1007 SEM: Coursework 2 Report Case Study - Chelsea FC Student ID: 6858834 - Sam Taylor

1007 SEM: Coursework 2 Report
   Case Study – Chelsea FC
     Student ID: 6858834

Contents:

Introduction                           3

Global Business Environment Overview   3

Interpretation of the Accounts         4

Break-even Analysis                    5

Conclusions and Recommendations        5

Reference List                         7

Appendix                               8

2

Introduction
This report shall investigate the financial situation of Chelsea FC and how the micro and macro
environment can shape its decisions. Furthermore, an interpretation of the accounts will lead to
recommendations to be made based, globally and locally, on how Chelsea FC could adjust their
books to increase stability. The period of analysis and evaluation will be within the researched
period of Q1 of 2015 and Q4 of 2017 through horizontal and ratio analysis and can be seen in the
appendix.

Chelsea FC are a world-renowned club winning every major domestic and European trophy available
with some of football’s greatest players and managers. They have been in the Premier League since
it’s formation in 1992 and have established themselves firmly as part of the big six in the league.

Global Business Environment Overview
Chelsea operate in an UK economy that is in a recovery period of the economic cycle as GDP,
unemployment rates and the inflation rate have all improved within the researched period. GDP
grew to £492,785m from £468,326m (ONS 2018a) and GDP per capita rose from US$42,700 up to
US$43,600 (CIA 2018), meanwhile unemployment rates dropped from 6% to 4.5% nationally
(Nomisweb 2017). However, inflation grew beyond the 2% Bank of England’s target by moving from
0.5% to 2.7% (ONS 2018b). This shows, that although more people are working and income per head
is rising, this is offset by rising inflation signifying no major change in real wage terms. Relating to
Chelsea FC, this could be beneficial in terms of fan base revenue as if their prices didn’t rise with the
inflation since fans would experience a money illusion believing that their money hadn’t lost value,
but prices of goods had increased (Fisher 1928). Significantly, if Chelsea FC kept their prices at a
constant level then fans would see this exemption in the price rise and spend more on the club.

With the political development of Brexit, exchange rates fell between the Pound and Euro from £1:
€1.37 in 2015 to £1: €1.14 in 2017 (OFX 2018). This impacts Chelsea FC’s involvement in European
football and the effect of it’s comparison against clubs in the other top 5 leagues. For example, after
the 2015 broadcast deal, distributions from the Premier League to clubs grew 45% but the
comparison against the European market was minimalised by the exchange rate movements
(Deloitte 2017). Alternatively, exports would become cheaper to European fans leading to increasing
sales abroad albeit until the unforeseen future when Brexit negotiations are finalised. The
implications of this is that the club may struggle attracting the European market as visas may be
needed to come and watch matches plus the emergence of customs duty can escalate merchandise
prices. For example, this could be applied to the Belgium fan base and their support for Eden Hazard.

On a global scale, the Asian market is still experiencing strong periods of growth of 5.5% between
2016 and 2018 (IMF 2017). This is positive for the club because of their growing influence in the
region by entering the generational shift through emphasising junior football development whilst
forming local partnerships (Nalapat 2015). This presents an opportunity for the club to
counterbalance the potential dip in revenue from Europe to maintain a balance of the books.

3

Interpretation of the Accounts
The accounts for Chelsea make for a varied reading due to the unpredictability of first team
performances and their rival clubs. This was shown during the 2015/16 season and accounting
period where the team finished 10th in the Premier League resulting in lower match day income and
a lack of European football.

The profitability seems to improve, as over the three years, the operating profit margin and net asset
turnover resulted in a higher return on capital employed (ROCE) therefore making the club more
efficient in its inputs. 2017 shows the first year of a positive ROCE which concluding that until this
point, Chelsea FC were losing a return on each liability for the previous two years, especially in 2016
where this dipped to an anomaly of -20.70% (FAME 2017). This year should be highlighted as being
an anomaly due to the poor first team performance thereby meaning that comparing some of the
data against the other years may lead to untrue conclusions.

