Project and Financial Management - Literature review Example

Introduction According to Shim & Siegel (2000), financial management can be described as the effective and efficient management of financial resources in accomplishing the stated goals and objectives of the business. This process can also be said to be the specialised function, which is associated with every business’ top management. This paper aims to investigate the financial management of Manchester United Football Club, and compare it with the financial management of its competitor, Hull City. According to the latest financial reports that the club released, the club has been facing a spiralling debt with a huge reduction in its revenue. The club has struggled to maintain a position that will guarantee them a place in the elite UEFA champion’s league, which is often a big boost to its revenue in all the years that the club participated in the competition. The clubs executive vice-chairman has in the recent past been showing a brave face amidst the statistics that have not been pleasing at all. An examination of the clubs financial performance in the ending season indicates that its debt has so far risen, reaching approximately £380.5million. Additionally, the club has also dipped in its fortunes, which have also reduced by about 14 percent. The clubs revenues in broadcasting also dropped by about 39.4%, which is believed to have been caused by the clubs lack of participation in the just about to be concluded UEFA champions league competition. For any club, participation in the elite competition is always the main target, not just because of the prestige that the championship brings, but also from the revenues that the club records. Inasmuch as the club has had a tough financial season, it managed to reduce its wage bill by about 2.9 percent for its last quarter. This paper will concentrate in the financial management of Leeds Football Club and Manchester United Football Club. Both these football clubs ensure their financial statutory accounts meet legal requirements and often evaluate their past financial results and appraisal of future opportunities. Therefore, this paper will conduct a detailed analysis of the financial position of both Manchester United Football Club and Leeds Football club. Financial Statements FS Definition, Financial statements are various documents that contain reports on a firms financial results, cash flows, and financial conditions. These statements are crucial to an organisation since they determine the ability of the firm to generate cash and explain the management is going to use it. Additionally, it determines the source of the cash, determines whether the firm is able to service the debts, tracks financial results, derives financial ratios, and investigates the details of transactions done by the firm. Income statement Definition Income statement is a document often prepared monthly or annually and it explains a firms earnings. It entails a comprehensive report of a firms relevant income and expenses that were used to generate the income. Some books refer to this as profit/loss statement. Table 1. Income statement of Manchester United F.C from 2010 – 2014. Highlighting key income statement information Table 2. Income statement of Leeds United F.C from 2010 – 2014. Highlighting key income statement information Balance Sheet Definition Balance sheet is a financial document that presents a companys financial position at the end of the financial period. It can be referred to as the snapshot of a companys financial position at an instant. For instance, if a balance sheet dated 28th, March, it reflects all the transactions undertaken by the firm through 28th March. 2014 £000 2013 £000 2012 £000 2011 £000 2010 £000 Current Assets 827,039 716,105 648,856 595,095 656,024 Non-current assets 63,109 70,871 151,642 310,290 277,770 Total Assets 890,148 786,976 800,498 905,385 933,794 Current liabilities 158,180 123,904 619,861 276,587 229,173 Non-current liabilities 477,896 493,556 89,613 484,227 569,419 Total liabilities 636,076 617,460 709,474 760,814 798,592 Share capital 26,519 26,519 26,519 26,519 26,519 Reserves 76,160 76,160 7,756 7,290 7,756 Retained earnings 151,393 66,837 56,749 110,762 100,927 Shareholders equity 254,072 169,516 91,024 144,571 135,202 Total equity 254,072 169,516 91,024 144,571 135,202 Total liabilities and equity 890,148 786,976 800,498 905,385 933,794 Table 3. Manchester United F.C balance sheet for 2010 – 2015. Highlighting key balance sheet information 2014 £000 2013 £000 2012 £000 2011 £000 2010 £000 Current Assets 21,587 9,732 14,035 12,058 8,396 Non-current assets 19,304 24,255 22,756 14,862 11,519 Total Assets 40,892 33,988 36,791 26,920 19,915 Current liabilities 18,734 28,594 17,248 15,316 11,631 Non-current liabilities 35,635 3,984 8,582 960 1,144 Total liabilities 54,370 32,579 25,830 16,276 12,775 Share capital 4,500 500 500 500 500 Reserves 4,000 0 0 0 0 Retained earnings -21,977 908 10,461 10,144 6,640 Shareholders equity -13,477 1,408 10,961 10,644 7,140 Total equity -13,477 1,408 10,961 10,644 7,140 Total liabilities and equity 40,892 33,988 36,791 26,920 19,915 Table 4. Leeds United F.C Balances Sheet for 2010 – 2015. Highlighting key balance sheet information Cash Flow Statement Definition Cash Flow statement is one of the major financial statements in a firm. It reports on the cash generated and used during a specified time. These statements are categorised into operating activities, investing activities, financing activities, and supplemental