How do Formula 1 Teams Make Money?

We all know the saying that

money

make

s the world go right in Formula One, the story is no different, in most sports like football, rugby or basketball it is much easier to be successful without needing a lot of

money

, but Formula One and motorsport in general are absolutely the best. Conversely, while other sports could be seen as pay to win, Formula 1 is instead pay to play or compete in the first place. This means that when you look at the Formula 1 balance sheets, there are a lot of zeros in 2019, Formula 1 earned a revenue of 2.02. billion dollars, while the highest paid drivers earn up to £40 million a year, putting them on par with some of the highest paid athletes in the world and this trend is not slowing down as karting now costs six figures in many cases and this is reflected by the number of paid drivers that have entered the sport in recent years, but enough complaining about paid drivers for now, this video is about the

teams

, so Formula One It's not just a business, it's a massive billion-dollar industry that employs tens of thousands of people.

People and

teams

are the businesses within the industry that keep the sport going, much like Google and Apple are to the tech industry, and therefore, like any business, the goal is to

make

a profit on the side. from charities and other non-profit organisations, but that's irrelevant, so how do we do it? Formula One teams make money and even make some profit. Stick around for the next 10 minutes or so while I dive into exactly that. Just a little disclaimer. All the figures that I will use in this video are from 2019 because the official figures. of 2020 have not yet been published and, due to the pandemic, those figures would not really be representative anyway.

Well, like any company, to talk about profits, you have to talk about the costs and income of that company. Expenses and income are how much the company earns and therefore to make a profit it must earn more than it spends or in other words its income must be greater than its costs and with Formula One teams, There are a lot of different things that come into play. Some of the costs and revenues you probably didn't even know about, so to start, let's dive into the costs of a Formula One team and what they spend their money on.

Costs can be divided into four main categories: research and development, salaries, production and operations. Therefore, research and development, or also known as R&D, consists of things like wind tunnel testing, track testing, and other forms of testing components to make sure they perform their function. Salaries are self-explanatory and consist of paying team personnel, such as the marketing team, for example. paying drivers to meet lewis hamilton's £40m salary and paying team managers like toto wolff christian horner etc. production costs for the team involve all new parts manufacturing, purchasing of new components and the build or purchase of the engine which can cost over £10 million alone and then the final part is the operations which deals with things like logistics and travel entertainment for customers who move everything by charge to long distance races like Singapore.

IT and technology costs. Factory operating costs. Professional services such as. marketing or things like that and interestingly the cost of fuel surprisingly adds up during the second season, so if I add various figures to these areas we can start to see how much the average team spends during a season. In this hypothetical example, the team spends. 158 million pounds over a season, now remember that number because it's a big deal, so with that 158 ​​million pounds in mind, let's flip the coin and take a look at how an F1 team makes money and generates revenue now. It is not a standard for all teams, which means that some teams make money in different ways than others, but I will explain it well, just like costs, income can be divided into three or four categories depending on the team, first Firstly, there are payments, investments from sponsors and, finally. driver links income let's start with the most important of payments for those who don't know, it means

formula

one management to explain how F1 pays F1 teams.

I actually have to split it into five columns, so the first column is £36 million. to each team that has been qualified for more than two seasons, this is known as a column one payment and each team receives this; Then in the second column is the prize money based on where the team finished the previous season, for example Mercedes received 61 million. dollars for winning the title, while Williams received only $13 million for coming last, everything so far seems pretty fair, well, we're not done yet. The third column is known as the first team or long-standing team, basically known as Ferrari's budget because it is only given to them and is a whopping $68 million more than Mercedes received for winning the title.

On top of this is the Constructors' Championship Bonus or CCB, which is a $35 million payment to Ferrari, Mercedes, Red Bull and McLaren for basically winning a load. of titles and finally there are a couple more payments like 10 million to Williams as a capital payment similar to Ferrari 35 million to Red Bull for signing the concord agreement first and 35 million to Mercedes for fulfilling his promise of winning two titles and breathe, a Pretty messy system huh well for those interested here's how it all adds up but this is just one piece of the puzzle when it comes to profits next is the sponsors I'm sure most people understand how they work, but basically it is a company. like Patronus goes to a team like Mercedes and says I want to be in your car so we can advertise and Mercedes says okay, great, it will be 70 million dollars, job done, in very simple terms, but on average a team has maybe 15 to 25 sponsors who pay a sum of money to the team to put their logo on the car and obviously the better performing teams will have more sponsors because they get more television time and are more marketable and the reverse is especially true if a The team or driver has a terrible reputation, sponsors don't approach them, so the next form of income for teams comes from investment from a parent company or shareholders, where basically let's say Daimler wants Mercedes have a better performance in Formula 1, so they give them 80 million.

Dollars per season, this is similar for all teams, but obviously some can afford to invest more than others, so while in 2018, Mercedes made 80 million dollars a year, Racing Point only made 25 million and for many teams, this represents at least a quarter of all revenue. teams win so it's easy to see why a team like Williams is bound to struggle and finally the last way is driver linked income which is basically when a driver pays the team a sum of money to drive the car, like Lance Stump, who paid Williams. 30 million in 2017 to drive the car, but obviously this only happens to teams further down the grid who are desperate for more revenue, so those are all the possible ways a team can make money, so Let's put it in our hypothetical example.

Let's say our team receives £65m in payouts, £30m in investments, £50m in sponsors and £20m in revenue from driverlink, which equates to £165m in total revenue, so in Our hypothetical example, the team would make a profit of £7 million, that's basically how an F1 team makes money, but why not look at reigning champions Mercedes and see how they compare? In 2019, Mercedes spent around $425 million on R&D, manufacturing testing, Lewis' paycheck, and looking at its revenue. It breaks down as follows: They received $180 million of an $80 million payment from Daimler and a $160 million payment from sponsors and technology partners, so doing the math in 2019, Mercedes actually had a loss of $5. million dollars approximately, more or less. hundred thousand dollars and looking at the grid as a whole, it is actually very interesting that every team except 2 breaks even, meaning that the costs are the same as the revenues, obviously these are rough estimates and an expected small loss or a small profit either way, but the point is virtually every team uses all its resources to the maximum, which makes a lot of sense and here's why car companies use Formula One not necessarily to make a profit, but as a marketing platform to the world to prove that their street cars are the best.

For teams like mercedes renault ferrari etc,

formula

one generates huge indirect profits for those companies if someone who likes or watches F1 buys one of their cars, so it doesn't really matter if they don't make a profit at the end of the day and then. Everything, if you make a profit, shows that you have more potential resources to improve the performance of the car, which after all is the most important thing, but next season the entire financial picture of Formula One is going to change drastically due to the budget limit. I've talked about this many times in other videos, but basically what it is is a maximum amount that teams can spend, which will be set at $145 million, so for any team that spends over $145 million now they will have to be much more. efficient in the way they spend their money this will no doubt affect teams like mercedes red bull and ferrari the most and the main goal is to create a more level playing field which I'm totally for now you might be wondering what was the budget of each team in 2019. above 145 million dollars, which is absolutely true, but due to the effect of the pandemic, the budgets of many teams have fallen significantly.

I'm sure some teams will find loopholes in the rules, but there's no doubt that it's a good thing for Formula One. So this is a brief look at how Formula One teams make money and operate as a business and it shows how efficient are some of the lower teams like Alpha Tari and it just puts into context how incredible things like Pierre Gasly's win at Monza were. Enjoy this new style of video focused more on the financial aspect of things like this video and please leave a comment below and as always be sure to subscribe and hit the notification bell to remind yourself of any new videos you see.