Strategic Financial Analysis

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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.

 

Sample Solution

Analyzing Stanford Medicine’s Financial Performance Against Strategic Direction

Slide 1: Title Slide

Title: Stanford Medicine: Financial Performance and Strategic Alignment

Slide 2: Stanford Medicine’s Strategic Direction

  • Vision: Precision Health: Predict. Prevent. Cure. Precisely.

  • Mission: Improving Human Health Through Discovery and Care.

  • Strategic Priorities:

    • Value Focused

    • Digitally Driven

    • Uniquely Stanford

Slide 3: Financial Analysis Overview

  • Horizontal Analysis: Examining changes in financial statement line items over time (2015-2018).

  • Vertical Analysis (Common-Size): Expressing each line item as a percentage of a base figure (total assets for balance sheet, total revenue for income statement) to facilitate comparisons across years.

  • Variance Analysis: Identifying positive and negative variances in financial data, highlighting areas of concern.

Slide 4: Key Negative Variances

  • Table: Display a table of the most significant negative variances identified from the horizontal and vertical analyses. Include line item, amount of variance, and percentage change.

  • Example:

    • Line Item: Operating Expenses

    • Variance: -$50 million

    • Percentage Change: -5%

Slide 5: Analyzing Negative Variance in Operating Expenses

  • Possible Causes:

    • Increased staffing costs (salaries, benefits)

    • Growth in research and development expenditures

    • Rise in administrative expenses

  • Alignment with Strategic Priorities:

    • Evaluate whether the expense growth is aligned with the strategic priorities of “Digitally Driven” (e.g., investments in technology) or “Uniquely Stanford” (e.g., research investments).

    • Are there any areas of spending that are not directly contributing to the strategic direction?

Slide 6: Analyzing Negative Variance in Net Income

  • Possible Causes:

    • Increased expenses (as discussed previously)

    • Reduced revenue growth (e.g., lower patient volume)

    • Changes in reimbursement rates from insurance companies

  • Alignment with Strategic Priorities:

    • Does the decline in net income impact the organization’s ability to invest in innovation, technology, and research, which are crucial for fulfilling the “Digitally Driven” and “Uniquely Stanford” priorities?

    • Is there a need to adjust revenue generation strategies to maintain financial stability?

Slide 7: Impact on Strategic Direction

  • Discuss the implications of the negative variances:

    • Are these financial trends hindering the organization’s ability to achieve its strategic priorities?

    • How might these variances affect the long-term financial sustainability of Stanford Medicine?

    • Are there potential risks to the organization’s ability to meet its vision and mission?

Slide 8: Recommendations for Action

  • Prioritize Cost Management: Implement strategies to control costs while maintaining quality care and research.

  • Enhance Revenue Generation: Explore ways to increase revenue streams, such as expanding service offerings or improving patient access.

  • Optimize Resource Allocation: Evaluate spending patterns and reallocate resources to areas that align most closely with the strategic priorities.

  • Implement Performance Monitoring: Regularly track key performance indicators (KPIs) to monitor the effectiveness of implemented initiatives.

Slide 9: The Importance of Strategic Alignment

  • Emphasize the connection between financial performance and strategic direction.

  • Explain how financial mismanagement can undermine an organization’s ability to achieve its goals.

  • Highlight the importance of a proactive approach to managing resources in support of the vision and mission.

Slide 10: Conclusion

  • Reiterate the key findings of the analysis.

  • Summarize the recommendations for action.

  • Emphasize the need for ongoing monitoring and evaluation to ensure financial health and strategic alignment.

Note: This presentation framework is a guide. You will need to:

  • Use actual data from the provided spreadsheet.

  • Conduct your own analysis.

  • Present your findings in a clear and concise way.

  • Provide specific recommendations based on your analysis.

This presentation should demonstrate your understanding of financial analysis techniques, your ability to connect financial data with strategic priorities, and your capacity to propose action-oriented recommendations for improving the organization’s financial performance.

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