Base on the Case Study please answer the following questions

1) What do you think of the public nature of budget discussions at Real Madrid? What would be the consequences of doing this in a publicly traded company, say GE or IBM? How would it affect what you put in the budget?

2) Should it be used to evaluate Jos ngel Snchezs performance? How would you judge his performance? Should Snchezs targets be stretched? What are the benefits and costs of stretch targets?

3) There is a stream of thought in business literature that recommends abandoning budgets. Do you think Real Madrid could or should abandon budgets?

4) What is the level of uncertainty in the budget? If this is high, would you recommend producing a budget?

5) Would you want to produce an activity-based budget for Real Madrid? If so, how would you do it?

Hala Madrid: Managing Real Madrid Club de Ftbol, the Team of the Century Introduction In June 2004, Carlos Martnez de Albornoz, corporate general manager for Real Madrid, a leading Spanish soccer team, was reviewing the Club's 2004-05 budget in preparation for a press conference scheduled by its president, Florentino Prez. In the two previous years, members of the Spanish press had predicted a financial catastrophe for Real Madrid after the Club signed Brazilian striker Ronaldo and British megastar Beckham. However, after Florentino'sl election as president in 2000 the team won seven official titles, including two Spanish Ligas" and one European Champions League, and Real Madrid had become one of the wealthiest soccer clubs in the world. Despite these successes, poor team results during the last two months of the 200304 season(including being eliminated from the European Champions League and losing a record five games in a row during the national competition) had left executives, players, and fans alike with a bitter feeling, just when Florentino was up for reelection. The 200405 budget challenge was to include the cost of acquiring new players who could recapture the support of the team's fans while avoiding the excesses that had nearly bankrupted the team before Florentino's arrival. Martnez de Albornoz thought of the decisions to be made during the planning process, knowing that Florentino would be probed on those decisions during his face-to-face with the press. Journalists enjoyed speculating on how many more player acquisitions the team would make and who would be the next star to join the Real Madrid "galaxy." Although the media touted Real Madrid as an organization with limitless resources, its management team knew that overspending would bring certain failure. The Budgetary Process The corporate manager coordinated the development of the annual plan, which began when the team directors and executives defined the objectives for the coming season in early May (see Exhibit 7). These objectives, in turn, were used to produce the annual budget for the coming fiscal year as well as a midterm plan for the following three years. Although the budget had to be approved by the socios in the annual meeting, the midterm plan did not because it was used solely as an internal control tool. With the guidance of the strategic objectives and the assumptions provided by the corporate manager (see Exhibit 8), each operating unit prepared a preliminary budget. Despite its name, this document was, in reality, an action plan that included a description of all the initiatives the unit intended to undertake during the following period and the set of Key Performance Indicators (KPIs) against which the management performance would be evaluated. (See Exhibit 3 for examples of KPI lists.) The preliminary budget was accompanied by a list of resources needed by each unit to meet its objectives. The resources requested in the preliminary budget were then assessed by the respective corporate units (Human Resources, Insurance, Infrastructure, etc.). Resources were preliminarily assigned to those initiatives with higher priority, and operating units then revised budgets accordingly. The resulting plans were then consolidated across the four different management areas before being sent for approval to the management committee, the board, and the socios. During the economic assessment and consolidation phase, the corporate manager held numerous informal discussions with the different operating units, in addition to participating in the formal budget meetings. The board of directors usually voted on the budget during the weekend of the first official home game of the season (late August or early September). Once approved by the board, the budget was submitted to the Liga de Ftbol Profesional (LFP) and the Consejo Superior de Deportes (CSD).28 Failure to submit acceptable budgets to these organizations would exclude the team from official competitions. Later, in