In May 1992, Tim Stanley, President of the Urban Arts Institute (UAI), had just received some good news and some bad news. The good news was that the Institute’s bank had approved the conversion of a portion of a long-term note (secured by a second mortgage on the Institute’s property and building) to an increase in its short-term line of credit. The increase had allowed the Institute to close its budget gap for the fiscal year ending June 30, 1992. The bad news was that the bank also had informed Mr. Stanley that the additional drawings on the line of credit needed to close the budget gap had taken the line of credit up to its maximum. Since the Institute had virtually no endowments or other reserves, there was no margin for error left for the upcoming fiscal year.
Mr. Stanley realized that unless he took some immediate steps to improve UAI’s budgeting system, the Institute was headed toward financial disaster. With the budget formulation process for fiscal year 1993 (July 1992 to June 1993) almost complete, he turned his attention to UAI’s fiscal operations with the following questions:
- With no reserves to fall back on, the Institute needed a balanced budget in FY 1993. What measures should he put in place to assure himself that this would happen?
- How could the overall budget formulation process be changed to reflect his management style and support some of his other strategic goals, such as improved communications among faculty, administration and the board?
UAI was founded in 1911 as a private for-profit enterprise with a mission to provide training for business and commercial applications of art skills. In 1965, to permit it to tap into additional revenue sources (e.g. government grants, scholarships, etc.), the UAI changed its legal status to private non-profit. Despite this change, the management of the institute retained its for-profit flavor, operating as a family-owned business. Until 1990, it was run by the same family that had founded it, with decision-making authority vested in a small circle, and board members comprised of friends of the family.
Historically, the school always had been highly tuition-dependent, with almost no endowment to contribute toward operating expenses. In 1985, the UAI financed about $2 million in building renovations entirely through bonds issued by the Massachusetts Health and Education Financing Authority (HEFA). In 1989, the UAI became accredited as a 4-year institution, having previously offered only a 3-year diploma to its students. To receive accreditation, the UAI needed to increase its curriculum to include the requisite number of liberal arts credits for its students.
In mid-1990, the Institute’s president of 11 years resigned. In the ensuing weeks, several board members also resigned, marking an end to the founding family’s control over the Institute. Steven Roberts, Dean of Academic and Faculty Affairs, stepped in as interim president until a new president could be recruited. Mr. Stanley assumed the position in August 1991. . . .
- What is your forecast of the surplus for FY 1992? What assumptions did you make in your analysis?
- What measures should Mr. Stanley put in place to assure himself of a balanced budget in FY 1993?
- How, if at all, should the budget formulation process be changed to reflect Mr. Stanley’s management style and his goals for the organization?