Why Prudence Pays

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One of the overriding principles in accrual accounting is that the financial records show a fair value for the enterprise concerned. One of the principles applied is known as the prudence concept. Under this regime liabilities are recognised as soon as they can be anticipated, assets not until they are realised.

To put it another way, you start the year in January with a budget for the season. Immediately you can subtract your known expenses. Even for a race in December you can predict that it will cost a certain amount in race fees, logistics and so on so you remove this amount from the operating budget and put it somewhere safe until needed. Conversely if some kind patron says that they will sponsor you it is when they pay the money into the bank it can be spent, but not before.

This is prudence, and it pays.

Let’s look at a real life example.

In 2015 the Manor Racing group reported a turnover of £40 million with net assets of £11 million. It is fair to say that these figures placed the team basically at the back of the grid when it came to finance and this was reflected in their position on the track.

By mid-season in 2016 at Austria the team received an unexpected fillip as their highly rated young driver Pascal Wehrlein managed to get his MRT05 over the line in tenth position earning the teams first, and as it transpired, only F1 championship point.

As the season wore on this looked like it would be good enough to place them 10th in the constructor’s championship, ahead of the equally results challenged Sauber team. Throughout the 2016 season Manor had asserted that a top 10 finish was essential to ensure survival and this would leave them in line for an enhanced pay-out under the concorde agreement which governed the provision of prize money by the FIA.

That is until the penultimate race of the season in Brazil, where Sauber’s Felipe Nasr in his home race managed to finish in an unexpected 9th place in the rain. The two points he scored placing Manor in a precarious position.

Although many fans would have liked to see Manor make a miraculous recovery in Abu Dhabi, this was not to be and the team went into administration in January 2017.

It is difficult to put a concrete number on what coming last cost Manor, but it has been estimated at £30 million in direct prize money and the more intangible loss of sponsorship or investment opportunities. What is certain, as history has shown time and again, is that Formula One is eye wateringly expensive and the smaller teams often race on the very edge of insolvency.

This is also a position many racers at all levels in all disciplines face, but the Manor Racing story emphasises why you have to keep control of your cash. 

Having a robust budget and racing to it may just save the day.

Photo by courtesy of Morio / CC BY-SA

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The Economics of Behaviour

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When it comes to finance most of us are surprisingly irrational.

This may come as a surprise to you, but as a rule we are subject to a number of subtle biases which affect the way that we make decisions regarding money and as a consequence business.

If you have a portfolio have you ever looked at a stock that is losing money and decided to keep it as it may ‘bounce back’ whilst selling a stock that is up to protect the profit? This may makes sense at the time; but of course makes absolutely no sense whatsoever when clinically reviewed. From a risk and finance perspective it would of course be far better to sell the underperforming stock and run the rising one. So why do we do this?
Almost all of us are psychologically averse to loss. As a result of this we most often make decisions based on the anticipated regret we will feel if things do not go as well as planned. Further we will be more inclined to take risks with losses whilst being rather conservative with gains.

In the past when you planned your season have you ever found that you ran over budget? This is often due to an underestimation of cost which is a result of overconfidence and is known as the planning fallacy. Did you persevere? If so you compounded matters with both commitment escalation and sunk cost bias, essentially refusing to write off a project due to the finds already spent and not wishing to admit to a mistake.

All of this can be strengthened by Framing, a bias which is caused based on whether information is presented in a positive or negative way. Which would you buy: a part that will work 70% of the time or one that will fail 30% of the time? They are of course one and the same thing. It is only the perception that differs.

This is made even worse by anchoring, or the tendency to make judgements based on the first or strongest information you receive on a subject. If asked if flying or driving is safer most respondents will quickly answer driving. An even cursory glance at the statistics will show that this is absolutely incorrect! Now think back. When was the last time you saw a report about a plane crash on the news? Although, and probably because, they are far more common car crashes rarely make the headlines. This leaves air travel available to you as the anchor you use in this scenario.

So how does all this of relevance to motorsport? You will find that it effects both the output and input finances of your team. When you are making decisions about your season and how to allocate resources you will be just as likely to fall foul of these misconceptions as anyone else, but they can be mitigated once you know they exist.

The same is also true when you try to market your team or yourself to potential sponsors who will be equally loss averse. You will have to be canny in your framing to overcome their omission bias which may lead them to do nothing rather than risk doing the wrong thing, i.e. giving you money.

As it happens these are also the main reasons that not more of you are requesting my assistance as a consultant to your teams…!

Diversity in Motorsport

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A lot has been talked about diversity recently, and rightly so. Bit what does it really mean? Not discriminating on the basis of gender, ethnicity, sexuality? Of course. BUT… these are legal requirements. Does their implementation form the basis of a coherent diversity policy? I think not.

