Presentation on theme: "Sport Management Sport Finance, Overview slides"— Presentation transcript:
1 Sport Management Sport Finance, Overview slides February 27, 2007
2 Basics of Sport Finance Financial issues in sport-Mega-dollars-Stocks-Merger-Sport Apparel Industry-Sponsorship-Arenas and stadiums
3 Basic Financial Concepts Revenues and expensesBudgetsDocumentationDetermining financial objectivesOverview of accounting concepts
4 Financial Systems Financial Markets Financial Institutions Government Influence on MarketsEnvironmental conditions
5 Business Structure in Sport Sole proprietorshipsGeneral and Limited PartnershipsSubchapter S CorporationsC CorporationsLLP and LLC
6 Financial Statements, Forecasts, and Planning TypesPreparationBreak-even analysis
7 Money and Time Value The worth of money Present and future value AnnuitiesRisk
8 Financial Planning Examine future revenues and expenses Data gathering -Internal data-External dataProcess, 2 major elements-Forecasting revenues-Budgeting future expensesDevelop new products, retire a product line, issue more stock, sell existing assetsInternal: several sources, personal observation, surveys, ZBB, incremental (history), more controllableExternal: Analyzing industry trends, drop off in high end loge sales, trade publications tracking inflation and the cpi, less controllable
9 More Planning Short term Long term Developing a pro forma budget How to proceed in a short time frame, usually less than 2 yearsMore orieneted to the present, immediate futureLong term: have a lot of variables to consider, harder to see what’s out in front of you.Obtain additional research, with greater emphasis on external data, variables
10 Sport Management Sport Finance, Specific slides February 27, 2007Slides derived in part from Sport Finance by Fried, et al., 2003
11 Decision-making Process Sport Businesses make decisions similarlyOften, more sophisticated, financial analysisAny 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.
12 Making and Managing Money Provides for future growthAids in determining sales patterns/purchasesProduct launchesSecure investors, venture capitalistsKey to financial success, therefore is:Financial Planning
13 Constraints Decisions require comprehensive review of: Internal constraintsExternal constraintsImportant to know and understand
14 How to make Money in Sport Ticket salesLicensingTelevision rightsLower costsSell the team!
15 Asset backed security Why I asked you if you ever bought a car CollateralNFL offer (p. 12)
16 Most dynamic topic in 1990’s Stadium construction dealsText focus is on pro stadiums, but…ImageOther important aspects?Funded through municipal bonds
17 Basic Financial Concepts Will now look at basic terms and principlesDistribute discussion itemsWrite down ideas, information you read about in Chapter 2 of text.Then, as before, get with same group numberDiscuss and appoint spokespersonShare ideas with class
18 Revenues and ExpensesList some revenues for a collegiate recreational sports departmentList some expenses for a collegiate recreational sports departmentDefine financial “debt”-the owing of money to othersWhen expenses exceed revenue…Then whatR & E are often similar across industries
19 Budgets Includes revenues and expenses Used by all to help make decisionsSeveral types, incremental, zero-based, etc.Critical analysis financial statements
20 Documentation Stockholder concerns Not end in itself, rather a tool Can get bogged downOften required by lawAnalyze financial “Doability” of projectsHelps with backingCan you trust the numbers?-Thinking about buying a business?
21 Financial Objectives Primary might be making highest profit possible Keep stockholders happy-earnings per share-stock price appreciation or total earningsIncreased stock valueExample earnings vs. appreciated value
22 Other Factors of Interest to Investors How often dividends are paidRisk, uncertainty of future earningsDebt of companyCorporate policies that influence decisions
23 Other Useful Analyses Considerations Where was the entity (financially) in the last yearWhat is projected for the current yearWhat its financial goals areMeasurement of financial success vs. failure
24 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).
25 Some Basic Accounting Concepts DefinitionT-AccountsUnderstanding cash management (receiving and processing)Methods of tracking and monitoring
26 Basic Accounting Requirements IdentificationMeasurementRecordingCommunication…of financial information associated with various critical events in the business.
27 Objective of Accounting Decisions about limited resourcesEffective directing and controlling the organization’s human and material resourcesMaintaining and reporting on the custodianship of resourcesContributing to the org’s. overall effectiveness
28 The Emphasis of Finance RecordingMonitoringControlling…the financial consequences of various activities within the business and analyzing the need for additional funds to meet current and future demands.
