Controlling Budgetary Pressures in Football - Essay Example

Controlling Budgetary Pressures in Football In football, winning is not everything, it is the only thing. This age-old adage has prompted teams to pursue winning, and placement into the upper leagues, that denied all realism and practicality. A team in the Premier League can stand to gain far more money from gate receipts and broadcast royalties than a team in the Division 1 Coca-Cola Championship League. A relegated team can lose millions of pounds due to fewer media revenue streams. A team that has a financial structure based on the Premier League media revenue will face severe cutbacks when relegated to a lower division. These challenges will mandate a budgetary control process that can optimise revenue, control expenditures, stay within the budget, and meet team objectives. With revenue cut in half, expenditures will need to be reduced to accommodate the new situation (Southampton Leisure Holdings PLC. 2006). The team management will need to make key decisions on players, as salaries are the largest single expense. A plan will need to be implemented that can reduce the costs associated with player demands and still provide a reasonable opportunity to compete towards a goal of promotion back into the Premier Division. Management will be required to draw up a business plan that reflects the business strategy of the team. Loss of revenue from relegation will mean restructuring the player roster and may amount to the loss of the best players. Other players may be sold to generate immediate cash. One of the first tasks of the budget will be to realistically match salaries and goals to achieve the required end. Management may set a long-term goal of remaining in Division 1 until they are competitive enough to produce a profit in the Premier League. Alternately, a team may set a goal of returning to the Premier League after only one season in the Championship League. This would involve structuring player expense to increase the probability of being promoted. The team may spend all their available cash as well as incur further debt. However, management needs to plan beyond the current season as well. Promotion to the Premier League may not be any financial advantage if they are unable to compete in the future at that level. Loss of cash and increased debt has the potential of creating a yo-yo situation where the team is alternately promoted and again relegated. A key consideration of relegation has to do with whether a team actually is financially better off by being promoted to a higher league. A Premier League team operates in a local market for selling tickets and a national market for selling media rights. In both cases, the demand for a team's products depends on its quality, the opponents, and their market. In general, teams in more populous, wealthier markets will generate more revenue. (Noll 2002 p. 172). Promotion into a league that is too strong for the market in which the team is located may have a negative effect due to marginal costs. The advantage of the increased press coverage that results in greater demand may be offset by the increased marginal player expense (Noll 2002 p. 173). Thus, a team that should be in a lower league from the perspective of profit maximisation may set goals that are not in the best financial interests of the stakeholders. Establishing a budgetary control process will be a necessity and require naming key individuals in each department that will be responsible for maintaining expenditures within the budget, and meeting the long term objectives. A sound approach to generating a good budget is characterised by the participation of as many people as possible, a budget that will consider the whole organisation, and utilises effective standards of performance. The budget must be flexible enough to allow for changing circumstances and analysing ongoing revenue and costs. A budget committee should be comprised of senior members of the organisation and should be represented by every part of the organisation. The budgetary committee will be responsible for analysing ongoing results, real expenditures, and the investigation of any variance between the projected and the actual (Carter, Macdonald, & Cheng 1997). The effective committee will issue information, guidelines, and timetables for completion and adherence. Each department needs to have an established goal and measurable progress. This will highlight the necessity of ensuring that appropriate structures and systems are in place to guarantee financial effectiveness. Missing or ineffective coverage of any specific area will potentially result in the limitation of its efficacy. Each department responsible for a portion of the budget will also need to be responsible for achieving the desired results. Fixed costs of equipment and insurance may only need to fulfil the requirement by delivering the product. However, marketing, planning, and management can affect attendance and performance. Turnover and team record need to be regularly reviewed with the departmental managers to continually assure that short-term goals are being met. If the team sets a goal of