I have always believed that motorsport is pragmatic. If what you do helps find that extra tenth of a second then that will be enough, irrespective of your demographic background. But this, of course, is a gross oversimplification and Motorsport remains predominantly male and predominantly white.

As with the rest of society this is a big question which will not be easy to answer. A start could be to take a step back and decide what diversity actually means to you, and then embed that into the very fabric of your team. There are many diversity strategies out there. For me personally diversity should center on everybody having the opportunity to reach their potential at whatever level this may be. At the end of the day we live in an ever increasingly globalised world, and this must fairly be reflected in all aspects of society. This of course is easier said than done.

I am aware that this article does not provide any answers. But, perhaps, it can help us too start to consider what the questions should be. That we need diversity in motorsport is a given. What this actually is and how we achieve it, these are the big ones.

Please feel free to discuss….

What’s in a Business Plan?

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When you think of a business plan it may well be that you picture a rather boring document held in a sweaty hand as you approach the bank manager for funding. This may well happen, but the business plan itself should be so much more than this.

Hopefully by now you have a good idea of what your team is, where it is going and how you are going to get there. What remains is to communicate your strategies and plans to any interested parties. The simplest way to this is to put together a business plan.

There are numerous templates available for free on the internet, and it is recommended that you obtain one that suits what you want to say whilst also thematically aligning with your teams branding and color scheme. Remember to be consistent in everything that you do!

I would further recommended that you put together a “master” plan that contains all the information possible about your team. At the start just preparing such a document can be very helpful in crystallizing exactly what you want to achieve and how you are going to do it. Later, if necessary, sections can be removed should they not be appropriate for the intended recipient. For instance, in a document you are making public you may be happy to discuss general financial management strategies, but not quite so happy to have your budgetary and accounting information freely available to opponents!

Sections that you may place in this master file could include (but not be limited to) the following:

  • Introduction/Executive Summary, briefly outline your team
  • Team contact details
  • Driver/Team member profiles
  • Details of team’s competition vehicles(s)
  • Current sponsors/partners
  • Historical team results
  • Planned events/results for the current season
  • Strategy Statements
  • SWOT Analysis
  • Stakeholder Analysis
  • Balanced Scorecard
  • Financial data (Budgets, Profit/Loss)

The critical point to grasp is that your business plan should be a living document. Update it regularly so that it contains current information. Your plan should grow with your team, but remember to remove any data that is out of date. You should illustrate your guide with pictures of the team in action. This can be worth a thousand words…

When forwarding it to third parties judge how much data they need. Try to keep it comprehensive but as simple as possible. The reader needs enough information to understand your team, but will not want to become bogged down in minutiae.

Take some time to put together a slick and cogent document. Remember that this may well be the single thing that your team is judged on. You never know when a potential sponsor will ask for more details…

If it comes across as professional, then this is how you will be judged and treated. If not…

The Balanced Scorecard – A Major Tool in your Box!

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The balanced scorecard is a performance management tool which is often also utilized to embed corporate strategy within an organization. Over the past twenty-five years its use has become almost endemic within business, and it is used by almost every major business entity in the world.

The objectives set by a company (or Team!) will have been formulated as a means to enact its declared strategy for future success. In other words they show what a company believes it needs to do at the strategic level to find success.

The balanced scorecard takes these broad objectives, and changes them into specific goals to be achieved at the tactical level. These are often referred to as Key Performance Indicators, and the conventional wisdom is that if these KPI’s are achieved then so will be the greater objective. As with the goals your KPI’s should be SMART in nature. It is normal for these to be listed as metrics that will quite clearly have, or have not, been achieved. If objectives show what you are going to do, then the KPI’s show how you are going to do it.

The most common form of balanced scorecard splits the KPI’s into four separate perspectives as shown below. These are supposed to be causal in nature as shown in the diagram, with success at each level proceeding up the chain and driving further success. Finance normally comes at the top of the system as it is seen as a lagging indicator. The conventional wisdom is that financial benefits will only be seen after the rest of your KPI’s have been achieved. Working backwards this is why learning is at the bottom. This is seen as a leading indicator as success here will be seen before the overall benefits become apparent.

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In basis this is all very simple. You learn new skills. This allows you to improve the way that you do things. This pleases your customers (think stakeholders rather than the more literal meaning of customer) who are subsequently more inclined to deal with/support the organization. As a result of this there is a measurable financial gain.

Let’s look at a simple illustration. Your car is quite old and has been spending a lot of time in the garage for repairs. To counter this one of the team takes a welding course. This means that the car is available in house more, and hence is better prepared. The scrutineers are happy with the standard of your vehicle, which now runs more efficiently. This keeps promoters and sponsors happy. The net result: Reduced maintenance costs and (hopefully) increased sponsorship income. This can be shown pictographically in a strategy map, which sometimes can help when deciding on how to put it all together.

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Although not a business panacea, the balanced scorecard certainly can drive you to success if used well…