early October, the general assembly of the socios approved both the financial statements for the previous fiscal year and the budget for the current season. Budget tracking and followup was carried out monthly by each area and department according to its Balanced Scorecard, which included both financial and nonfinancial KPIs. In addition, two other internal documents were used to implement the budget: the UPA (ltima Previsin Anualizada),29 which was developed every three months as the most up-to-date forecast of annual performance, and the monthly Executive Synthesis of Economic Information, which analyzed the risks and opportunities of every area for the management committee. Preparing the Budget It had been a long day in the Santiago Bernabu Stadium offices. Even though the 200304 season was over, Real Madrid's executive team could not afford a much-needed break. The year had been a disappointment on the sports side. Even though the team strove to win three major tournaments, April and May's losses left them empty-handed. However, despite the sport mishaps, the season had been a total success from an economic perspective, generating record revenues (see Exhibit 9) and continuing the turnaround that had begun in 2000 when Florentino won the election (see Exhibit 10). The disappointing sports results, together with the Club's upcoming presidential elections on July 11, made the 2004-05 budget process particularly complex. Valdano, the sports general manager, summarized precisely the importance of the budget: "Nobody has ever seen a concentration (of fans and players) at Cibeles30 to celebrate a balance sheetbut a healthy balance sheet is we're going to make it to Cibeles to celebrate." The budget needed to be in reasonably good shape for the upcoming press conference and for the meeting of the management committee immediately before, where important decisions could be made. The committee and journalists alike would analyze all of the main budgetary lines and would question underlying assumptions to gauge the prudence of the plan. In that respect, understanding 200304 budget deviations would be important to improving the accuracy of the new budget (see Exhibit 11). Expenses Payroll The payroll was the single most important expense line and had been growing steadily over the past few years as new megastars joined the team. The increases were slightly mitigated during the 200304 season (see Exhibit 14). This budget line was at the core of managerial decisions about which players to hire and renew for the next season. Butragueo, Snchez, and the newly appointed coach, Jos Antonio Camacho, were key contributors to this discussion. Nevertheless, the board of directors always had the last word about player acquisitions, and it had always stood by Florentino's decisions. For 200405, Florentino insisted on signing a world-class star who would help the team win more tournaments and whose worldwide popularity would support sustained revenue growth. At a gross salary of 10 million per year, recent history suggested that such a player would cost between 30 and 50 million, depending on his age and the number of years remaining in his current contract.33 Also, the management team had to decide which cantera players were ready to join the team and which should be transferred. Players promoted from within would command between 400,000 and 1 million. However, many argued that the team also needed less spectacular reinforcements in various positions to give depth to the bench. This would be a significant change from the previous Zidanes & Pavones strategy. Transfer fees for these players ranged between 15 and 25 million and their salaries between 2 million and 4 million per year. The sports managers wanted to exercise most, if not all, of these options; however, each new signing further swelled the expense line and approached the limit set by Real Madrid for salary expenses50% of ordinary revenues. Moreover, as the typical contract had a four-year length, hiring decisions would influence financial flexibility in future periods. All these considerations made the budgeting process a difficult juggling exercise. Before the new hiring decisions, the personnel expenses (including the basketball section and the management team) were budgeted to be around 130 million. Operating expenses All of the remaining operating expenses including stadium operations, marketing, Real Madrid TV production, technology, and infrastructure still had to be budgeted. The operating expenses line would also increase for the 200405 season following the changes in consolidation criteria for Real Madrid Gestin de Derechos.34 The net effect of all these trends was that the operating expenses budgeted for the 200405 season would be 90 million. Ordinary depreciation Depreciation of the property