Finance assignment

1. ¡HALA MADRID!
GROUP 1

2. GROUP 1
THE FINANCIAL SITUATION BEFORE FLORENTINO PÉREZ
Real Madrid was on the verge of bankruptcy when Florentino
Pérez was appointed as Club President in the summer of 2000.
✕ The Net Debt of the Club (245 million in the financial year
1999-2000) was almost double of Net Sales (129 million).
✕ The following year, 2000-2001, the Net Debt grew further up
to 271 million, compared to 138 million as Net Sales.

3. GROUP 1
WHY?
✕ In terms of revenues, Real Madrid marketing unit was not
commercializing the image of the club in respect to its
immense potential: jerseys were the only merchandise sold
by the club and sponsorship deals were only striked with
Spanish companies. The retail stores were few and pre-
season games were only for training purposes.
Endorsement fees and image rights were negotiated
individually by players.
✕ Nevertheless, Real Madrid board kept investing massively
on salaries and fees to secure itself the best players all over
the world. Such strategy revealed to be absolutely
devastating for the financial stability of the club.

4. GROUP 1
PÉREZ’S APPOINTMENT BROUGHT ABOUT A MASSIVE CHANGE OF THE FINANCIAL SITUATION
0
50
100
150
200
250
300
1999-2000 2000-2001 2001-2002 2002-2003 2003-2004
Net Equity, Net Sales and Net Debt before and after
Pérez's appointment (in million euros)
Net Equity Net Sales Net Debt
Pérez dealt with the terribile financial scenario
of the Club both in short and in long term.
In first place, the President immediately sold
the «Ciudad Deportiva», to pay back all debt
and invest in the creation of «Ciudad del
Real Madrid»;
On the other hand, Pérez put in place a
professionalization of Real Madrid
management board and a marketing strategy
to better exploit the brand of the club, while
establishing severe boundaries to the
expenses of the Club in terms of players’
fees and salaries («Zidanes & Pavones»
strategy).

5. GROUP 1
THE IMPORTANCE
OF 2004-2005
BUDGET: THE FIRST
RESULTS OF
FLORENTINO’S
ACTIVITY
The impact of 2004-2005 is remarkable, both in sports and in
managerial aspects:
After a not-satisfying season in terms of sports results, it was
crucial to try and increase the fanbase enthusiasm through the
acquisition of superstars for the first team, without yet
jeopardizing the financial situation of the club: 2004-2005 budget
can be considered the first exam for Pérez businessfare as Real
Madrid President.
On the other hand, a realistic but ambitious budget is
fundamental to gain the support of the media and, more
importantly, of the management committee, that takes core
decisions for the present and the future of the Club depending
on their perspective of the budget itself.

6. GROUP 1
HOW CAN PUBLICITY AND TRANSPARENCY AFFECT A FINANCIAL BUDGET AND THE OPPORTUNITIES
DERIVING FROM SUCH A SCENARIO
⌖ Obliging clubs to publicly present the budget they set out for the upcoming
season means putting these latter in the position in which they cannot lie
about their financial situation. Indeed, the communication of misleading or
irrealistic exteems would determine a massive loss in terms of credibility
and reputation of the directive board. A similar decision, thus, significantly
helps in terms of stability of clubs and, consequently, competitions.
♚ Nevertheless, wealthy and well-managed clubs can take advantage of the
situation – and that is exactly what Pérez is trying to do in the press
conference. A promising budget is definitely going to increase the fanbase
support and engagement for the team and for the board itself. All of the
above significantly contributes to the atmosphere surrounding the club.

7. GROUP 1
YET, THE BUDGET NEED TO TAKE INTO ACCOUNT THOSE ELEMENTS THE CLUB CANNOT CONTROL
TEAM RESULTS MACROECONOMICAL ASPECTS
Real Madrid results on the pitch are unpredictable
at the presentation of the budget. Yet, they have a
massive impact on the preparation of the latter,
since they are crucial in every sports organization.
In order not to rely too much on revenues deriving
from the results of the team, that may not arrive, a
good idea would be the underestimation of Real
Madrid achievement throughout the season –
which the board actually did.
The board cannot foresee the upcoming traits of
national and international economy. Political, social
and financial phenomena could have devastating
effects on the income statement of the Club. For
this very reason, the conceiving of the budget have
to take into account events that could determine a
fall of revenues. Once again, the best idea to
contain such potential effects is to underestimate
the capacity of the club to generate income.

8. GROUP 1
HOW DOES THE NON-PROFIT NATURE OF REAL MADRID INFLUENCE THE FINANCIAL POSITION OF
CLUB AND SOCIOS
A non-profit organization is an entity which goal is to make profit
but that precludes the possibility to pay dividends to owners. Of
course, though, making profit is an important purpose in the
activity of the organization, since it guarantees the financial
wealth of the latter. Such a scenario brings about that the entity
is forced to exploit the profit to carry on its activity or to set it
aside for future financial years.
Real Madrid Socios, considering all of the above, are not in the
position to receive dividends. Yet, they all maintain the right to
influence the decision-making process, depending on the
percentage of Club owning they can rely on.

9. GROUP 1
FLORENTINO
PÉREZ SHORT TIME
STRATEGY: THE
ACCELERATED
AMORTIZATION
☞ Amortization is an administrative and accountable process aimed
at the distribution of the cost of an investment in multiple financial
years. This tool proves to be useful when a company means to
share the value of an investment between the life of an intangible
asset. Nevertheless, Real Madrid board chose, for 2004-2005
budget, to perform an accelerate amortization of the transfer fees
characterizing the financial year.
☞ The ratio of such a decision relies in the possibility for the Club to
lower the taxes for the upcoming financial year. Indeed, while
drafting the income statement, the amortization lowers the value
of EBITDA, which determines a decrease of net income and, thus,
of the taxes the organization has to pay.
☞ In Group 1’s opinion, the application of the accelerated
amortization may pay off in the sort term, for the very next
financial year, since it determines a significant fall of the taxes the
Club needs to pay. In the medium-long term, though, such a
decision could put Real Madrid in a delicate spot, since they will
not be able to rely on the amortization for the investment of this
season any longer, which means the Club will have to pay the
totality of the taxes they are going to be charged with.

10. THANKS!
GROUP 1