Tasks of the finance function in a business
The finance function is tasked with both internal and external functions in a business. The major functions include budgeting and forecasting, recording financial transactions in both the ledgers and books of original entries, financial reporting of statements and to adhere to regulatory rules and to meet the business tax obligation. The finance function also has a role in the management of business accounts such as costing records, budget and pricing. The management accounts are usually used by managers for decision-making purposes when making critical business decisions such as pricing strategies and the amount of money to be allocated to various departments within the business. The finance function also plays a role in treasury management which assists the management in planning for the cost of risk associated with a particular business activity. The Treasury as finance function also sources for ways of raising short and medium term finance for the business.
Budgeting in sports organizations
The finance function carries the function of budgeting to ensure that resources are allocated to all the functional units in the organization. The finance department gathers data on all the activities of the organization and their plans for the proceeding periods. For instance, a football club has a department handling the senior team, the youth team, the purchasing department, the public relations office, among other departments. Each departmental head submits their plans and activities they plan to undertake in the coming period. The department handling the senior team will present to the finance unit the activities the team plans to participate in and the estimated costs. All other units present their estimates to the finance department.
The finance unit, through the budget committee then reviews the budget estimates from other sections of the organization. The review is to ensure that the departmental units’ budgets are in line with the overall goals and strategy of the organization. In addition, it ensures that the budgets are within the organization’s resource constraints. The finance function approves the functional budgets from all the units of the organization after the review. After approving the functional budgets, the finance function prepares a master budget for the entire organization as well as the revised budgets for all the functional units. The master budget is then presented to the board of the club for approval.
During the actual budget period, the finance function allocates the organization’s resources to the departments depending on the approved budgets. The function is also responsible for controlling the use of resources, which is part of the budgeting process. The department regularly reviews the actual expenditures to determine whether they are within the budget or not. The unit uses techniques such as variance analysis in order to monitor and control the expenditure of all the units of the club. It holds the functional managers responsible and accountable for any expenditure beyond the budgeted amounts. This ensures efficient and effective use of the club’s resources thus helping the club to achieve its corporate goals.
Factors considered when managing working capital in sports organizations
Sports organizations, just like any other businesses, require working capital to finance their daily operations. The finance units of sports organizations, therefore, carry an important role of ensuring the working capital is at optimum levels (Preve and Sarria-Allende, 2010). Several factors determine the level of working capital in a club and other sports organizations as well as the policies for managing working capital.
Firstly, the management of working capital in sports businesses is influenced by the organization’s working capital cycle. Working capital cycle is the period between the date the business orders raw materials to the time the business receives cash from its accounts receivables (Ross, Westerfield and Jordan, 2007). In a non-profit organization like some clubs, it may be defined as the period between the day it requests for sponsorship and the day it receives cash from the sponsors (Wilson, 2011). When an organization’s working capital is short, it will require less working capital while a business with a longer working capital cycle requires a significant working capital balance. This implies that a club that offers credit facilities to its clients will need more net current assets than one that does not provide credit facilities. A strategy that helps in maintaining working capital in organizations with longer working capital cycles may include using retained earnings to finance operating activities as well as making fewer capital investments from operating cash flows.
Secondly, the working capital management strategy of a sports business is influenced by the ease of access to funds, both long-term and short-term sources. A sports business with a limited access to sources of funds should maintain a large working capital. The large working capital is necessary to avoid disruption of the daily operations in case there are eventualities that require additional cash. Such businesses must limit selling or offering services on credit and should only allow shorter credit periods for their accounts receivables (Sagner, 2011). On the other hand, an organization that can easily access funds does not need a large working capital. Such businesses can afford to sell on credit and offer longer credit periods for their accounts receivables.
The size of the sports organization also determines the working capital needs as well as the strategy for managing net current assets. A large sports business serves many customers and has numerous daily activities that require funding. Therefore, a large sports business needs to reduce its credit periods as well as the percentage of products or services offered on credit. A small sports business has less daily operations and a small client base hence it does not a large amount of net current assets (Trenberth and Hassan, 2011). A small business can therefore offer its services and longer credit periods to its customers. The finance manager must therefore consider the size of the sports business when designing and implementing the working capital management policy.
A finance manager must also consider the nature of the sports business in establishing the strategy for managing net current assets. Service organizations such as a boxing training center do not require large amounts of working capital. Most of their operations do not require cash since they majorly use capital assets in the provision of such services. A manufacturing sports business requires a large working capital since it has several daily operating activities that require cash and other current resources. It follows that most manufacturing businesses require large stocks of raw materials and finished products hence they require a considerable amount of net current assets. Most service sports organizations do not have large inventory needs hence they can survive with less working capital.
Inflation must also be considered in designing the firm’s working capital approach. Working capital is required to meet daily operations such as purchase of raw materials, supplies, among other operating items. If the inflation rates are high, working capital for a given month may not be adequate for the proceeding period. In this case, the finance manager must establish a policy that enables the business to adjust its working capital requirements to changes in the price level.
