The National Folk Festival Case

Table of Contents

Introduction

Managing organization finances is a crucial ingredient in the ensuring the success of any organization. This paper presents an analysis of the financial performance of the National Folk Festival Ltd for the year ending on 30 June 2007. Financial management focuses on various areas of an organization’s financial performance. This paper has specifically focused on evaluating the working capital of the organization and the implication of this to the organization. This paper also presents a variance analysis that compares the organization’s income statement in 2007 with that of the previous years. The aim of this exercise to identify various changes in the organization’s; cost, revenue and income elements and their implications to the organization. Finally, the paper has explored into some of the factors that the organization should consider while seeking sponsorship arrangements.

Overview of Working Capital

Working capital refers the variation between short term resources and short term liabilities of an organization (Kennon, 2010). It is calculated by deducting the value of current liability from that of current assets. This implies that an organization with a value of current assets that is large than that of current liability is bound to record a positive figure of working capital. Working capital is an indicator the current financial position of an organization (Kennon, 2010). It indicates the ability of the organizations to meet it immediate financial needs.

Working capital is an essential requirement to the running of the routine operations of an organization (Magpayo, 2010). Routine operation results in spending by the organization on essential items such as rent, salaries and basic utilities. A large working capital means that an organization will experience least strain while meeting its liabilities. This is because the organization has the capacity to meet these liabilities using the currently available resources. Even large organizations with large value of fixed asset can experience difficulties in running routine operations if these organizations do not have adequate working capital.

A large working capital also means that an organization has the capacity to expand without seeking for external financial assistance (Nasif, 2010). Organizations need to invest resources in order to grow. There are various sources of financing growth. Most organizations have to rely on external financial resources such as equity and debt in order to invest in growth projects. However, these sources of finances have several limitations including; logistical costs, cost of paying interest; alteration of organization ownership structures and many others (Nasif, 2010). An organization with a large working capital can avoid these costs by using internal resources to finance growth activities.

In 2006/ 07 financial year, Folk Festival recorded an operating capital of $438,387 (The National Folk Festival, 2007). This means that the value of current assets exceeding the value of current liabilities by $438,387. This was a significant increase from the value recorded in the previous year of $263,182. The 2006/ 07 annual report attributes the increase in working capital to the restructuring of the organization of Folk Festival. The restructuring saw the separation the business aspects of the organization from the artist aspects of the organization. The new structure assigned the business responsibilities to the managing director while it assigned the management of artistic activities to the Artistic Director.

Recording a working capital figure of $438,387 has two significant implications on Folk Festival. First, this implies that there is an enhancement of the liquidity situation of the organization (Magpayo, 2010). Liquidity refers to the capability of an organization to meet its immediate financial obligation using current organizational resources. Recording a positive working capital means that Folk Festival was capable of meeting it immediate financial obligation without depending on external financial assistance. A positive working capital not only indicates the liquidity position of the organization in the past financial year but also has an impact on the organization future liquidity position. A working capital of $438,387 means that Folk Festival had this liquid amount in its account at the beginning of 2007/08 financial year. This is a substantial boost to an organization as it would not experience much strain in financing routine activities in the 2007/ 08 financial year.

Another implication of having an operating surplus is that Folk Festival will be in a position to make further investments into the festival without acquiring external financial assistance (Nasif, 2011). A working capital of $438,387 means that Folk festival has $438,387 more than what it required to finance the organization’s routine activities. This implies that the organization can afford to channel this money into capital projects. It also means that Folk Festival will minimize its reliance on external sources of capital thus reducing the costs of acquiring capital for the organization.

Analysis of the 2007 Income and Expenditure

Change in Sales Mix

There were varied changes in the sale mix in 2007 as compared to the previous year. The number of festival attendees increased by 5.66% in 2007 thus, leading to an increase in the volume sales. Total ticket sales increased by 3.47%, to reach a figure of 33,534, in the 2007 financial year. The largest increase in sales was recorded in the camping category. Sales from camping activities rose by 23.07% from the 2006 figure. The sale of ticket also rose by 7.27% in 2007.