activities. Budgeting As noted in a study by Oberoi (2014), budgeting is a representation of a firms policies in financial terms. Both Leeds Football Club and Manchester United design budgets that guide them during the financial year. According to experts, the budgeting process is an essential component of management since it provides the basis of planning and control for the top leadership (Oberoi, 2014). In the sports sector, the budgeting process is very difficult. It is difficult because their objectives are difficult to define in a quantifiable way. For instance, organisations in other sectors say banking; have only a single objective of attaining profits. However, in the sports sector, say football; clubs have very many objectives such as raising revenue, playing nice football, playing in big leagues, and attracting the best talent (Rosner, 2011). There are two methods that can be used to prepare budgets: incremental budgeting and zero-based approach (Rikardsson, 2013). These two clubs cannot use the same method of preparing budgets. Leeds United is currently facing liquidation and they are on a verge of experiencing insolvency. On the other hand, Manchester United is recording high revenues despite having a huge debt. That said, Manchester United would be in a good position if they use incremental budgeting because with their good revenues, the club could this revenues as a base when preparing budget. This ensures the club performs better financially during the next results. On the other hand, Leeds United can survive if they used Zero-based budgeting. This type of budgeting is appropriate because the club will neglect the previous results, but focus more on re-evaluating annually from a zero-base. Sources of Funding Define Sources of Funding Sources of funding are the working capital for an organisation and they include cash generated from operations, decrease in noncurrent assets, increase in non-current liabilities, and increase in stockholders equity. Manchester United has various sources of funding. One of the sources is cash generated from winning tournaments. For instance, when the club won the league in 2008/2009 season, it was awarded the largest share of 5.178 billion Euros. The second source is sponsorship deals. The biggest sponsor is Adidas, which agreed a deal with the club worth 750 million Euros for ten years. This was a record deal and made the clubs uniform the most expensive uniforms in premier league history. Adidas provides the uniforms at a cost of around $1.3 billion. This deal with Manchester United was the biggest for Adidas, since it also sponsors Real Madrid Football Club. Manchester United receives $128 million a year where as Real Madrid receives $53 million from Adidas. Additionally, Chevrolet is another company that sponsors Manchester United. This US Motor giant agreed a deal worth $560 million for the next seven years. The deal involves provision of shirts at a cost of $50 million for a year. The deal was the reason why Manchester United recorded a record income of $195 million for the 2014-15 season. Before the deal with Chevrolet, Manchester United was already on an ongoing $20 million deal a year with AON. AON officially sponsors Manchester Uniteds training kit and sponsorship of Carrington training ground. So far, Manchester United has signed more than ten sponsorship deals. These deals are major sources of funding for the club. Apart from sponsorship deals, the club earns money from shareholders. The clubs majority shareholder is the US based Glazer family. They own 85% of the clubs shares purchased through a $1.4 billion in 2005. Since the takeover, the family has spent over $800 million to service debts. Ratio Analysis Ratio analysis is comparing numbers from balance sheet, income statement, and cash flow statement of companies. It involves comparing numbers from the previous year, competitors, or even the whole economy. With ratio analysis, a person is able to know how a company is performing financially, and be able to predict future results. Ration analysis- Manchester United Profitability Return on Assets 0.51% Return on Capital 0.67% Return on equity 0.04% Margin analysis Gross margin 99.52% EBITDA Margin 28.29% Levered Free Cash Flow Margin 3.24% SG&A Margin 53.21% Asset turnover Total assets turnover 0.3x Fixed assets turnover 1.5x Accounts receivable turnover 4.5x Inventory turnover (no data) Credit ratios Current ratio 0.5x Quick ratio 0.5x Long term solvency Total debt/equity 83.99% Growth over Prior Year Total revenue -8.63% EBITDA -16.70% Receivables 53.20% Diluted EPS before Extra -99.87% Cash from OPS 60.17% Tangible book value -34.70% Gross profit -8.77% Inventory (no data) Capital expenditures -38.76% Leveraged Free Cash Flow -50.22% Growth over Prior Year Total revenue -8.63% EBITDA -16.70% Receivables 53.20% Diluted EPS before Extra -99.87% Cash from OPS 60.17% Tangible book value -34.70% Gross profit -8.77% Inventory (no data) Capital expenditures -38.76% Leveraged Free Cash Flow -50.22% Manchester United has both poor and the best results. First, Manchester United has a low debt/equity ratio. This means that the company has a strong balance sheet. When it comes to pre-tax profits, the company performs poorly. For any established company, the pre-tax profit need to be above 8% (Conn, 2013). The club needs to have a high return on equity because it will ensure structural flaws are missing in the organisation. However, Manchester United risks flaws because it has a low ROE (Conn, 2013). Manchester United