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Sport Management Sport Finance, Overview slides. February 27, 2007. Basics of Sport Finance. Financial issues in sport -Mega-dollars -Stocks -Merger -Sport Apparel Industry -Sponsorship -Arenas and stadiums. Basic Financial Concepts. Revenues and expenses Budgets Documentation

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basics of sport finance
Basics of Sport Finance
  • Financial issues in sport

-Mega-dollars

-Stocks

-Merger

-Sport Apparel Industry

-Sponsorship

-Arenas and stadiums

basic financial concepts
Basic Financial Concepts
  • Revenues and expenses
  • Budgets
  • Documentation
  • Determining financial objectives
  • Overview of accounting concepts
financial systems
Financial Systems
  • Financial Markets
  • Financial Institutions
  • Government Influence on Markets
  • Environmental conditions
business structure in sport
Business Structure in Sport
  • Sole proprietorships
  • General and Limited Partnerships
  • Subchapter S Corporations
  • C Corporations
  • LLP and LLC
financial statements forecasts and planning
Financial Statements, Forecasts, and Planning
  • Types
  • Types
  • Preparation
  • Break-even analysis
money and time value
Money and Time Value
  • The worth of money
  • Present and future value
  • Annuities
  • Risk
financial planning
Financial Planning
  • Examine future revenues and expenses
  • Data gathering

-Internal data

-External data

  • Process, 2 major elements

-Forecasting revenues

-Budgeting future expenses

more planning
More Planning
  • Short term
  • Long term
  • Developing a pro forma budget
sport management sport finance specific slides

Sport Management Sport Finance, Specific slides

February 27, 2007

Slides derived in part from Sport Finance by Fried, et al., 2003

decision making process
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.

making and managing money
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

constraints
Constraints
  • Decisions require comprehensive review of:

Internal constraints

External constraints

  • Important to know and understand
how to make money in sport
How to make Money in Sport
  • Ticket sales
  • Licensing
  • Television rights
  • Lower costs

Sell the team!

asset backed security
Asset backed security
  • Why I asked you if you ever bought a car
  • Collateral
  • NFL offer (p. 12)
most dynamic topic in 1990 s
Most dynamic topic in 1990’s
  • Stadium construction deals
  • Text focus is on pro stadiums, but…
  • Image
  • Other important aspects?
  • Funded through municipal bonds
basic financial concepts17
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
revenues and expenses
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
budgets
Budgets
  • Includes revenues and expenses
  • Used by all to help make decisions
  • Several types, incremental, zero-based, etc.
  • Critical analysis financial statements
documentation
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?

financial objectives
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
other factors of interest to investors
Other Factors of Interest to Investors
  • How often dividends are paid
  • Risk, uncertainty of future earnings
  • Debt of company
  • Corporate policies that influence decisions
other useful analyses considerations
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
definition of accounting
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).
some basic accounting concepts
Some Basic Accounting Concepts
  • Definition
  • T-Accounts
  • Understanding cash management (receiving and processing)
  • Methods of tracking and monitoring
basic accounting requirements
Basic Accounting Requirements
  • Identification
  • Measurement
  • Recording
  • Communication

…of financial information associated with various critical events in the business.

objective of accounting
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
the emphasis of finance
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.

controllers
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
managerial accounting
Managerial Accounting
  • The process for forecasts and monitoring
  • Data that facilitates communication between a business’ departments
  • Facilitates internal success
treasurer
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)

t accounts
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
cash vs accrual basis
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

financial systems34
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

markets as part of financial systems
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?
money
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
marketable securities
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
marketable securities continued
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

financial institutions
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

sole proprietorship
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
in sport
In Sport
  • Many businesses are sole proprietorship
  • Sporting goods, bowling alleys, etc.
  • Independent contractors
  • Can incorporate
general limited partnerships
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
general
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
limited
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
subchapter s corporations
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
c corporations
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
slide47
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
financial statements
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

balance sheet
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

balance sheet con t
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
balance sheet con t51
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

income statement
Income Statement
  • Measures profitability over given time period
  • Income = Revenue – Expenses
  • Balance sheet provides snapshot