One clear trend is that both turnover and operating expenses rose over the period because of the
larger broadcast deal increasing centralised distributions by the Premier League and the partnership
with Carabao. Increased costs may have been the result of bonuses and rewards of new contracts
being given to staff and players from winning the Premier League title in 2017. Consequently, it may
be no coincidence that 2017 saw the only net profit of £15.2m (FAME 2017) within the period.
Despite this, comparing data from 2016 and 2017 shows turnover increased by 9.78% yet
administration expenses, cost of sales and overall operating expenses rose by 17.11%, 7.23% and
10.54% respectively. These percentages show that generally costs have increased at a greater rate
than the turnover thereby, the only cause of a net profit being recorded was a result of the
incomings from player transfers that year. This implies that if business was not conducted correctly
in the transfer market then Chelsea FC could have made a loss which, going forward, is
unsustainable.

Looking at the club’s efficiency, turnover per employee decreased by 3.59%, which even though
initially seems largely negative, is offset by the fact that Chelsea FC have gained a further 131
employees in this period. Although, the added contribution of those extra employees from the
marginal product of additional turnover gained has averaged out at £358,939 which is still below the
average for the year 2017. Further evidence shows that the efficiency of the club’s employees has
decreased greatly over the researched period.

Along with this, the time taken for clubs to settle payments with debtors and creditors rose sharply
in 2017 in comparison. This could affect the cash flow, especially given the drastic change in the
average days taken to perform the action albeit this may not have such an impact given the size of
the club.

Overall Chelsea FC is not a liquid business as its current ratio in 2017 was 0.75x (FAME 2017)
showing that in the short term, the club cannot cover it’s current liabilities using its current assets.
Seeing that the current ratio has fallen since 2015, Chelsea FC should address the issue to increase
stability. However, the current ratio may not play as much of an important role in the sport industry
as even if clubs fail to survive, they are still able to operate due to the impact it has on society.

4

The financial gearing of Chelsea FC is low in comparison to the average business, yet it has still
increased over the past 3 years, spiking in 2016. This may have been as a result to the poor season
meaning there was money lost from a lack of Champions League football and lower earnings from
finishing 10th in the league table. In addition, this shows that the owners funds are large enough to
finance the club which in general is often the case in many football clubs today.

Break-even Analysis
A break-even analysis looks to compare the incoming value needed by an organisation compared to
the outgoing value of deliverance which is expressed by dividing the fixed costs by the contribution
margin per unit (Cafferky and Wentworth 2014). This establishes the quantity of units needed to be
sold to break-even on the accounts thus providing targets to reach so losses are avoided. A break-
even point (BEP) is determined from the break-even chart which combines sales, fixed costs and
total costs graphs together allowing to see areas of profit, loss and the margin of safety (Black 2005).

UEFA uses a variation of the break-even analysis to dictate whether a club falls in line with Financial
Fair Play (FFP) and bases it on that ‘the difference between relevant income and relevant expenses is
the breakeven result’ (UEFA 2012). This varies from the main break-even analysis concept in that
there is no clear differentiation between fixed and variable costs, although it still seeks to find a BEP.
One issue is that is does not give direction as to what targets they need to set plus whether it is
possible for clubs to achieve a regular amount of fans who will contribute to the club reaching its
BEP (Atrill and McLaney 2017). This infers to the unpredictability of first team performances and
what impact it has on competition performance and fan satisfaction as attendances and
merchandise sales could impact revenue as seen during Chelsea’s 2015-16 season.

A break-even analysis can have limitations in that it is based on linear relationships. In reality, costs
can change such as fixed costs becoming stepped or that the organisation offers several products
(Atrill and McLaney 2017). In terms of Chelsea FC, the fixed cost of stadium operations would change
depending on the number of home games that season plus the club’s different products such as
match day tickets, merchandise, hospitality etc. can add confusion over where costs are allocated.

For a full break-even analysis to be conducted, there needs to be more clarity on categorising the
club’s fixed and variable costs. Without this, a full analysis is not feasible as costs can be missed
consequently leaving the club targeting a revenue that is below the real BEP. McKinsey (1924),
advised that to gain this information, a break-even analysis should be conducted by each operating
unit of the organisation because of their varying costs and then be brought together in a financial
meeting to discuss an overall BEP. Moreover, additional information could be given towards the
fixed costs as the accounts show no clear data on standard bills such as telephone, internet and
electricity. Without data like this, it is difficult to underline the basic costs from which to add the
accumulating variable costs.

Conclusions and Recommendations
The following recommendations will be drawn from the Du Pont pyramid approach that highlights
how to strengthen ROCE by developing the efficiency of capital employed and the turnover sales
(Elliott and Elliott 2017).

