THE FINANCE FUNCTION
Overview of key tasks of the finance function
The finance function has the overall duty of managing the organization’s finances in order to achieve the organization’s goals. The finance function is responsible for working capital management that involves the management of cash, receivables, inventory and accounts payable. The finance function ensures that the organization maintains a desirable level of working capital. It is also in charge of identifying viable investments that can increase the organization’s value. In addition, the finance function allocates the organization’s resources to various departments or products depending on their needs as well value added to the organization. Allocation of resources is done through the budgeting process (Brown, 2010). The unit also carries the duty of keeping financial records as well analyzing the financial performance of the organization. It evaluates the financial performance through the application of financial ratios among other tools. It also advises the top management on measures to improve the performance of the organization.
Capital budgeting in sports organizations
The finance function of a sports organization is charged with looking for and evaluating long-term projects (Baker and Esherick, 2013). Capital budgeting involves evaluating an investment in order to determine its viability. Capital budgeting is critical to the success of a sports organization since capital projects affect the long-term growth of the business. Capital projects require a considerable initial capital and are usually medium or long-term projects. For instance, in a motorsport firm, purchasing motorsport cars is a capital project. The motorsport company earns its revenue from the participation in formula one, among other sporting events. The finance function will determine the purchase cost of the motorsport cars as well as their useful lives. In addition, the Department will estimate the cash flows expected from the cars considering the expected number of sporting events. The finance function can then use any of the capital budgeting techniques to assess whether the purchase of the cars is a viable investment or not. It can use the payback period that determines the duration the cars will take before generating adequate cash flows to recover their initial cost. In addition, the financial managers can determine the accounting rate of return by dividing the annual income by the initial cost of purchasing the cars. The above two methods are limited by the fact that they ignore the time value of money.
Most financial managers use the modern techniques such as the NPV, IRR, and profitability index. The net present value method involves determining the difference between the present value of benefits and costs associated with the purchase of the cars (Emery, 2011). In this case, the finance management team will discount the expected cash flows in order using the organization’s cost of capital in order to find their present values (Smart, Megginson and Graham, 2010). The department will recommend the purchase of cars to the top management if they have a positive net present value. The internal rate of return is the rate at which the net present value of the cars is zero. If the IRR is more than the organization’s cost of capital, the project is viable and hence it is considered investment.
Illustration
Assuming the sports organization plans to purchase 10 cars costing $200,000 each with useful lives of 5 years and no salvage value. If the expected cash flow is 75,000 annually and the firm’s cost of capital is 10%, the net present value will be as follows:
NPV = (75,000 × PVIFA15%,5yrs) – 200,000 = (75,000 × 3.791) – 200,000 = $84,325
In this case, the NPV is positive hence the finance function will recommend to the management of the organization to buy the motorsport cars.
WORKING CAPITAL MANAGEMENT
Managing working capital is also critical in sports organizations to ensure that there is adequate working capital to finance daily operations. Working capital is the difference between the current assets and current liabilities of an organization at a given time.
Factors considered in managing working capital in sports organizations
Size of the organization
The amount of working capital is directly influenced by the size of the business. A large sports organization has several daily operations that require resources (Vora, 2013). Therefore, a large organization will require a substantial working capital than a small sports organization. The finance manager must, therefore, consider the size of the firm in order to determine the optimum level of working capital.
Nature of the business
Manufacturing and trading firms require more working capital than service organizations. The financial manager must identify the nature of operations of the sports organization in order to develop an appropriate working capital management strategy. If the sports organization is a service business such as a fitness center, it will require less working capital. In this case, the organization can afford using most of its operating revenues to finance long-term projects. However, if the business deals in manufacturing sporting equipment, it will require a significant working capital hence the finance manager should develop a strategy that ensures that a substantial working capital is maintained. Such organizations spend most of their operating revenues to finance daily operations. In addition, the amount of inventory required and the storage period should be considered in managing working capital. A service sports organization does not require high levels of inventory, unlike a manufacturing sports organization. If the level of stock required is high, the company must establish a policy that ensures a large working capital is maintained.
