The Sport Industry

1. The Sport Industry January 16, 2007

2. What is the Sport Industry? • Never been answered clearly • Define Industry: 1. Similarity of Products 2. Similarity of Economic activities • Term has been used at the discretion, whim of people in the industry. • Will look at various definitions, segments

3. The Sport Industry: Basics of Sport Finance • A big part of any industry is: MONEY • No less true in the sport industry • On what basis do YOU decide to spend money? • Who made a sport-related purchase over $200 lately? Describe what went into your decision

4. Decision-making Process • Sport Businesses make decisions similarly • Often, more sophisticated, financial analysis • Any business needs trained financial analysts -look at where the money is, or how to get it. • Businesses usually take a different view of $$$ than individuals, however. -in most cases exist solely to make money -all businesses need to focus on the bottom-line, what comes in and what goes out.

5. Making and Managing Money • Provides for future growth • Aids in determining sales patterns/purchases • Product launches • Secure investors, venture capitalists • Key to financial success, therefore is: Financial Planning

6. The Sport Industry January 22, 2007

7. Look at Outline of Project • Distribute project outlines • Discuss project outlines • Intended to be a guide, would expect to see some variation based on the organization

8. Constraints • Decisions require comprehensive review of: Internal constraints External constraints • Important to know and understand

9. How to make Money in Sport • Ticket sales • Licensing • Television rights • Lower costs Sell the team!

10. Asset backed security • Why I asked you if you ever bought a car • Collateral • NFL offer (p. 12)

11. Most dynamic topic in 1990’s • Stadium construction deals • Text focus is on pro stadiums, but… • Image • Other important aspects? • Funded through municipal bonds

12. True of False? • The General public can purchase interest (shares) in certain professional sport teams True • The method used to fund most pro stadium construction during the boom of the 1990’s was municipal bonds True • Most collegiate recreation centers were funded through student fees True

13. Basic Financial Concepts • Will now look at basic terms and principles • Distribute discussion items • Write down ideas, information you read about in Chapter 2 of text. • Then, as before, get with same group number • Discuss and appoint spokesperson • Share ideas with class

14. Revenues and Expenses • List some revenues for a collegiate recreational sports department • List some expenses for a collegiate recreational sports department • Define financial “debt” -the owing of money to others • When expenses exceed revenue…Then what • R & E are often similar across industries

15. Budgets • Includes revenues and expenses • Used by all to help make decisions • Several types, incremental, zero-based, etc. • Critical analysis financial statements

16. Documentation • Stockholder concerns • Not end in itself, rather a tool • Can get bogged down • Often required by law • Analyze financial “Doability” of projects • Helps with backing • Can you trust the numbers? -Thinking about buying a business?

17. Financial Objectives • Primary might be making highest profit possible • Keep stockholders happy -earnings per share -stock price appreciation or total earnings • Increased stock value • Example earnings vs. appreciated value

18. Other Factors of Interest to Investors • How often dividends are paid • Risk, uncertainty of future earnings • Debt of company • Corporate policies that influence decisions

19. Other Useful Analyses Considerations • Where was the entity (financially) in the last year • What is projected for the current year • What its financial goals are • Measurement of financial success vs. failure

20. Some Basic Accounting Concepts • Definition

21. Definition of Accounting • According to Fried et al., accounting is defined as: “ the art of processing the revenue and expense numbers to develop appropriate reporting procedures upon which financial decisions are made” (p. 28).

22. Some Basic Accounting Concepts • Definition • T-Accounts • Understanding cash management (receiving and processing) • Methods of tracking and monitoring

23. Basic Accounting Requirements • Identification • Measurement • Recording • Communication …of financial information associated with various critical events in the business.

24. Objective of Accounting • Decisions about limited resources • Effective directing and controlling the organization’s human and material resources • Maintaining and reporting on the custodianship of resources • Contributing to the org’s. overall effectiveness

25. The Emphasis of Finance • Recording • Monitoring • Controlling …the financial consequences of various activities within the business and analyzing the need for additional funds to meet current and future demands.

26. Controllers • Mainly internal to business • Accounting is most often performed by a controller -documents what happened, not what should have happened • Focus is on accuracy and industry-defined rules • Usually involved in Managerial Accounting

27. Managerial Accounting • The process for forecasts and monitoring • Data that facilitates communication between a business’ departments • Facilitates internal success

28. Treasurer • Focus mostly on external factors • Bonds, stockholders, etc. • Takes information from the accounting process • Uses information as leverage • Word of caution -note the glowing terms: “linchpin” (p. ix)

29. T-Accounts • Right side is credit • Left side is debit • Key is to keep in mind what goes on left and on right (Debit=Left, Credit=Right) • Multiple accounts are changing, referred to as double-entry bookkeeping