29 Controllers Mainly internal to business Accounting is most often performed by a controller-documents what happened, not what should have happenedFocus is on accuracy and industry-defined rulesUsually involved in Managerial Accounting
30 Managerial Accounting The process for forecasts and monitoringData that facilitates communication between a business’ departmentsFacilitates internal success
31 Treasurer Focus mostly on external factors Bonds, stockholders, etc. Takes information from the accounting processUses information as leverageWord of caution-note the glowing terms: “linchpin” (p. ix)
32 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
33 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 timeCash 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
34 Financial Systems Definition -”mechanisms that allow anything of value to be exchanged between different parties” (Fried, p. 36)Systems work in a cyclical mannerBusinesses work in a cyclical manner, also-constant exchange occurring, receiving and paying out money
35 Markets as part of Financial Systems Sometimes a sport business needs fundsSeveral markets, discuss the “primary” listing-Tangible -Financial asset -Spot-Futures -Money -Capital-Mortgage -International -Primary-SecondaryUse these to sell or obtain (buy) assetsSport business limited to certain ones? Y/N?
36 Money Paper/metal money Needed monetary vehicle, instruments In place of moneyChecks, credit cardsMore modern: EFTDeedsOwnership of stocks, bonds: marketable securities
37 Marketable Securities Widely accepted, like cashLiquidity of common stockHard assets are opposite extreme: factoryA/R and inventory are marketableFactoring makes some assets more liquid-selling assets-without recourse-with recourseMore expensive than bank borrowing
38 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
39 Financial Institutions Entities facilitate the transfer of capitalBanks, 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
40 Sole Proprietorship Owned by a single person No formal paperwork to start upCost of organizing is lowControl and profits are not sharedLimited ability to raise capitalUnlimited personal liabilityNo support, you are aloneEnds at death
41 In Sport Many businesses are sole proprietorship Sporting goods, bowling alleys, etc.Independent contractorsCan incorporate
42 General/Limited Partnerships More than one person running businessMinimal formation costsFew Governmental regulationsLimited ability to raise capitalUnlimited liability for all partnersImmediate termination with death/withdrawalTwo types: General and Limited
43 General Combine resources Share operating, managing and controling Share in profits and liabilitiesGreater access to capitalProfits taxed only onceEnhanced business decision makingLimited longevityJoint liabilityStill have limited access to capitalLimited human resource talent
44 Limited One general partner who manages One or more financial only partnersLimited shares profits, but not managementLiability is only financial, an incentiveAbility for greater capital than sole prop.Profits not taxed until reportedAllows for even more investmentsLacks managerial involvementGeneral still subject to unlimited liability
45 Subchapter S Corporations Many organized under this structureUp to 35 shareholdersCan own subsidiariesTax-exempt can own sharesIncome flows to shareholders who pay taxesAvoids double taxationInsulated from liability through sub. OwnerOne form of stockBased in US, no foreign investment, corporation ownership, partnershipsCan not own 80% or more of another’s stock
46 C Corporations The Corporation Delaware friendliest state to CorporationsMore than half formed in DEIncreased value of Delaware companiesCorporation takes on liabilityDouble taxation; profits and shareholdersGovernment compliance, organizationShareholder rebellion
47 LLC Agile, inexpensive, timely Gaining favor in US because of simplicityClassification as partnership for tax reasonsLiability protection given corporationsCan be owned by corp. or partnershipNewness, few standards, each state governsFile articles of partnership in stateSEC keeps their distance, unless publicly held
48 Financial Statements Balance sheet -financial state at given point Income Statement-profit/loss over a given timeStatement of Cash Flows-change in cash position over given time
49 Balance Sheet Snapshot of business at single point Assets = Liabilities + Capital prov. by ownersListed according to length of time to liquidateAsset = nature of businessCurrent Assets = Most liquid, 1 yr or less-cash, short-term assets-accounts receivable-inventory
50 Balance Sheet (con’t.) Fixed assets -Least liquidity -Real estate -Plant-EquipmentNot normally converted to cash for day-to-day…Let’s visit Nike now
51 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
52 Income Statement Measures profitability over given time period Income = Revenue – ExpensesBalance sheet provides snapshot-income sheet, performance between the snapshots
53 Statement of Cash Flows Direct cash flow into businessChanges in a company’s cash holdings over given period of timeThree primary sources-from operating activities-from investing activities-from financing activitiesDifference between brought in and paid out
54 Cash Flow from Operating Activities Positive and negative cash flowResult from company basic operating activityEqual to all operating revenues less all operating expenses other than non-cashEarn = positivePay = Negative
55 Cash Flow from Investing Activity Additions to current or fixed assetsPurchases of same lead to negative flowSelling leads to positiveIncreased liabilities increases cash flow here
56 Cash Flow from Financing Activity Flows to and from creditors and ownersChanges in the firm’s debt and equityIncreased borrowing increases cash flowPaying dividends results in negativeStock issue increases flow (like a loan?)