Working capital cycle
Some sports organizations sell their products or offer their services to their clients on credit. The credit period influences the working capital management policy in the organization. If the organization has longer credit periods, it implies the customers pay their dues long after receiving the products or services. Such an organization will need a substantial amount of working capital to finance the daily operating activities for the period before the customers pay their dues. In this, the management should allocate operating cash flows to long-term projects. In an organization where the credit period is short, the management can maintain a low amount of working capital without crowding out funds for the daily operating activities.
Other aspects of the working capital cycle include the duration of paying accounts payable, inventory holding periods, among other aspects. A shorter working capital cycle implies that the organization does not need a large amount of net current assets to support operating activities. It also means that the sports organization frequently receives cash from its customers.
Access to credit facilities
An organization with access to credit facilities can quickly raise funds whenever required. Such organizations do not need to maintain large amounts of working capital since unexpected operations will be readily financed through borrowing (Covell, et al, 2007). However, if the sports business has limited access to loan facilities, it must keep a large amount of working capital. The strategy will, therefore, differ if the organization can easily borrow and when it cannot. The size of the organization as well as its relationship with its stakeholders also comes in. Large organizations can readily secure short-term loans since they have security, unlike small sports organizations.
Seasonality in demand
The demand for most sports products and services are seasonal. For instance, balls, sports shoes, among other products are in high demand when the sports season is on. The finance manager of a sports organization must, therefore, consider the seasonality of demand by matching working capital to the corresponding season (Walker, Siciliano and Hess, 2007). During the season of high demand, the finance manager must maintain an ample working capital in terms of inventory and cash while, during the low seasons, a small working capital is maintained. In that case, a working capital policy that leads to a constant working capital throughout the year is not appropriate. The policy should allow fluctuation of working capital depending on the demand for sports products and services.
Growth plans
If there is a potential for the growth of the firm or the management plans to expand the organization, it will require a significant amount of working capital to finance the increase in daily operations. The strategy should, therefore, be aggressive to ensure adequate cash and inventories in the organization.
Cash flow budget
The club will have a positive balance in each of the months from March to August. The club will receive cash from its activities in March, April and May while costs and operating expenses will be incurred throughout the period to August. The balance will be even in the months when the club will not be receiving any cash from operating activities. However, the month of August will have a negative cash balance of £50 if the sponsor pays his donation in September. If he pays the donation in August as promised, the club will have a positive cash balance. The total cash receipts from March to August will be £14,350 while total cash payments will be £11,400. The cash balance of August will be £2,950.
PROJECTED FINANCIAL STATEMENTS
Budget for a football exhibition match
The main headings in the above budget are the budgeted income, budgeted expenditure, and the surplus. Budgeted income is the revenues the club expects to obtain from the football exhibition match. In this case, the budget revenue includes ticket sales, sponsorship, and food sales. The club estimates that a total at least 20,000 fans will turn up for the event, and each ticket will be sold at £15. The club will also receive £50,000 from the event’s sponsor. The club’s canteen also expects revenue of $100,000 from food sales.
The budgeted expenditure refers to the cost the club expects to incur in organizing the event. It expects to hire a nearby stadium for a cost of $75,000. Printing and other costs are expected to be $5 for each ticket. The club will donate a third of the total ticket revenue to charity. The club canteen estimates the cost of food items at $72,000. The club will also pay stewards a total of $27,000 to provide security during the event. Other expenditures will be for license and advertising the event.
The budgeted surplus is the difference the budgeted incomes and the estimated expenditures. It represents the amount the club will gain from organizing the event. Then the club can use the surplus to finance other activities.