and equipment was budgeted to increase 20% to 16 million as the Club capitalized improvements to the stadium and the construction costs of "Ciudad del Real Madrid." Accelerated amortization The amortization line captured the cost of the transfer fees. Despite the fact that Spanish accounting rules favored the amortization of transfer fees over the duration of the contract, Real Madrid chose to amortize the full value of the transfer fees in the year of the player's acquisition. In prior years the acquisition of the annual star player dominated this account (Zidane 200102, Ronaldo 2002-03, and Beckham and Samuel 200304). Real Madrid did not budget this line of the income statement and would decide on it by the end of the season, when the Club had a better understanding of the net income for the year. Exhibit 3 Evaluation Sheets SOCCER DIVISION SUCCESS Optimize costs KEY PERFORMANCE INDICATORS Area costs Financial Optimize profitability of investment in players Maximize revenues Quality received by internal/external client Revenues from sale/transfer players Deviation over budget in players' salaries Area Revenues Perceived quality Rookies of the first team who become team members next season Customer Optimize area effectiveness Internal Processes Number of games played per rookie in official competitions Percent of players promoted to upper category teams Sport achievements Percent fulfillment of the plan (speed quality) Learning and Growth Maximize sport profitability Innovation and improvement plans CAPACITY AND FACILITIES MANAGEMENT DIVISION SUCCESS Optimize costs Financial Maximize revenues Customer Quality received by interna external client KEY PERFORMANCE INDICATORS Area costs Area revenues Perceived quality Average percent of the capacity sold Tickets sold to non-socios Optimize capacity management Maximize ticket sales of VIP areas Number of VIP season tickets Minimize tickets sold at ticket boxes Ticket box sales/total sales Internal Processes Minimize waiting periods Waiting periods to buy tickets Optimize season ticket receivables Season ticket holders' uncollectibles ratio Percent of season ticket holders with direct debit Minimize incidents at counters, boxes and VIP areas Innovation and improvement plans Number of incidents Percent fulfillment of the plan (speed/quality) Learning and Growth Source: Club records. Exhibit 7 Real Madrid Budgetary Process May June July August September Socios Annual meeting Vote Board : Electoral program Approval Top Management Strategic Objectives: Short & medium term Approval Corporate Units Planning & Control Planning assumptions: Economic and sport Coordination of unit budgets Support Units (Human Resources, Infrastructure, Insurance, etc) Economic assessment of needs Business Units Budget of needs: -Personnel -Investment -Current Expenses, Economic Budget Exhibit 8 Real Madrid Club de Ftbol Budget for 200405, 2005-06, and 2006-07 Assumptions MACROECONOMIC ASSUMPTIONS In order to budget for revenues and expenses, the following macroeconomic variables will be considered wherever necessary. INFLATION To be considered in revenues and expenses that contractually move in tandem with the CPI and in the personnel expenses as agreed in the General wages agreement. Spain: 3.0% USA: 1.5% INTEREST RATE To be considered in the revenues and expenses financial budget EURIBOR 1 YEAR: 2.5% EXCHANGE RATES 1.18 $/ 1.55 CHF/ (UEFA revenues) 0.68 / SPORTS RESULTS ASSUMPTIONS (200405) Regardless of the objective of victory in every competition, the following targets are set in order to budget for revenues and expenses. SOCCER FIRST TEAM LA LIGA: Reach the third position. This means playing 19 games in Santiago Bernabu Stadium (ESB) and 19 games away. COPA DEL REY: Reach quarter finals. This means playing 2 games in ESB and 4 away. CHAMPION'S LEAGUE: Reach quarter finals. This means playing 5 games in ESB and 5 away. BASKETBALL FIRST TEAM ACB LEAGUE: Reach the fourth position. This means playing a minimum of 19 and a maximum of 23 games at home and a minimum of 19 and a maximum of 23 games away. COPA DEL REY: EUROLIGA: At the moment wanting to know if they will participate in the 200405 season. Exhibit 11 Real Madrid Budget and Actual 2003-04 Thousands Budget 2003-04 Actual 2003-04 Variance 200304 Club Members & Stadium Revenues Preseason, International, and Exhibition Games Broadcasting Revenues Marketing Revenues TOTAL ORDINARY REVENUES 61,604 20,487 70,409 80,060 232,560 62,575 18,604 69,517 85,305 236,001 971 -1,883 -892 5,245 3,441 Sport & Non-Sport Personnel Expenses Operating Expenses EBITDA -133,236 -61,503 37,821 -123,646 -61,166 51,189 9,590 337 13,368 Ordinary Depreciation EBIT - 16,226 21,595 -13,204 37,985 3,022 16,390 Financial Result INCOME BEFORE EXTRAORDINARY ITEMS -1,318 20,277 104 38,089 1,422 17,812 