
(1,000.00)
(21,202.00)
(19,461.00)
(62.00)
329,679.00
0.6%
0.0%
8.4%
2,645.00
20,717.00
0.0%
0.9%
744.00
1,683.00
4,062.00
52,333.00
62.00
1,667.00
2,537.00
(9,372.00)
(973.00)
15,444.00
(15,663.00)
(2,288.00)
42,710.00
-0.1%
0.0%
0.9%
200.00
200.00
(5,558.00)
3,059,708.00
3,054,150.00
2.00
2.00
372,391.00
2,687,317.00
3,059,708.00
0.0%
0.0%
9.3%
71.4%
80.7%
0.0%
0.1%
Common Size Income Statements
Years Ending August 31, 2015, 2016, 2017,
and 2018
2017 (%)
2016 (%)
2015 (%)
97%
-2%
95%
2%
3%
0%
100%
98%
-3%
95%
2%
3%
0%
100%
99%
-4%
95%
2%
3%
0%
100%
45%
1%
13%
26%
3%
1%
9%
-3%
95%
5%
0%
0%
3%
45%
1%
13%
26%
3%
1%
9%
-3%
96%
4%
0%
40%
1%
14%
26%
3%
1%
10%
-3%
92%
8%
0%
1%
-3%
2%
-2%
11%
2%
0%
3%
11%
-2%
0%
-2%
0%
0%
-2%
1%
0%
0%
0%
0%
2%
0%
0%
10%
0%
0%
-1%
-1%
0%
9%
0%
1%
0%
1%
0%
0%
0%
0%
0%
1%
0%
0%
0%
0%
0%
1%
0%
0%
0%
0%
0%
1%
0%
0%
10%
69%
79%
0%
0%
0%
75%
75%
0%
0%
10%
75%
86%

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