30. Cash vs. Accrual Basis • GAAP • Accrual is preferred technique -recognizes revenue when earned, recognizes expenses when incurred -key is record income when you perform the service whether it is paid for or not at the time • Cash basis less likely to be used, less likely to be allowed by IRS -allowed to use when receiving and paying cash -does not recognize sales made on credit or bills owed until they are paid

31. Financial Systems • Definition -”mechanisms that allow anything of value to be exchanged between different parties” (Fried, p. 36) • Systems work in a cyclical manner • Businesses work in a cyclical manner, also -constant exchange occurring, receiving and paying out money

32. Markets as part of Financial Systems • Sometimes a sport business needs funds • Several markets, discuss the “primary” listing -Tangible -Financial asset -Spot -Futures -Money -Capital -Mortgage -International -Primary -Secondary • Use these to sell or obtain (buy) assets • Sport business limited to certain ones? Y/N?

33. Money • Paper/metal money • Needed monetary vehicle, instruments • In place of money • Checks, credit cards • More modern: EFT • Deeds • Ownership of stocks, bonds: marketable securities

34. Marketable Securities • Widely accepted, like cash • Liquidity of common stock • Hard assets are opposite extreme: factory • A/R and inventory are marketable • Factoring makes some assets more liquid -selling assets -without recourse -with recourse • More expensive than bank borrowing

35. Marketable Securities (continued) • Liquid because of: -shorter maturity period (CD) -ability to sell on a daily basis (stock) -relatively risk free (gov’t. securities) • Text examples of more common M.S.’s -T-bills -Treasury notes -Government agency securities -CD’s -Commercial paper

36. Financial Institutions • Entities facilitate the transfer of capital • Banks, long history -can influence markets -finite amount of cash in system -capital, think of as money on hand -capital reserve, prevent run (A Wonderful Life?) -borrowing, banks borrow, too -The Fed, raise or lower bank reserves -Not Alan Greenspan -Ben Bernanke, 1st anniversary

37. Chapter 3 Wrap-up • Bank lending rules -loan-to-deposit ratio • Protecting deposits • Quasi bankers (TIAA-CREF) • Stock Exchanges, image

38. Sole Proprietorship • Owned by a single person • No formal paperwork to start up • Cost of organizing is low • Control and profits are not shared • Limited ability to raise capital • Unlimited personal liability • No support, you are alone • Ends at death

39. In Sport • Many businesses are sole proprietorship • Sporting goods, bowling alleys, etc. • Independent contractors • Can incorporate

40. General/Limited Partnerships • More than one person running business • Minimal formation costs • Few Governmental regulations • Limited ability to raise capital • Unlimited liability for all partners • Immediate termination with death/withdrawal • Two types: General and Limited

41. General • Combine resources • Share operating, managing and controling • Share in profits and liabilities • Greater access to capital • Profits taxed only once • Enhanced business decision making • Limited longevity • Joint liability • Still have limited access to capital • Limited human resource talent

42. Limited • One general partner who manages • One or more financial only partners • Limited shares profits, but not management • Liability is only financial, an incentive • Ability for greater capital than sole prop. • Profits not taxed until reported • Allows for even more investments • Lacks managerial involvement • General still subject to unlimited liability

43. Subchapter S Corporations • Many organized under this structure • Up to 35 shareholders • Can own subsidiaries • Tax-exempt can own shares • Income flows to shareholders who pay taxes • Avoids double taxation • Insulated from liability through sub. Owner • One form of stock • Based in US, no foreign investment, corporation ownership, partnerships • Can not own 80% or more of another’s stock

44. C Corporations • The Corporation • Delaware friendliest state to Corporations • More than half formed in DE • Increased value of Delaware companies • Corporation takes on liability • Double taxation; profits and shareholders • Government compliance, organization • Shareholder rebellion

45. LLC • Agile, inexpensive, timely • Gaining favor in US because of simplicity • Classification as partnership for tax reasons • Liability protection given corporations • Can be owned by corp. or partnership • Newness, few standards, each state governs • File articles of partnership in state • SEC keeps their distance, unless publicly held

46. Financial Statements • Balance sheet -financial state at given point • Income Statement -profit/loss over a given time • Statement of Cash Flows -change in cash position over given time

47. Balance Sheet • Snapshot of business at single point • Assets = Liabilities + Capital prov. by owners • Listed according to length of time to liquidate • Asset = nature of business • Current Assets = Most liquid, 1 yr or less -cash, short-term assets -accounts receivable -inventory

48. Balance Sheet (con’t.) • Fixed assets -Least liquidity -Real estate -Plant -Equipment • Not normally converted to cash for day-to-day • …Let’s visit Nike now

49. Balance Sheet (con’t.) • Liabilities -listed in the order they must be paid -current, pay in one year or less -long-term, time period? -reflection of decisions like debt vs. equity

50. Income Statement • Measures profitability over given time period • Income = Revenue – Expenses • Balance sheet provides snapshot -income sheet, performance between the snapshots