Extraordinary Results Accelerated Amortizationa INCOME BEFORE TAXES 38,552 0 58,829 33,515 -63,491 8,113 -5,037 -63,491 -50,716 Taxes (25%) INCOME AFTER TAXES -14,707 44,122 -2,048 6,065 12,659 -38,057 MAIN MANAGEMENT INDICATORS Revenues Mix Members and Stadium Exhibition and International Broadcasting Marketing 27% 9% 30% 34% 27% 8% 29% 36% 0% -1% -1% 2% Personnel Expenses/Ordinary Revenues Ratio 57% 52% -5% Hala Madrid: Managing Real Madrid Club de Ftbol, the Team of the Century Introduction In June 2004, Carlos Martnez de Albornoz, corporate general manager for Real Madrid, a leading Spanish soccer team, was reviewing the Club's 2004-05 budget in preparation for a press conference scheduled by its president, Florentino Prez. In the two previous years, members of the Spanish press had predicted a financial catastrophe for Real Madrid after the Club signed Brazilian striker Ronaldo and British megastar Beckham. However, after Florentino'sl election as president in 2000 the team won seven official titles, including two Spanish Ligas" and one European Champions League, and Real Madrid had become one of the wealthiest soccer clubs in the world. Despite these successes, poor team results during the last two months of the 200304 season(including being eliminated from the European Champions League and losing a record five games in a row during the national competition) had left executives, players, and fans alike with a bitter feeling, just when Florentino was up for reelection. The 200405 budget challenge was to include the cost of acquiring new players who could recapture the support of the team's fans while avoiding the excesses that had nearly bankrupted the team before Florentino's arrival. Martnez de Albornoz thought of the decisions to be made during the planning process, knowing that Florentino would be probed on those decisions during his face-to-face with the press. Journalists enjoyed speculating on how many more player acquisitions the team would make and who would be the next star to join the Real Madrid "galaxy." Although the media touted Real Madrid as an organization with limitless resources, its management team knew that overspending would bring certain failure. The Budgetary Process The corporate manager coordinated the development of the annual plan, which began when the team directors and executives defined the objectives for the coming season in early May (see Exhibit 7). These objectives, in turn, were used to produce the annual budget for the coming fiscal year as well as a midterm plan for the following three years. Although the budget had to be approved by the socios in the annual meeting, the midterm plan did not because it was used solely as an internal control tool. With the guidance of the strategic objectives and the assumptions provided by the corporate manager (see Exhibit 8), each operating unit prepared a preliminary budget. Despite its name, this document was, in reality, an action plan that included a description of all the initiatives the unit intended to undertake during the following period and the set of Key Performance Indicators (KPIs) against which the management performance would be evaluated. (See Exhibit 3 for examples of KPI lists.) The preliminary budget was accompanied by a list of resources needed by each unit to meet its objectives. The resources requested in the preliminary budget were then assessed by the respective corporate units (Human Resources, Insurance, Infrastructure, etc.). Resources were preliminarily assigned to those initiatives with higher priority, and operating units then revised budgets accordingly. The resulting plans were then consolidated across the four different management areas before being sent for approval to the management committee, the board, and the socios. During the economic assessment and consolidation phase, the corporate manager held numerous informal discussions with the different operating units, in addition to participating in the formal budget meetings. The board of directors usually voted on the budget during the weekend of the first official home game of the season (late August or early September). Once approved by the board, the budget was submitted to the Liga de Ftbol Profesional (LFP) and the Consejo Superior de Deportes (CSD).28 Failure to submit acceptable budgets to these organizations would exclude the team from official competitions. Later, in early October, the general assembly of the socios approved both the financial statements for the previous fiscal year and the budget for the current season. Budget tracking and followup was carried out monthly by each area and department according to its Balanced Scorecard, which included both financial and nonfinancial KPIs. In addition, two other internal documents were used to implement the budget: the UPA (ltima Previsin Anualizada),29 which was developed every three months as the most up-to-date forecast of annual performance, and the monthly Executive Synthesis of Economic Information, which analyzed the risks and opportunities of every area for the management committee. Preparing the Budget It had been a long day in the Santiago Bernabu Stadium offices. Even though the 200304 season was over, Real Madrid's executive team could not afford a much-needed break. The year had been a disappointment on the sports side. Even though the team strove to win three major tournaments, April and May's losses left them empty-handed. However, despite the sport mishaps, the season had been a total success from an economic perspective, generating record revenues (see Exhibit 9) and continuing the turnaround that had begun in 2000 when Florentino won the election (see Exhibit 10). The disappointing sports results, together with the Club's upcoming presidential elections on July 11, made the 2004-05 budget process particularly complex. Valdano, the sports general manager, summarized precisely the importance of the budget: "Nobody has ever seen a concentration (of fans and players) at Cibeles30 to celebrate a balance sheetbut a healthy balance sheet is we're going to make it to Cibeles to celebrate." The budget needed to be in reasonably good shape for the upcoming press conference and for the meeting of the management committee immediately before, where important decisions could be made. The committee and journalists alike would analyze all of the main budgetary lines and would question underlying assumptions to gauge the prudence of the plan. In that respect, understanding 200304 budget deviations would be important to improving the accuracy of the new budget (see Exhibit 11). Expenses Payroll The payroll was the single most important expense line and had been growing steadily over the past few years as new megastars joined the team. The increases were slightly mitigated during the 200304 season (see Exhibit 14). This budget line was at the core of managerial decisions about which players to hire and renew for the next season. Butragueo, Snchez, and the newly appointed coach, Jos Antonio Camacho, were key contributors to this discussion. Nevertheless, the board of directors always had the last word about player acquisitions, and it had always stood by Florentino's decisions. For 200405, Florentino insisted on signing a world-class star who would help the team win more tournaments and whose worldwide popularity would support sustained revenue growth. At a gross salary of 10 million per year, recent history suggested that such a player would cost between 30 and 50 million, depending on his age and the number of years remaining in his current contract.33 Also, the management team had to decide which cantera players were ready to join the team and which should be transferred. Players promoted from within would command between 400,000 and 1 million. However, many argued that the team also needed less spectacular reinforcements in various positions to give depth to the bench. This would be a significant change from the previous Zidanes & Pavones strategy. Transfer fees for these players ranged between 15 and 25 million and their salaries between 2 million and 4 million per year. The sports managers wanted to exercise most, if not all, of these options; however, each new signing further swelled the expense line and approached the limit set by Real Madrid for salary expenses50% of ordinary revenues. Moreover, as the typical contract had a four-year length, hiring decisions would influence financial flexibility in future periods. All these considerations made the budgeting process a difficult juggling exercise. Before the new hiring decisions, the personnel expenses (including the basketball section and the management team) were budgeted to be around 130 million. Operating expenses All of the remaining operating expenses including stadium operations, marketing, Real Madrid TV production, technology, and infrastructure still had to be budgeted. The operating expenses line would also increase for the 200405 season following the changes in consolidation criteria for Real Madrid Gestin de Derechos.34 The net effect of all these trends was that the operating expenses budgeted for the 200405 season would be 90 million. Ordinary depreciation Depreciation of the property and equipment was budgeted to increase 20% to 16 million as the Club capitalized improvements to the stadium and the construction costs of "Ciudad del Real Madrid." Accelerated amortization The amortization line captured the cost of the transfer fees. Despite the fact that Spanish accounting rules favored the amortization of transfer fees over the duration of the contract, Real Madrid chose to amortize the full