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