Change in Cost Profile

National Folk Festival recorded a 6.08% decline in overall costs in 2007. This decline in overall cost is largely attributed to a massive reduction in the organization’s value of other costs (Edwards, 2008). The value of other costs went down by a massive 90% in 2007. Other significant decreases in costs were recorded in various cost items. These include; depreciation and amortization; performance costs; training expenses and administration expenses. These cost items reduced by 33.28%, 26.77%, 18.35% and 2.78% respectively. These reductions in cost have a positive impact on the organization financial statements. Apart from doubtful debt, whose value remained constant, the rest of costs items recorded an increase from the 2006 figure. The largest increase was recorded in the cost associated with hiring audit, legal and consultancy services. The cost of obtaining these services rose by 43.95%.

Change in Total Revenues

The total revenue for National Folk Festival rose by 6.14% in the year 2007. This is largely attributed to an increase in ticket revenues (Edwards, 2008). Though the value of ticket sales rose by 7.27%, this percentage increase translated to a massive figure of $89,187. This is the highest increase in the sales figure. The increase in ticket revenue is attributed to both an increase in the ticket sale volume and a rise in the average price of a ticket (Edwards, 2008). The volume of ticket sales increased by 3.47%, while the average price of a ticket increased by 5.41% from the previous year.

Increase in total revenues is also attributed to an increase in; camping revenues; concessions; subsidies and interest income. Despite the increase in total revenue, there were declines in some sources of revenues. Revenues from donations declined by 31.62% while revenues from grant and subsidies declined by 42.07%. A decline in these sources of revenues is an indication of the organization’s increased capacity to operate within its means.

Change in Profits

National Folk Festival profit figure rose to $159,106 in 2007 from a figure of $20,763 in 2006. This translated to a significant increase of 86.95%. The increase in profit can be attributed to a number of events. The increase in the organization’s total revenues is one of these events (Edwards, 2008). In 2007, the organization’s total revenues increased by 6.14%. This percentage increase translated to an increase of $95,268 in the organization revenues. The massive increase in profits is also attributed to the decline in total costs of the organization (Edwards, 2008). In the same year, National Folk Festival recorded a decrease of 6.08% in the organization’s total costs. This decrease translates to a figure of $ 84,601.

Overview of Sponsorship Funding

Sponsorship is one of the main sources of revenues for organizations which are not profit oriented. Sponsorships are agreement between parties, where one party agree to avail funds to another party (Australian Sports Department, 2010). It involves director provision of funds rather than other forms of assistance such as; personnel, advisory, legal and other services. Sponsorship agreement usually target to benefit both parties within the agreement (Australian Sports Department, 2010). The organization should consider several issues while seeking and managing sponsorship funds.

Factors to Consider in Seeking Sponsorship Funds

The first consideration for Folk Festival should be the overall objectives of the organization (Australian Sports Department, 2010). Organizational objectives communicate the reasons for the organization’s existence. These objectives should provide a framework upon which all decisions of the organized are based. The main objective of National Folk Festival is to promote the cultures of local communities living in various places. This objective should provide the management team with a clear direction in regards to selection of sponsorship deals.

National Folk Festival must also consider the objective of the sponsoring partners (Australian Sports Department, 2010). Organizations are usually driven by different objectives. Some are driven by the need to make money while others are driven by the need to provide essential goods and services. It is paramount for Folk Festival to evaluate the objective of the sponsoring partners. There should a fit between the sponsor’s objectives and objectives of National Folk Festival. Having shared values would create a suitable working relationship. On the hand, presence of inconsistent objectives between Folk Festival and its sponsors may result in a conflict of interest.