value of the transfer fees in the year of the player's acquisition. In prior years the acquisition of the annual star player dominated this account (Zidane 200102, Ronaldo 2002-03, and Beckham and Samuel 200304). Real Madrid did not budget this line of the income statement and would decide on it by the end of the season, when the Club had a better understanding of the net income for the year. Exhibit 3 Evaluation Sheets SOCCER DIVISION SUCCESS Optimize costs KEY PERFORMANCE INDICATORS Area costs Financial Optimize profitability of investment in players Maximize revenues Quality received by internal/external client Revenues from sale/transfer players Deviation over budget in players' salaries Area Revenues Perceived quality Rookies of the first team who become team members next season Customer Optimize area effectiveness Internal Processes Number of games played per rookie in official competitions Percent of players promoted to upper category teams Sport achievements Percent fulfillment of the plan (speed quality) Learning and Growth Maximize sport profitability Innovation and improvement plans CAPACITY AND FACILITIES MANAGEMENT DIVISION SUCCESS Optimize costs Financial Maximize revenues Customer Quality received by interna external client KEY PERFORMANCE INDICATORS Area costs Area revenues Perceived quality Average percent of the capacity sold Tickets sold to non-socios Optimize capacity management Maximize ticket sales of VIP areas Number of VIP season tickets Minimize tickets sold at ticket boxes Ticket box sales/total sales Internal Processes Minimize waiting periods Waiting periods to buy tickets Optimize season ticket receivables Season ticket holders' uncollectibles ratio Percent of season ticket holders with direct debit Minimize incidents at counters, boxes and VIP areas Innovation and improvement plans Number of incidents Percent fulfillment of the plan (speed/quality) Learning and Growth Source: Club records. Exhibit 7 Real Madrid Budgetary Process May June July August September Socios Annual meeting Vote Board : Electoral program Approval Top Management Strategic Objectives: Short & medium term Approval Corporate Units Planning & Control Planning assumptions: Economic and sport Coordination of unit budgets Support Units (Human Resources, Infrastructure, Insurance, etc) Economic assessment of needs Business Units Budget of needs: -Personnel -Investment -Current Expenses, Economic Budget Exhibit 8 Real Madrid Club de Ftbol Budget for 200405, 2005-06, and 2006-07 Assumptions MACROECONOMIC ASSUMPTIONS In order to budget for revenues and expenses, the following macroeconomic variables will be considered wherever necessary. INFLATION To be considered in revenues and expenses that contractually move in tandem with the CPI and in the personnel expenses as agreed in the General wages agreement. Spain: 3.0% USA: 1.5% INTEREST RATE To be considered in the revenues and expenses financial budget EURIBOR 1 YEAR: 2.5% EXCHANGE RATES 1.18 $/ 1.55 CHF/ (UEFA revenues) 0.68 / SPORTS RESULTS ASSUMPTIONS (200405) Regardless of the objective of victory in every competition, the following targets are set in order to budget for revenues and expenses. SOCCER FIRST TEAM LA LIGA: Reach the third position. This means playing 19 games in Santiago Bernabu Stadium (ESB) and 19 games away. COPA DEL REY: Reach quarter finals. This means playing 2 games in ESB and 4 away. CHAMPION'S LEAGUE: Reach quarter finals. This means playing 5 games in ESB and 5 away. BASKETBALL FIRST TEAM ACB LEAGUE: Reach the fourth position. This means playing a minimum of 19 and a maximum of 23 games at home and a minimum of 19 and a maximum of 23 games away. COPA DEL REY: EUROLIGA: At the moment wanting to know if they will participate in the 200405 season. Exhibit 11 Real Madrid Budget and Actual 2003-04 Thousands Budget 2003-04 Actual 2003-04 Variance 200304 Club Members & Stadium Revenues Preseason, International, and Exhibition Games Broadcasting Revenues Marketing Revenues TOTAL ORDINARY REVENUES 61,604 20,487 70,409 80,060 232,560 62,575 18,604 69,517 85,305 236,001 971 -1,883 -892 5,245 3,441 Sport & Non-Sport Personnel Expenses Operating Expenses EBITDA -133,236 -61,503 37,821 -123,646 -61,166 51,189 9,590 337 13,368 Ordinary Depreciation EBIT - 16,226 21,595 -13,204 37,985 3,022 16,390 Financial Result INCOME BEFORE EXTRAORDINARY ITEMS -1,318 20,277 104 38,089 1,422 17,812 Extraordinary Results Accelerated Amortizationa INCOME BEFORE TAXES 38,552 0 58,829 33,515 -63,491 8,113 -5,037 -63,491 -50,716 Taxes (25%) INCOME AFTER TAXES -14,707 44,122 -2,048 6,065 12,659 -38,057 MAIN MANAGEMENT INDICATORS Revenues Mix Members and Stadium Exhibition and International Broadcasting Marketing 27% 9% 30% 34% 27% 8% 29% 36% 0% -1% -1% 2% Personnel Expenses/Ordinary Revenues Ratio 57% 52% -5%