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Instructions
Read the following scenario, then draft a 3 page business memorandum to Linda Hoff, Stanford’s
CFO.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 an
Excel spreadsheet as an attachment to the memo. In this memo you will:
1. Review the year-over-year variances contained in the audited Stanford balance sheets and
income statements for fiscal years 201518 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.
2. Speculate as to the reasons for the negative variances.
3. Examine the common size balance sheets and income statements looking for abnormally low or
high ratios based on what you know about the line item and what you observe in the data for the
other fiscal years.
4. Look for patterns in the line items over the three-year period and identify any unusual findings that
may need to be examined further.
5. Assess the alignment of the organization’s fiscal management to the strategic direction of the firm.
Fiscal management is based on your horizontal and vertical analyses. The strategic direction is
based on the vision, mission, and strategic priorities of Stanford.
Purpose
The purpose of this assignment is 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.
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.
Scenario
You’re a health care 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.
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.
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 health care 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 of 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
has asked you to conduct a variance analysis of the company’s consolidated balance sheets and
income statements for fiscal years 2015, 2016, 2017, and 2018, which you began. You have
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.
Once you’ve completed your variance analysis over time, which is referred to as a horizontal
analysis, you are ready to create a common size balance sheet and income statement of each of
the four fiscal years (201518). You prepared the common sized financials, which are captured in
your spreadsheet. Now it is time to perform vertical and horizontal analyses of these common size
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.
financials. The common size balance sheet allows you to see each asset relative to total assets as
well as each liability and net asset (in the case of nonprofit organizations) relative to total liabilities
and net assets. In a common size income statement, each line item is expressed as a percentage of
total revenue or sales. Common sizing balance sheets and income statements allows firms to
compare against one another even though they may be of different sizes. It also allows a firm to
benchmark its financial performance against comparative groups. In this case, there isn’t any
comparative data to benchmark against; however, you can examine the ratios in each fiscal year
and look to see if anything looks abnormally low or high based on what you know about the line item
and what you observe in the data for the other fiscal years (vertical analysis). You can also look for
patterns in the line items over the four fiscal years and point out any unusual findings that may need
to be examined further (horizontal analysis). In finance, sometimes the organization establishes
interim goals and targets for certain line items in the financials. The firm can compare its actual
performance against the established goals and targets.
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.
Business Memorandum to CFO
Using the analysis that you performed on Stanford Healthcare and trends that you identified, write a
business memorandum to the CFO.In your memo, codify your findings and interpretations, and
assess the alignment of the organization’s fiscal management to the firm’s strategic direction. Attach
to the memo your analysis in an Excel spreadsheet.Your analysis and trends identified should take
into account any feedback that you received from your professor and/or peers.
Helpful hints: Negative variance is not always a bad thing. For example, you might see a slight
increase in the operating costs; however, if you achieved a positive variance in the total operating
revenue that outpaced the increase in operating costs, that may be perceived as a positive
outcome. Remember, you need to spend money to make money. We just want to make certain that
operating expenses don’t outpace the growth in operating revenues. Also, keep in mind that some
variances are useful in explaining other variances even if these variances are associated with
different financial statements. For example, you may see an increase in operating costs, which is a
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.
negative variance, but an increase in current assets, which is a positive variance. Furthermore, you
should look for patterns over time. This can reveal both positive and negative trends that may
provide insight into the variances you discovered. For example, you may have noticed that a certain
expense has continued growth over the past 3 years (negative variance); however, the rate of growth
year-over-year has been declining. It could be that Stanford has implemented some cost-cutting
measures that are showing signs of working.
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.
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