Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which example illustrates a business in financial difficulty that may enter administration?

1. A retail store

2. A tech startup

3. A football club

4. A manufacturing company

The correct answer is: A football club

A football club often faces unique financial challenges that can lead to severe financial difficulty and potentially result in administration. This can occur due to a variety of reasons such as fluctuating revenue streams from ticket sales, television rights, sponsorship, and economic conditions that impact attendance and overall fan engagement. To remain competitive, football clubs might also incur substantial player wages and transfer fees, exacerbating financial pressures, especially if they do not consistently achieve desired performance levels or if they experience lower performance metrics that affect their revenue. In contrast, the other types of businesses listed can certainly encounter financial difficulties, but the operational and financial structures of a retail store, a tech startup, and a manufacturing company can be somewhat more stable or manageable, depending on the market conditions and their respective industry dynamics. For example, retail stores may rely on a constant flow of sales which, while susceptible to economic downturns, can often pivot strategies. Similarly, tech startups, despite their inherent risk, may attract venture capital funding or adapt their business models more easily than traditional sectors. Manufacturing companies might struggle as well due to high overhead and supply chain issues, but their assets often provide some mitigation against total collapse. In summary, the unique financial landscape of a football club – characterized by high expenditures versus variable income