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 expenses
Budgets
Documentation
Determining financial objectives
Overview of accounting concepts

4. Financial Systems Financial Markets Financial Institutions
Government Influence on Markets
Environmental conditions

5. Business Structure in Sport
Sole proprietorships
General and Limited Partnerships
Subchapter S Corporations
C Corporations
LLP and LLC

6. Financial Statements, Forecasts, and Planning
Types
Preparation
Break-even analysis

7. Money and Time Value The worth of money Present and future value
Annuities
Risk

8. 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

9. 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

10. Sport Management Sport Finance, Specific slides
February 27, 2007
Slides derived in part from Sport Finance by Fried, et al., 2003

11. 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.

12. 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

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

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

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

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

17. 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

18. 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

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

20. 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?

21. 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

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

23. 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

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
Definition
T-Accounts
Understanding cash management (receiving and processing)
Methods of tracking and monitoring

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

27. 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

28. 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.

29. 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

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

31. 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)

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 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

34. 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

35. 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?

36. 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

37. 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

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 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

40. 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

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

42. 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

43. 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

44. 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

45. 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

46. 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

47. 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

48. 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

49. 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

50. 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

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 – Expenses
Balance sheet provides snapshot
-income sheet, performance between the snapshots

53. 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

54. 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

55. 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

56. 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?)

57. 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

58. 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

59. 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

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 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 X = 1,125,000 vs Milton offer of 1,000,000
PV X (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.

61. 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

62. 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

63. 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.

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 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.

66. 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?

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, 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.

69. 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

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 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