Although all accountants adopt the generally accepted accounting rules, each industry has its own characteristics. This is why analysts need specific knowledge about the industry so as to decide which set of accounting rules to apply to reflect the financial situation of the corporation best.
And in the football industry, perhaps the main characteristics is the fluctuations in revenue and net income due to uncertainties in the industry. A team can earn a huge amount of money in this year but it can find itself losing money in the next year.
The uncertainties root from the uncertain results in the league games. The revenues of football clubs heavily depend on the performance of the team in the league. A simple example is that the football club which does well may have a higher revenue than its counterparts due to the elevated demand of the club-related merchandize.
So, if the underlying principles that affect the team’s revenue-generating factor can be identified, predicting the company performance will be much easier. This shall be discussed in the following by analyzing the annual reports from 2004-2007 of three football clubs, which are Arsenal Football Club, Liverpool Football Club and Tottenham Hotspur. (Notes: The annual report for the year 2007 of Liverpool is not yet released and therefore we use the statistics in 2004 instead. As said previously, since the financial performance fluctuates greatly, we are not going to estimate the figures in 2007.)
There are a number of factors that can affect the ability of a football team of generating revenues.
First, it is known that a part of the operating income of a football club comes from the reward of winning a championship. For UK football clubs, they usually aim at advancing in the UEFA Cup or the even loftier UEFA Championship League, which have a relatively high value of prize money. They sometimes pay less attention to domestic competitions like Premier League, Carling Cup and FA Cup.
Apart from the prize money, another important factor is the broadcasting revenue. This comes from the agreements signed between the clubs and the league or cup organizers. Each team in the league receives the broadcasting fee directly proportioned to the number of rounds they played. Therefore, a team in the league usually receives the same share of broadcasting revenues. Yet, for the cup competitions where the knock-out system is adopted, a team which makes a deeper run has more matches to play and hence more broadcasting revenues. It also attracts a larger audience to watch the broadcast, thereby benefiting the club.
Also, the revenue gained from the gate receipts is also crucial. Similar to the TV broadcasting fees, the better the team performs, the higher the revenue the team gets from the ticket sales, partly due to the brand name effect, which boosts the ticket sales.
The above four factors shall be discussed in the upcoming section of Team Results.
Secondly, the sales of team-related merchandize items can also be a major source of income. This highly depends on the size of fan-base. A larger fan-base has a higher demand in the club merchandize, which boosts the operating income. Clubs tend to invest to enlarge its fan-base, which is often described as a marketing strategy as found in the annual reports.
A larger fan-base also enhances the brand name of the football club, which can also be a potential benefit for the football club itself. This shall be discussed in the Fan Base section.
Thirdly, a team who is able to control the payroll of independent players better enjoys a greater fiscal freedom due to the stricter cost control, which can be beneficial to the football club. Plus, if a team can efficiently deal with the sum involving trading player, the team places itself to a sound financial position.
These factors shall be discussed in the section Payroll and Trading of Players.
Last but not least, the administration...