57 Types of Financial Ratios Why calculate ratios? Financial ScorekeepingLiquidity ratios-ability to meet short-term $$$ obligationsActivity ratios-effectiveness in managing assetsFinancial leverage ratios-extent to which company relies on loansProfitability-ability to make enough to grow, also keep shareholders happy
58 Worth of a Business Market Value -Price per share of common stock X the average number of outstanding sharesBook Value-Total Assets – Total LiabilitiesBook Value per Share-Owner’s equity / Total outstanding sharesPE Ratio-Price per share / Earnings per share
59 Time Value of Money (Ch. 6) Money is sensitive to timeHow are changes in value calculatedTime constraintsMoney received today worth moreTime value of money: money decreases in value over timeMoney received today is worth more than money received in the future (Impact on receivables)Money decreases in value over time
60 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)Junk bond is a high-risk, non-investment grade bond with a low credit rating, usually BB or lower; as a consequence, it usually has a high yield. Investment grade: a bond which is relatively safe, having a high bond rating usually BBB and above. Even have bonds that are CPI-Indexed!Inflation is a continuous and considerable rise in prices in general. Some definitions suggest that pure inflation would not account for only a 1, even 2 % rise in general pricesFuture value is the value of an initial lump sum of money (the 1 million) after it is invested over one or more periods of time (1 year, in this case).Do the MVD offer sheet, future value X = 1,125,000 vs Milton offer of 1,000,000PV X (discount rate)= 1,100,000 (get that from Milton in 1 year)P.V.= 1,100,000/1.125 = $977,778You are discounting the money because of the year you have to wait for it. So, you compare presnt value of MK’s offer to the caluclated value of PM’s offer.The future value of MK’s offer is $1,125,000, reflecting the interest paid on the investment in the CD.
61 Perpetuities and Annuities Wouldn’t even mention, except for Nike, ex.-former discussion of FDIC, $$$ protection-consols are something Nike, Microsoft might considerAnnuities-problem with pensions, don’t know term-more commonly used in U.S.British government, 1750’s consolidated annuities (hence the contraction consols). So, the Nike example, purchase enough to ensure the $1,000,000, and then the PV = C/ (1+r) = C/(1 + r)²… But math has us do this PV = C/r PV = $1,000,000/0.05= $20,000,000Annuity is constant stream of payments received for a fixed number of periods. Home mortgages, leases, pensions.Do the annuity example, Messerly
62 Financial Planning (C. 7) Examine income and expenses, futureSo, it’s trying to predict, provide appropriate solutions to financial issuesHow does one go about it?Key to financial planning is to look at future income and expenses.You are trying to give the best,most edcuated guess you can. Remmber in the business plan where there was a quote from a comptroller who said the only exact thing you know about putting together a financial or business plan is that is soon as it’s finished, it’s already wrong.Use history of business, gather data, put together a pro forma budget
63 Steps Gather data -Internal (sound familiar?), primary -External (sound familiar?), secondaryDevelop a process-history-short-term planning-Long-term planningPro Forma Budget, incorporateFirst step is to gather data.
64 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
65 Zero-based budgeting Text: justify expense compared with others Objective documentationWhat it doesn’t say…Justify every expenditure in comparisio with other projectsObjective documentation is key, try to eliminate bias, distortion. Go to external sourcesDifficult to utilize. padding , bias, politics, the best persuader, text even suggests that successful programs may have built-in justification, so it’s still historical.Part of MBO, so aprt of an overall process that gets bogged down.Should t really have to go out aand strat with a clean slate each time, usually every year.
66 External Data Includes but not limited to: -analyzing industry trends -tracking the rate of inflation, the cpi-tracking benchmark businesses-read-utilize agenciesAnalyze prices, costs, business structureUse available govenrment reports, dataWatch what competitors are doing, do research, surveysAthletic Business. Athletic management, SEC, WSJ.Agencies like Small Business Admin, IRS,What person would be most blikley to deal with this?
67 Process Two major activities -forecasting potential revenues -budgeting for future expenses (budgeting)These are the two major things you are looking at in your business plans
68 Types of Planning Short-term Long-term What to do over the short term, 2 years or less, generallyLook at specific research, meeting of specific goalsClosely monitor internal variables (watched budget every day)Long-term, less certain, obviously.Focuses on the future, so external variables become important, the 30-year NYSE trend for example.
69 Pro Forma Budget Forecast future from past Base year Calculate from baseA target agreed upon by management as indicator of successSections of planSections similar to those outlined
70 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?CP= large corporationFactoring = anybodyLong term = stocks and bonds larger companies, smaller bank loans, mortagags, nediumMezzanine, borrowing money and selling stokks from same invesortVenture: startup