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 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 Develop new products, retire a product line, issue more stock, sell existing assets Internal: several sources, personal observation, surveys, ZBB, incremental (history), more controllable External: Analyzing industry trends, drop off in high end loge sales, trade publications tracking inflation and the cpi, less controllable

More Planning Short term Long term Developing a pro forma budget How to proceed in a short time frame, usually less than 2 years More orieneted to the present, immediate future Long 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

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

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

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 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 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 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 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 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) 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 Money received today is worth more than money received in the future (Impact on receivables) Money decreases in value 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) 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 prices Future 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 1.125 X 1000000= 1,125,000 vs Milton offer of 1,000,000 PV X 1.125 (discount rate)= 1,100,000 (get that from Milton in 1 year) P.V.= 1,100,000/1.125 = $977,778 You 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.

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. 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= $20,000,000 Annuity is constant stream of payments received for a fixed number of periods. Home mortgages, leases, pensions. Do the annuity example, Messerly

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? 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

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 First step is to gather 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 Text: justify expense compared with others Objective documentation What it doesn’t say… Justify every expenditure in comparisio with other projects Objective documentation is key, try to eliminate bias, distortion. Go to external sources Difficult 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.

External Data Includes but not limited to: -analyzing industry trends -tracking the rate of inflation, the cpi -tracking benchmark businesses -read -utilize agencies Analyze prices, costs, business structure Use available govenrment reports, data Watch what competitors are doing, do research, surveys Athletic Business. Athletic management, SEC, WSJ. Agencies like Small Business Admin, IRS, What person would be most blikley to deal with this?

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

Types of Planning Short-term Long-term What to do over the short term, 2 years or less, generally Look at specific research, meeting of specific goals Closely 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.

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 Sections similar to those outlined

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 corporation Factoring = anybody Long term = stocks and bonds larger companies, smaller bank loans, mortagags, nedium Mezzanine, borrowing money and selling stokks from same invesort Venture: startup