National Folk Festival must also consider the demands of the sponsors (SPARC, 2009). Demands may relate to various issues. One such issue is the benefit presented by Folk Festivals to the sponsors. Sponsorships must result in some form of benefits to both parties. Since Folk Festival is receiving funds from the sponsors, it must present some form of benefits to these sponsors. In most cases, sponsors offer sponsorship deals in exchange for an opportunity to market their brands or products through publicity, advertising and other activities. National Folk Festival must evaluate the benefits demanded by the sponsorship partners. The organization should negotiate an arrangement that benefits both parties.

Demands of the sponsors are also likely to affect the autonomy of National Folk Festivals in running its activities (SPARC, 2009). There are varied sponsorship models. Some model of sponsorship grant the sponsor a lot of control over the sponsored project or sponsorship funds. Other arrangements grant the project greater control over the funds. National Folk Festival needs to ensure that it negotiates models that do not undermine the organization’s autonomy. Granting greater control to sponsors may undermine the mission of the organization.

Factors to Consider in Managing Sponsorship Funds

There also factors that National Folk Festival needs to consider when managing sponsorship funds. Transparency and accountability are some of the essential consideration (Australian Sports Department, 2010). Most sponsors channel their funds into an organization because they believe in the cause being advance by the organization. Thus, sponsors are likely to withdrawal their support if they discover that the funds are not utilized in a transparent manner. Efficiency should also be a key consideration when managing sponsorship funds (Australian Sports Department, 2010). Sponsors have a keen interest in the activities of the organization. Thus, they are not only interested in seeing their funds being utilized transparently but are also keen to see their funds being utilized optimally in the pursuit of the organization’s goals.

Conclusion

This report reveals that, in 2007, National Folk Festival recorded the highest working capital figure in the history of the organization. This performance has significant implication on the organization’s liquidity and accessibility to finance. The report also reveals that National Folk Festival recorded the highest value of income in the history of the organization. This performance has been attributed to increase in the organization’s revenues and a decline in the organization’s cost. Folk Festival considers boosting its revenue through the acquisition of additional sponsorship funds. Folk festival objectives, objectives of sponsors and demand of the sponsors are some of the consideration the Folk Festival should make while searching for sponsors.

Appendices

Appendix I: Variance Analysis

National Folk Festival Limited
Income and Expenditure Statement
Statistics	2007	2006	Variance	% Variance
Number of Attendees	53784	50,740	3,044	5.66
Number of tickets sold	33534	32,372	1,162	3.47
Average price per ticket	37	35	2	5.41
average price per attendee	23	22	1	4.35

Income
Ticket Sales	1,227,075	1,137,888	89,187	7.27
Camping	170,091	130,856	39,235	23.07
Concessions	20,000	10,500	9,500	47.50
Subsidies and grants	65,808	93,491	-27,683	-42.07
Donations received	50,003	65,813	-15,810	-31.62
Interest Income	17,634	16,795	839	4.76
Total Income	1,550,611	1,455,343	95,268	6.14
Expenditure
Administration	75,906	78,018	-2,112	-2.78
Marketing & Promotion	70,757	75,023	-4,266	-6.03
Performance costs	260,793	330,610	-69,817	-26.77
Volunteer Costs	86,655	58,691	27,964	32.27
Doubtful Debts	1,405	1,405	0	0.00
Repairs & Maintenance	5,732	4,951	781	13.63
Rental expense	9,217	9,155	62	0.67
Training Expense	1,858	2,199	-341	-18.35
Employee wage & salaries	423,496	390,136	33,360	7.88
Employee benefits	283,316	215,181	68,135	24.05
Depreciation & Amortization	15,710	20,938	-5,228	-33.28
Audit, Legal & Consultancy	6,350	3,559	2,791	43.95
Other Costs	150,310	286,240	-135,930	-90.43
Total Expenditure	1,391,505	1,476,106	-84,601	-6.08
Profit/ Loss	159,106	20,763	138,343	86.95