Using the budget as a monitoring and controlling tool
The budget can be used to control the activities during the football exhibition match. Controlling the activities involve comparing the estimated values to the actual values during or after the event, and taking appropriate corrective actions (Jordan, 2010). For instance, I can use the budgeted incomes to monitor and control revenues from the event. The income from ticket revenue is expected to be £300,000, £15 for every ticket. I will regularly review the ticket revenue collection to identify if there are any variations. If 5,000 tickets have been sold, the total ticket revenue should be £75,000. If the amount collected is less than £75,000, I would investigate the causes of this disparity and discuss the issue with the persons responsible. I will then take appropriate actions to ensure that the remaining 15,000 tickets generate the expected revenues. This will ensure that the club gets the budgeted revenue from the event and reduce unnecessary losses (Finch, 2010). This would not be possible if there is no budget for the event. It is impossible to determine whether the revenues received are less or more if there is no figure for the standard revenue.
In addition, I will use the budget to control costs by ensuring that the actual costs do not exceed the budgeted costs. I will compare the costs of producing and distributing the tickets, the cost of food items, and cost of security, among other costs, with the budgeted values. For instance, I will review the cost of producing the first 5,000 tickets, and if it exceeds $5 per ticket, I will take appropriate measures. I will investigate if there is any inefficiency in the process and take appropriate actions. The budget will, therefore, help the organization in ensuring that it does not incur unnecessary extra costs in organizing the exhibition match.
The areas with the greatest risk are the ticket revenues and costs, food costs, and revenue. The club may not sell all the tickets at the same price hence the actual income is likely to differ from the budgeted revenue. In addition, the turnout may be less than 20,000 fans. Due to unexpected occurrences or inefficiency in operations, the cost of producing a ticket may exceed $5. The cost of food items for the canteen may also vary from the budgeted amount due to price changes, wastes, among other factors.
Use of variances
Variance analysis involves the determination of the difference the budgeted and the actual incomes or expenses. A variance can be adverse or favorable depending on the nature of the variation (Fried, Shapiro and Deschriver, 2008). Where the actual cost exceeds the budgeted cost, the variance will be adverse, and this is a concern to the club as this reduces the surplus from the exhibition match. Actions must be taken to correct favorable variances to enable the event attain its intended objectives.
Illustration
Assume the club sold a total of 18,000 tickets at a price of £12 per ticket. The variance analysis will be as follows:
Budgeted sales = 20,000 tickets
Budgeted price = £15
Total budgeted revenue = £300,000
Total actual revenue = 12 × 18,000 = £216,000
Total ticket revenue variance = 216,000 – 300,000 = £84,000A
The above figure implies that there an adverse variance of £84,000 since the actual revenue was less than the estimated ticket revenue. Variance analysis will go further to determine the causes of the adverse variance. In this case, the above variance is decomposed into price and quantity variances as follows:
Sales price variance = (Actual price – Budgeted price) × Actual quantity
= (12 – 15) × 18,000 = £54,000 A
Sales quantity variance = (Actual number of tickets sold – budgeted number of tickets) × Budgeted price
= (18,000 – 20,000) × 15 = £30,000
This indicates that the variance was caused by selling the tickets at less than the budgeted price. In addition, it was caused by the disparity in the turnout to the event. This could have corrected through additional promotion activities, among other measures.
Bibliography
Baker, R. and Esherick, C., 2013. Fundamentals of sport management. Champaign, IL: Human Kinetics.
Brown, M., 2010. Financial management in the sport industry. Scottsdale, Ariz.: Holcomb Hathaway, Publishers.
Covell, D., Walker, S., Hess, P. and Siciliano, J., 2007. Managing Sports Organizations. Burlington: Elsevier Science & Technology.
Emery, P., 2011. The sports management toolkit. Abingdon, Oxon [U.K.]: Routledge.
Finch, B., 2010. Effective financial management. London: Kogan Page.
Fried, G., Shapiro, S. and Deschriver, T., 2008. Sport finance. Stanningley: Human Kinetics.
Jordan, L., 2010. Sports event management. Surrey: Ashgate.
Smart, S., Megginson, W. and Graham, J., 2010. Financial management. Mason, Ohio: South-Western.
Vora, J., 2013. Working capital management. Jaipur: Vista Publishers.
Walker, S., Siciliano, J. and Hess, P., 2007. Managing Sports Organizations. Taylor & Francis.