has been recording high profits, but its spending power is high. For instance, in 2013, the club spent 71 million Euros, thereby increasing the debt further despite recording revenue of 363M (Conn, 2013). The club often experiences rise in revenues because of good sponsorships, especially from Nike and mobile companies. This can be a sigh of relief to stakeholders because the sponsors inject 42% of total income to the club. Additionally, TV rights contribute over 30% to the total revenues (SHEEN, 2015). Evaluation Many financial experts deemed Manchester United as a financial experiment to determine whether a highly leveraged buyout can make a club more successful. But judging from the results in United’s financial statements, things seem not to work for clubs under buyouts. When the Glazer family bought Manchester United, they got their funds from loans. These loans continue to haunt Manchester United, and despite making a lot of revenues, the club is still at debt. During the last five years, Manchester United has experienced increase in sponsorship deals, lucrative television contracts, and the unexpected impact of new financial regulations on behaviour of competitor clubs. These regulations were implemented because football competition across the world has become very competitive. As a result, most football clubs are using a lot of money to invest on the best talents. This has led to financial mismanagement. To bring order in this sector, UEFA, a European body that governs soccer implemented financial fair play regulations. These rules require clubs to use their own efforts in order to break into UEFAs competition. For instance, Manchester United cannot rely on external funds in order to cover up for its debts and investments in players. The club will have to generate own money to cover all the costs (Zelman, 2009). As validated in the club’s balance sheet, before the Glazer family bought the club, Manchester United had incurred debts worth $800 million. There were many loans, and the most infamous one was the PIK loans which were paid in 2010. At the same time, the club generated income from the sale of Cristiano Ronaldo for $80 million and signed a deal with AON. Additionally, the club generated some money in the IPO and this was useful in clearing the huge debt. As of 2012, the debt had fallen from $600 million to around $400 million. After smashing the debt by almost half, the next chapter of Manchester United was experiencing of rapid revenue growth and higher profit margins. One can predict that Manchester United is going to enjoy more media and commercial income, as validated by the graph above. Though this is unusual in football business, the balance sheet of the club demonstrates that the organisation is going to make more money than usual in future. In broader terms, from the financial statements, the club is expected to generate profit margins never realised before. In the end, many financial pundits will agree that the huge debt of the club is going to be cleared. The club has three sources that are certain the will generate a lot of revenue for the club. These sources are Chevrolet, premier league rights, and Nike renewal. Chevrolet signed a deal which ensures the club receives $14 to $15 million per year, coupled with the AON deal. The premier league rights are very lucrative, and if the club performs well in the league, it is guaranteed a bigger share of the rights. The Nike deal guarantees the club over $38 million annually. Looking at these deals, it is evident the club is strong financially and it is not in a position to fall into a financial crisis like Leeds United. The EBITDA of Manchester United has been very steady, and in a very tight range. The EBITDA is the cash profits before transfers. This is normally calculated by getting the difference of revenues and cash costs. As demonstrated by the graph below, the EBITDA margins are expected to raise, thereby reduction in wages to income ratio. The club is expected to stay with their revenues, than spend them. v Recommendation / Action Plan Managers can use their skills to improve their companys financial position and performance. The best way to improve financial position is through sponsorship. Sponsorship gives an opportunity for two or more partners to come together and create synergy. With synergy, firms can save effectively and grow tremendously (Pandey, 2009). Organisations that get funding from sponsorships understand their target audience. For instance, one of the sponsors of Manchester United is Chevrolet, which is very popular in the UK. Therefore, Manchester United has a sponsor who really understands the clubs audience. Sponsorship is defined as giving material support for an event, or an organisation by an unrelated partner (Oberoi, 2014). Here, Chevrolet helps Manchester United generate consumer preference and the sponsor itself benefits from fostering brand loyalty. The benefits of having a sponsor includes brand enhancement, awareness rising, access to niche markets, increase sales, and cost effective. The disadvantages include negative image association, lack of control, and ambush marketing (Brigham, 2010). Reference list Conn, D., 2013. Manchester United spent £71m in 2012-13 financing debt of takeover. The Guardian . SHEEN, T., 2015. Manchester United financial results: Club announce debt up 12% to £395.4m and post pre-tax loss of £11.4m. The Independent. Zelman, W. N., 2009. Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts and Applications. s.l.:John Wiley & Sons. Read More