-income sheet, performance between the snapshots

statement of cash flows
Statement of Cash Flows
  • Direct cash flow into business
  • Changes in a company’s cash holdings over given period of time
  • Three primary sources

-from operating activities

-from investing activities

-from financing activities

Difference between brought in and paid out

cash flow from operating activities
Cash Flow from Operating Activities
  • Positive and negative cash flow
  • Result from company basic operating activity
  • Equal to all operating revenues less all operating expenses other than non-cash
  • Earn = positive
  • Pay = Negative
cash flow from investing activity
Cash Flow from Investing Activity
  • Additions to current or fixed assets
  • Purchases of same lead to negative flow
  • Selling leads to positive
  • Increased liabilities increases cash flow here
cash flow from financing activity
Cash Flow from Financing Activity
  • Flows to and from creditors and owners
  • Changes in the firm’s debt and equity
  • Increased borrowing increases cash flow
  • Paying dividends results in negative
  • Stock issue increases flow (like a loan?)
types of financial ratios
Types of Financial Ratios
  • Why calculate ratios? Financial Scorekeeping
  • Liquidity ratios

-ability to meet short-term $$$ obligations

  • Activity ratios

-effectiveness in managing assets

  • Financial leverage ratios

-extent to which company relies on loans

  • Profitability

-ability to make enough to grow, also keep shareholders happy

worth of a business
Worth of a Business
  • Market Value

-Price per share of common stock X the average number of outstanding shares

  • Book Value

-Total Assets – Total Liabilities

  • Book Value per Share

-Owner’s equity / Total outstanding shares

  • PE Ratio

-Price per share / Earnings per share

time value of money ch 6
Time Value of Money (Ch. 6)
  • Money is sensitive to time
  • How are changes in value calculated
  • Time constraints
  • Money received today worth more
  • Time value of money: money decreases in value over time
an investment over time
An investment over time
  • Better to have safe investment, or risk?
  • Look at CD vs. junk bond

-CD more secure, needs to outpace inflation

-such return would exceed the time value of $

  • Consider another example, similar to text:
  • Concept of Future Value (FV)
  • Concept of Present Value (PV)
perpetuities and annuities
Perpetuities and Annuities
  • Wouldn’t even mention, except for Nike, ex.

-former discussion of FDIC, $$$ protection

-consols are something Nike, Microsoft might consider

  • Annuities

-problem with pensions, don’t know term

-more commonly used in U.S.

financial planning c 7
Financial Planning (C. 7)
  • Examine income and expenses, future
  • So, it’s trying to predict, provide appropriate solutions to financial issues
  • How does one go about it?
steps
Steps
  • Gather data

-Internal (sound familiar?), primary

-External (sound familiar?), secondary

  • Develop a process

-history

-short-term planning

-Long-term planning

  • Pro Forma Budget, incorporate
internal data
Internal Data
  • Includes, but not limited to:

-past balance sheets

-past income statements

-audited financial records

-research and development reports

-other?

  • Primary sources, primary data
zero based budgeting
Zero-based budgeting
  • Text: justify expense compared with others
  • Objective documentation
  • What it doesn’t say…
external data
External Data
  • Includes but not limited to:

-analyzing industry trends

-tracking the rate of inflation, the cpi

-tracking benchmark businesses

-read

-utilize agencies

process
Process
  • Two major activities

-forecasting potential revenues

-budgeting for future expenses (budgeting)

types of planning
Types of Planning
  • Short-term
  • Long-term
pro forma budget
Pro Forma Budget
  • Forecast future from past
  • Base year
  • Calculate from base
  • A target agreed upon by management as indicator of success
  • Sections of plan
obtaining funding
Obtaining Funding
  • How does one get money?

-who is most likely to use what funding?

-who uses commercial paper?

-who uses the various types of long-term borrowing?

-who uses mezzanine financing?

-who uses venture capital?