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Awash with debt

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It could be a week, a year or possibly two, but it will happen; a UK premiership club will go out of business. Portsmouth F.C. has been on the brink. The club had four owners in just one season. Afflicted by the desire to compete with the Liverpools and Manchester Uniteds of this world... they spent big. They attracted international stars to a relatively small provincial club with the carrot of wages beyond their means. In 2009, wages represented 90% of the revenues of the club. The bonuses were so high, that if they had won the F.A. Cup, they would have lost money. What does this prove? It is simple. No business, whether a bank or a fashion house like McQueen, can spend more than it earns for a long period. If costs are higher than revenues there will come a time when the business is financially unsustainable.

A business may represent the heart and soul of a community or be the brand choice of Hollywood stars, but if it fails to maintain an adequate cash flow or to make a profit it is dead.

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Read the article, Portsmouth FC's insolvency lessons and then consider answers to the questions below. You can either read the article in the window below, or follow the previous link to open the article in a new window.

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Before answering the questions below you might also like to read the following articles. The first is an BBC 'questions and answers' article, which explains the concept of a business, such as Portsmouth FC, going into administration and the consequences for its survival:

The second article outlines the financial mismanagement at the club and lists the creditors. The third article describes one of the actions of the administrator in seeking to reduce the debts of the club.


Question 1

Define the term 'insolvency'.

Question 2

Explain what happens when a business is put into administration.

Question 3

Examine the practical consequences for Portsmouth F.C. resulting from its poor liquidity.

Question 4

"Cash flow is a key component in operating a successful business, and during a recession its importance cannot be understated." Discuss the importance of cash flow management during a recession.