Archive for May 15th, 2011

To cut or not to cut?

May 15, 2011

Suppose you owned a premiership football club that was losing money and not winning many matches. You would face the following dilemma: should you spend more money on players, in the hope of improving the team’s performances, and therefore revenue, or should you save money by selling players but risk being relegated, which, if it happened, would mean that your club would lose out on huge amounts of money from lucrative TV deals?

Because your club is losing money, the current situation is unsustainable, so you are more or less forced to go one way or the other: either you try to spend your way to success or you play it safe. If you try the first strategy and it fails, then you end up in a much worse position than before — you have spent a lot of money and are still losing money. If you try the second strategy, then you will lose your best players, so that even if the club becomes financially sound it will probably face an extended period of not doing very well on the pitch.