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 • Determining financial objectives • Overview of accounting concepts
Financial Systems • Financial Markets • Financial Institutions • Government Influence on Markets • Environmental conditions
Business Structure in Sport • Sole proprietorships • General and Limited Partnerships • Subchapter S Corporations • C Corporations • LLP and LLC
Financial Statements, Forecasts, and Planning • Types • Types • Preparation • Break-even analysis
Money and Time Value • The worth of money • Present and future value • Annuities • Risk
Financial Planning • Examine future revenues and expenses • Data gathering -Internal data -External data • Process, 2 major elements -Forecasting revenues -Budgeting future expenses
More Planning • Short term • Long term • Developing a pro forma budget
Sport Management Sport Finance, Specific slides February 27, 2007 Slides derived in part from Sport Finance by Fried, et al., 2003
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 • 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 • Decisions require comprehensive review of: Internal constraints External constraints • Important to know and understand
How to make Money in Sport • Ticket sales • Licensing • Television rights • Lower costs Sell the team!
Asset backed security • Why I asked you if you ever bought a car • Collateral • NFL offer (p. 12)
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 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 • 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 • Includes revenues and expenses • Used by all to help make decisions • Several types, incremental, zero-based, etc. • Critical analysis financial statements
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 • 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 • How often dividends are paid • Risk, uncertainty of future earnings • Debt of company • Corporate policies that influence decisions
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 • 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 • Definition • T-Accounts • Understanding cash management (receiving and processing) • Methods of tracking and monitoring
Basic Accounting Requirements • Identification • Measurement • Recording • Communication …of financial information associated with various critical events in the business.
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 • 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 • 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 • The process for forecasts and monitoring • Data that facilitates communication between a business’ departments • Facilitates internal success
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 • 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 • 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 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 • 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 • 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 • 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) • 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 • 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 • 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 • Many businesses are sole proprietorship • Sporting goods, bowling alleys, etc. • Independent contractors • Can incorporate
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 • 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 • 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 • 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 • 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
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 • 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 • 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.) • Fixed assets -Least liquidity -Real estate -Plant -Equipment • Not normally converted to cash for day-to-day • …Let’s visit Nike now