Portsmouth FC's insolvency lessons
Portsmouth Football Club’s insolvency has valuable lessons for other troubled businesses. Why did this premiership club that has been established for over 112 years go bust?
Putting aside the football legislation and emotional embroilment of Pompey’s fans, there were several business factors that led to Portsmouth FC becoming the first premiership club to go into administration.
- Overdue payments to HMRC
Portsmouth failed to pay its scheduled payments as they fell due. This allowed HMRC to provide the courts with evidence that the company was technically insolvent. Not every case will result in a creditor taking action against an overdue unpaid bill, but directors should remain aware of the potential consequences. 43% of successful winding-up petitions are presented by HMRC, but they will support what they believe to be a viable business, so it is vital directors act early.
- Cash flow
It is reported by the BBC that due to Portsmouth’s insufficient ground capacity, the club relied heavily on TV payments to meet its monthly outgoings. When the premier league withheld its TV payments in January 2010, the strain on the company’s cash flow was evident with players not been paid on time and management searching for new sources of finance. Accountancy Age reported that the club was looking to receive a cash injection before 17 February from an associate, but this never came. Cash flow is a key component in operating a successful business, and during a recession its importance cannot be understated. If you are regularly unable to pay suppliers or employees, then without restructuring your business and finances, the outcome will normally be insolvency. There are various cash management strategies that can be implemented (for example, re-negotiating supplier terms or selling non-core assets) to give a company some breathing space.
- Management and infrastructure
In the last 12 months, Portsmouth has had 4 different owners and sold several key players, such as Jermain Defoe and Peter Crouch. Management failed to recognise that stability and long term planning is vital for the future success of a company. Without key employees or coherent management strategies, it will be difficult to overcome any external pressures. Now, more than ever, owners/directors should be keeping a close eye on the company’s accounts and the monthly management reports. Spot potential problems and resolve them quickly and swiftly. If ever unsure, directors should seek advice promptly before it is too late.
Should these recent events be a stark warning to all that HMRC are starting to play hard ball? Will 2010 bring a influx of winding up petitions being presented against companies? Should the Portsmouth situation start to ring alarm bells for other companies in similar situations? The answers are most likely to be yes in all cases.
On 2 March, the Financial Times reported that following HMRC request the High Court has ordered a hearing to be held to consider whether the administrators appointment was valid. So with HMRC continuing to add pressure, there is still a danger that Portsmouth could be wound up.
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