Besides profitabilty recovering since 2015, the ROCE and operating profit still remain low hence
depending on a high sales revenue to compensate for the capital employed (Atrill and McLaney

5

2017). To reduce the dependency, the club should increase its operating profit by finding new
revenue streams in richer economies such as the growing Asian market. Already, the club have
begun developing connections through its shirt sponsor and their junior programme yet this could
be pushed further. A suggestion could be expanding Chelsea FC’s involvement in E-Sports, a rapidly
developing sport in Asia, therefore not only raising the club’s exposure but entering a new market of
potential fans. Consequently, increasing the fan base, boosting merchandise sales and providing
extra marketing opportunities, all of which positively impacting operating profit. This would only be
lucrative in that region due to the earlier research showing the economic growth meaning potential
fans could have more disposable income so be willing to pay higher prices which may be less likely
elsewhere. Thereby not only raising operating profit but also turnover sales.

Secondly, the club can improve its efficiency as the data shows that overall Chelsea FC has become
less efficient during the research period as not only have the efficiency ratios declined but also the
marginal product by each employee towards the turnover has also dropped. Thus demonstrating the
law of diminishing returns by which the marginal product falls as the amount of variable input rises
in relation to a fixed input (Brue 1993). In Layman’s terms saying that adding too many employees
within an environment, i.e. the stadium, can be more costly than having fewer employees. Based off
this, it would be recommeded that Chelsea FC look at reducing staff numbers or by generating
targets for employees to reach to justify their employment. Expanding McKinsey’s point of each
department having its own break-even analysis could help achieve this because each unit will
understand what needs to be generated for to achieve the BEP. Subsequently, accomplishing this
would also benefit UEFA’s financial fair play scheme eliminating any punishments from not adhering
to those legislations.

Overall, Chelsea FC have struggled to make the club profitable despite attempts to increase the
turnover but have faced growing costs to generate this. Additionally, fan satisfaction remains crucial
to financial success as strong performances on the pitch can lead to stronger financial performance
and vice versa. This is apparent through the two seasons ending 2016 and 2017 where Chelsea FC
finished a well below par 10th place followed by then becoming Premier League champions. In
summary, it is vital that the financial stability is as strong as possible as the unpredictable nature of
the game can deal huge blows to the accounts.

6

Reference List
Atrill, P. and McLaney, E. (2017) Accounting and Finance for Non-Specialists. 10th edn. London:
       Pearson Education
Black, G. (2005) Introduction to Accounting and Finance. London: Pearson Education
Brue, S.L. (1993) ‘The Law of Diminishing Returns’. Journal of Economic Perspectives 7 (3), 185–192
Cafferky, M.E. and Wentworth, J. (2014) Breakeven Analysis: The Definitive Guide to Cost-Volume-
     Profit Analysis. 2nd edn. New York: Business Expert Press
CIA (2018) The World Factbook: United Kingdom [online] available from
       [15 April 2018]
Deloitte (2017) Ahead of the Curve: Annual Review of Football Finance [online] ed. by Jones, D.
     Manchester: Sport Business Group. available from
     
Elliott, B. and Elliott, J. (2017) Financial Accounting and Reporting. 18th edn. London: Pearson
      Education
FAME (2017) Chelsea FC PLC [online] available from  [17 April 2018]
Fisher, I. (1928) Money Illusion. New York: Adelphi Publishers
IMF (2017) Asia’s Dynamic Economies Continue to Lead Global Growth [online] available from
      [15 April 2018]
McKinsey, J.O. (1924) ‘Co-Ordination of Sales, Production and Finance’. The University Journal of
    Business 2 (4), 399–405
Nalapat, A. (2015) Chelsea on Cusp of a Generational Shift amongst Fans in Southeast Asia [online]
     available from
      [17 April 2018]
Nomisweb (2017) Economically Active - Time Series [online] available from
     [15 April 2018]
OFX (2018) Yearly Average Rates [online] available from  [15 April 2018]
ONS (2018a) Gross Domestic Product [online] available from
      [15
     April 2018]
ONS (2018b) CPIH Annual Rate [online] available from

7

[15 April
    2018]
UEFA (2012) UEFA Club Licensing and Financial Fair Play Regulations [online] available from
    
Appendix
Appendix A:

Appendix B:

Appendix C:

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