promotion to the Premier League at the end of the next season, the necessary financial research must be undertaken to ensure that these budget figures are as accurate as possible. As in most situations, being conservative about income and pessimistic about expenditure is the best way for an organisation to meet its budget obligations. Player costs should be examined and approved by several management personnel. Managers and players may have a conflict of interest if they receive a bonus based on team performance. Watt (1996) warns of the failure to achieve accuracy when he states, "It is a recipe for disaster to pluck figures out of the air, which can then throw the organisation off in the wrong direction." (p. 139). It may be personally rewarding for a manager to over-spend on a star player, but could place the team's finances in jeopardy. English football has begun to structure the leagues with a greater sense of financial realism and most teams budget for placement in the middle table (PKF 2004 p.2). This budgeting gives them greater flexibility and the opportunity to adjust their plans if the season does not go as planned. Still, as the chairman of the board of Southampton states about their recent relegation, "[...] it is a priority to be a member of the Premiership" (qtd. in Annual Report 2006). Southampton has restructured and invested heavily with hopes or returning to the top flight. Recent experience has shown that it is possible to bridge the budgetary gap between the Football League Championship and the Premiership without risking the financial health of the club. The immediate revenue boost, which the Premiership provides, can be sufficient for a promoted club to achieve survival. The key is managing the transition (Jones 2006). In 2005/06 both West Ham United and Wigan Athletic proved that it can be done, by securing a "top half finish in the Premiership and reaching domestic cup finals (Jones 2006). Managers may tend to exaggerate results, use inaccurate accounting, or even over estimate spending to prevent them from being blamed in the event of cost overruns. However, effective budgeting can place pressure on managers to limit over-spending and still motivate results. Performance bonuses can be useful if responsible budget reviews are done with an eye toward realism. Long term goals and trends need to be routinely reviewed by the budget committee and modified when appropriate. According to Babatudne et al., English football financing has traditionally not been subject to profit maximisation and investment return. Common sense would say that you should budget for your expected income, but only recently has football applied common sense. Setting an ambitious budget is fine, but the vast majority of commitments are long-term and need to be paid in full. Therefore, the risks are greater if the budget targets are not met. Over the last two years big strides forward have been taken in terms of setting realistic revenue targets and in reducing player costs (PKF 2004 p. 8). This new realism is a necessary budget consideration to prevent teams from going into administration. Management can exert considerable control over a football team by demanding, and adhering to, a realistic budget. Clear team objectives can help guide departments into producing accurate data and attainable goals. Though a cost cutting budget may produce personal animosity, all aspects of revenue should be forecast and team performance influenced. These trade-offs are prudently made to achieve the goal of promotion. Open and easily understood team objectives will make these important decisions easier to quantify. Given the unpredictable nature of the potential income, setting the budget for a football club can be difficult, but not impossible. The most important characteristics are organisational agreement on goals, well-defined timetables, and a realistic assessment of the costs associated with success. The transparent process needs to involve people from throughout the organisation and scrutinised to eliminate personal bias. These approaches will result in a longer-range outlook for the team, eliminate the short-term yo-yo effect, and enhance the team's chances for accurate planning and future financial success. References Babatunde, B, Simmons, R. & Szymanski, S. (2006). English Football. Journal of Sports Economics, vol. 7 no. 1, pp. 29-46, viewed 15 January 2007, (online @ Thomson Gale) Carter, S, Macdonald NJ, & Cheng DCB (1997). Basic financing for marketers, FAO of the United Nations, Rome, viewed 15 January 2007, Jones, D. (2006). Annual review of football finance. London. Deloitte Noll RG (2002). The Economics of promotion and relegation in sports leagues: The case of English football. Journal of Sports Economics, vol. 3 no. 2, pp. 169-203, viewed 15 January 2007 (online @ Thomson Gale) PKF (2004) Financing football: Fit for business London, PKF, viewed 15 January 2007, < www.football-research.org/docs/PKF2004.pdf> Southampton Leisure Holdings PLC. (2006) Annual Report and Accounts 2006. London, Southampton Leisure Holdings PLC. Watt, D. C. (1996) Sports Management and Administration. London, Routledge . Read More