Financial Performance

Persona l use on

ly, do no t reprodu

ce.

2021-02 -10

lamar.do uglas@s

tudent.a shford.e

du

Persona l use on

ly, do no t reprodu

ce.

2021-02 -10

lamar.do uglas@s

tudent.a shford.e

du

Persona l use on

ly, do no t reprodu

ce.

2021-02 -10

lamar.do uglas@s

tudent.a shford.e

du

Persona l use on

ly, do no t reprodu

ce.

2021-02 -10

lamar.do uglas@s

tudent.a shford.e

du

Persona l use on

ly, do no t reprodu

ce.

2021-02 -10

lamar.do uglas@s

tudent.a shford.e

du

ot reprod uce.

0

This chapter starts with examining the importance of financial planning. Every coach goes into a game with a plan. That plan might focus onwhich players to start, what offense to use, and what defensive strategies to use. Some coaches are known for scripting most of the game and writing down every play that they expect to run during a given period or under certain circumstances. The same basic concept applies to financial planning. Every sports organization needs to determine before a new year or season starts what they want to accomplish and then develop a road map. The map that is used is a budget. The budget focuses on what the business wants to accomplish during a set period for a given product or industry unit. Financial planning entails examining future income and expenses to help steer a company in a given direction. Every business decision requires planning. Strategic planning has gained popularity as a way of critically analyzing given business scenarios to generate appropriate solutions. This same strategic planning perspective applies to financial planning. Every monetary issue needs to be examined for fiscal soundness. Every dollar needs to be planned for to maximize that dollar’s impact. Planning for most typical contingencies can help a business operate smoothly and save money. While this chapter discusses basic issues and the need for budgets, chapter 8 covers the mechanics of developing, implementing, and evaluating a budget.

This chapter highlights the various components necessary to plan effectively. The process starts with understanding that a sports organization needs a plan. While there are many plans such as a marketing plan or a strategic plan, we are going to focus on a financial plan. That financial plan results in a budget. The budget is a road map for the organization. Through utilizing a number of different budgets, an organization can be better prepared for financial conditions that might arise. One of the most well-known budgets is a pro forma budget that is often developed when a business or organization is initially developed to explore where money will come from and where it will be spent. The pro forma budget is a key to writing an effective business plan.

IMPORTANCE OF FINANCIAL PLANNING Financial planning can help provide appropriate solutions for the types of problems businesses face every day, such as the need to

develop new products, pay bills as they become due, spend more money on research and development, retire a given product line, borrow funds for future expansion, issue commercial paper, issue more stock, issue more bonds, sell existing assets, purchase new assets, increase prices, decrease prices, move the business to another location, acquire a competing company, or file for bankruptcy protection.

As the list suggests, every future action that a business might undertake entails financial planning. Some are short-term issues while others entail long-term focus. The financial planning examined in this chapter is focused on everyday financial issues such as paying rent and salaries. The financial planning covered in chapter 12 is much broader and covers long-term financial ideas such as whether to build a new facility. Both short- and long-term financial decisions will require planning, yet many businesses do not undertake this simple process. Some executives go with a hunch or a feeling, but the truly successful executives have a plan. Normally, two major steps are explored. The first approach is to undertake minor changes such as reducing costs or raising prices a small percentage. The second approach is to undertake major projects. The first approach is often called “thinking at the margins.” Thinking at the margins is an economic term focused on how to cover marginal costs and then add some profit to the mix. Assume a team sells a hot dog for $2 at the ballpark. That price is the standard price based on 30 cents for the raw material used (hot dog and bun) and 30 cents for the fixed costs (employees, kitchen equipment, signage, and other expenses incurred regardless of how many units are sold [see chapter 5]). At the end of the game, all unsold hot dogs need to be thrown away, composted, or donated. Thus, in the middle of the ninth inning the team might reduce the price of each hot dog to $1 and possibly earn 40 cents profit or it could stick with the $2 price and maybe throw away some possible profits. While there is the simple math, there is also a strategy component as some people might wait until close to the end of the game to buy hot dogs if they know the price will be reduced. Microeconomic theory indicates that the lowest offer you should take is the one that exceeds your marginal cost. Sunk costs cannot be recouped, so if the fixed costs are removed from the analysis (as the employees will be paid and the hot dog warmer will still be on), the key point is the 30 cents of variable costs. Thus, earning 70 cents would be a great return compared to losing the 30 cents if the bun and hot dog will need to be discarded. Whatever the price, through developing a budget based on sound numbers, a team can make this calculation and therefore make sound financial plans.

Small changes can provide significant impact. Walmart changed its plastic bag design in 2017, which resulted in saving $20 million. Walmart also shortened the receipt length, and that saved the company $7 million in one year. Not every company can save so much money, but if the team understands how much it costs to put on a game, it can undertake specific steps to reduce costs or increase revenue. This approach can be reflected in a game budget where all the expenses and revenues are projected.

In contrast, long-term budgets often focus on much more than just incremental changes (plus or minus a small percentage). Long-term budgets will often focus on transformative goals. The difference could be whether to undertake incremental activity that might increase market share by 2% to 5% or aim for a transformative goal that is much riskier but could increase market share by 25%. Much more information and the

Persona l use on

ly, do no t repro

2021-02 -10

lamar.do uglas@s

tudent.a shford.e

duquality of analysis are enhanced with long-term budgets and executive need to use information from accountants, economists, marketers, andothers to successfully craft a budget that would have the greatest potential for accuracy. In some areas, there is little room for error. For example, Churchill Downs is known for hosting the most famous horse race in the world—the

Kentucky Derby. The publicly traded company (Churchill Downs, NASDAQ CHDN) generates around 55% of its profits in the week leading up to and including the race (Hall, 2013). If a storm or some other issue arose, then revenue could be significantly impacted. That is why it is so critical for the company to have an accurate budget and financial forecasts of various scenarios to avoid any surprises or miscalculations.

Significant change in an organization often leads to a new plan and a new budget. For example, when The Sports Authority went bankrupt, one of its top suppliers, Under Armour, had to develop a new plan and new budgets to reflect that reality. Similarly, when the National Collegiate Athletic Association allowed member universities to provide more benefits to students, this was seen as a great benefit for both student-athletes and universities. However, it also changed the dynamic of expenses for all these institutions. Tuition was already increasing at many schools, and that is often one of the biggest expenses for an athletic department. The new expenses needed to be added to the budget. This created an imbalance that needed to be corrected with additional revenue or reductions in other expenses. This is why the budgetary process is so important. A university cannot just hope they have enough money to cover all its expenses. While a state university might overspend and be bailed out by the state government, a private company normally does not have a sugar daddy to bail it out of trouble.

Sound financial planning and the budgetary process can be seen in the example of a company undertaking an advertising campaign. The company needs to develop an advertising budget that incorporates forecasts of future advertising expenditures and then examine the potential revenue from each advertising effort. Table 7.1 is an example of an advertising budget worksheet