The finance managers of sports organizations must also consider the level of completion in managing the firm’s working capital (Stewart, 2007). Where competition is high, the sports business can attract and retain customers by ensuring quick delivery of services and products as well as offering longer credit periods. Clients prefer businesses that offer longer credit periods to allow them ample time to prepare before paying their dues. Businesses in highly competitive markets must therefore keep a high level of inventory to enable quick delivery to clients. In addition, they need ample cash to finance operations during the long credit periods. They, therefore, require more working capital than sports businesses in, less competitive markets.
Other factors that must be considered include operating efficiency, availability of raw materials, growth prospects, seasonal factors and business cycles, among other factors (Kimmel, Weygandt and Kieso, 2011). Differences in these factors lead to the variation in working capital management practices in different sports businesses.
Cash flow budget for Winfield Village Rugby Club
The Rugby Club will receive cash in only three of the seven months from March to August. In the month of March, the club will receive a total cash of £3,450 hence it will have available cash of £3,450. The total cash payments for March will be £1,900 hence the club will have a closing balance of £2,550. The cash forecast indicates that the club will not face cash problems in any of the months. The closing balance of the cash account will be positive even during the months when it does not expect any cash receipts. The cash payments for these months will be financed by the balances brought forward from the previous month. The balance at the end of August will also be positive unless it does not receive the money promised by the sponsor.
Projected financial statements
Budget for Texas Road Race
Carlie Sports Limited does the business of organizing athletics events. It plans to organize a marathon in Texas. The budget for the event is as follows:
The budget for the Texas marathon has two main headings; the budgeted revenues and the budgeted expenses. The budgeted revenues are the incomes the company expects from the event (Barrow and Barrow, 2008). It includes t-shirt sales, income from the sponsor, advertising income and merchandising income. The company requires all participating athletes to pay a registration fee of £100. The company expects a total of 2,000 athletes to turn up and participate in the event. The company will also receive £500,000 from the sponsor of the city marathon. It will also receive merchandising income from the sale of its products such as t-shirts, sports shoes, among others. Other corporates advertising their products during the event will pay $50,000 to the organizing company.
Budgeted expenses are the costs the company expects to incur before and during the marathon. The company will have to hire additional workers to assist in organizing the event. The addition staff costs are expected to amount to £75,000. The company will also pay winners of different races a total of £250,000. It also incur £100,000 in printing and distribution t-shirts for the marathon. The budgeted profit is the difference between the firm’s budgeted incomes and expenses from the marathon event. It is the amount it will gain after paying all the marathon expenses.
Budget as a control and monitoring tool
The above budgeted figures provide a basis against which the activities during the marathon can be evaluated. I would compare the actual against the budgeted figures to identify any disparities. For instance, the expected costs for the t-shirts for the entire event amount to £100,000. The production of these t-shirts can be regularly monitored in order to identify any disparities. Each t-shirt is supposed to cost about £50. Supposing the company’s production department has printed 100 t-shirts, the total cost should be £5,000. If the cost is above the budgeted £5,000, the variance is noted and analyzed to identify the causes of the variations. This is a negative variance hence measures should be taken to correct the variance. The corrective actions will help the company in controlling the cost of producing the remaining t-shirts. The same process is undertaken for other items as well as the collection of t-shirt revenues. Areas at a high risk of adverse variances are the t-shirt revenue and costs, other operating expenses and the merchandising income.
Variance as a control mechanism
Determining the difference between budgeted and actual values can be used to control activities before and during the marathon. If any variances are identified, a detailed analysis is carried out to identify the sources and take appropriate actions to prevent such in future (Berger, 2011). Variance analysis takes a management by exception approach as it focuses on adverse variances while ignoring most favourable variances (Berger, 2011). For instance, if the company produces 2,100 t-shirts at a total cost of £100,800, variance analysis can be carried out as follows:
Budgeted total cost = 100,000
Actual cost = 100,800
Variance = 100,800 – 100,000 = £800
This indicates that there was an adverse variance of £800. The variance is partly due to the difference in cost and the difference in quantity. The above figure shows that the actual cost per t-shirt was £48, a favorable variance. The increase in cost was therefore due to the increase in quantity. The company produced 100 more than the budgeted t-shirts. Actions can be taken to reduce this adverse variance to ensure that the marathon event is organized within the company’s budget (Besley and Brigham, 2012).
Barrow, C. and Barrow, C., 2008. Practical financial management. London: Kogan Page.
Berger, A., 2011. Standard Costing, Variance Analysis and Decision-Making. Munchen: GRIN Verlag.
Besley, S. and Brigham, E., 2012. Principles of finance. Mason, Ohio: South-Western Cengage Learning.
Kimmel, P., Weygandt, J. and Kieso, D., 2011. Accounting. Hoboken, N.J.: Wiley.
Preve, L. and Sarria-Allende, V., 2010. Working capital management. New York: Oxford University Press.
Ross, S., Westerfield, R. and Jordan, B., 2007. Essentials of corporate finance. Boston: McGraw-Hill/Irwin.
Sagner, J., 2011. Essentials of working capital management. Hoboken, N.J.: Wiley.
Stewart, B., 2007. Sport funding and finance. Amsterdam: Elsevier.
Trenberth, L. and Hassan, D., 2011. Managing sport business. Milton Park, Abingdon, Oxon: Routledge.
Wilson, R., 2011. Managing sport finance. London: Routledge.