Stadium Funding and Operations
Chalkywhite
sponsorsrevenue.pdf
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21 d edu
SCHEDULE 4—DEBT SERVICE PLUS OTHER EXPENSES
Interest 180
Depreciation 260
Amortization of contracts 400
Total expenses 4,450
SCHEDULE 5—OTHER EXPENSES
Amortization 370
Auto expenses 18
Bad debt expenses 10
Bank service charge 40
Contributions 2
Entertainment 10
Insurance 160
Professional fees 60
Miscellaneous 2
Outside services 16
Postage 40
Rent 2
Repairs 16
Supplies 32
Taxes—others 60
Telephone 80
Travel 16
Total other expenses 934 Total debt service 840
Although we often use Under Armour as a real-world example in this book, here we use the fictitious Sport Manufacturing Company (SMC). Inventory numbers are rarely publicly available because companies do not want their competitors knowing what manufacturing cycles they are following. In this example, SMC manufactures and sells golf clubs and skis. Variable costs for SMC include the cost of labor and material. If the company finds that it is selling fewer golf clubs, it will reduce production. As production is reduced, SMC can reduce the number of people employed in production as well as the purchase of materials used to manufacture the golf clubs.
As for fixed costs, we assume that SMC has extensive machinery and equipment in its manufacturing facilities. The machinery and equipment, along with the manufacturing premises, are long-term capital assets whose costs are considered fixed over any particular period. If the machinery and equipment are used in a facility that fabricates golf clubs, the annual expense is incurred even if no golf clubs are produced. When expenses are mostly fixed, higher profitability will be associated with higher sales because the cost per unit sold will fall as sales increase. If we assume that most of SMC’s expenses are the fixed costs associated with its machinery and equipment, the company needs to maximize golf club sales to boost profitability by lowering the cost per golf club sold.
In the short run, a major constraint in SMC’s attempts to maximize profitability through increased golf club sales is the maximum production capacity of the manufacturing facility. A production constraint is also a sales constraint. If SMC can produce only 800,000 golf clubs in a year, it will be unable to sell more than 800,000 golf clubs annually. Even if the demand for golf clubs is one million per year, SMC will be unable to sell that many unless it can find some way to increase production. SMC could conduct break-even analysis using the fixed and variable costs to help determine the initial manufacturing run consistent with the research data it would have on projected sales.
In contrast to a manufacturing company that has numerous variable costs, the major cost for a professional sports team is the salaries of players and coaches, which are fixed costs. No matter how much revenue is derived from attendance at games or broadcast rights, the team will be paying the same salaries, so it needs to make sure that the budget covers at least those expenses.
External Data By knowing how successful internal operations are, a business can plan more appropriately. External data can serve the same purpose. External data and documentation are critical for successful planning. External data can be used to help shape various decisions to reflect the true business environment. For example, some leagues have league-wide data available to teams where they can examine their costs and revenue against competitors and league-wide averages. Similarly, a football team in Europe might face relegation (or promotion) and will be faced with brand new budgetary challenges. They might face a significant decline in broadcast revenue or they might have new revenue streams they had not had in the past along with new expenses such as higher priced players. To help create a budget based on these new challenges and opportunities, the team might contact other teams or league offices to obtain additional information. Such information is considered external data. Once the budget is produced for the team, it will be considered internal data for that team. These are only two examples of the use of external data to help shape sport business decisions.
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External data can help shape decisions in many other ways as well. The following are examples of gathering external data:
Monitoring international terrorist activities to determine whether an event needs to be canceled Analyzing industry trends to develop appropriate pricing for concessions items Tracking culinary advances to determine the most effective means of packaging and selling food items Reading current articles in trade publications to stay abreast of industry changes Attending conferences to hear what other executives are saying about the industry Reviewing government census reports to understand demographic changes in the possible fan base
Publications such as Barron’s, Forbes, Business Week, and The Wall Street Journal provide useful general information. More specific information can be obtained from such sources as Dun & Bradstreet’s Key Business Ratios, which analyzes 14 key ratios for various industries. Both state and federal governments produce significant useful data such as statistical abstracts. Industry trade groups can also produce valuable data to assist with financial planning. The suggested resources section contains information on these publications and how to access them.
Among the best information sources for the sport industry are industry publications such as Athletic Business, Athletic Management, Fitness Management, and NCAA News. Each has unique special features, reports, and surveys that can provide invaluable assistance. One of the premier publications in the industry is Street & Smith’s Sports Business Journal. This weekly publication has special sections devoted to attendance numbers, a stock market index for sport-related companies, and information on sponsorship deals, among other features.
Regular newspapers often list the payrolls for every professional team in leagues such as the MLB, the NFL, and the NBA. Such data can help a team compare itself with others, which is called benchmarking. Benchmarking allows a business to see whether it is paying more for similar work or results. For example, a basketball team can compare its salary range with other teams in the league or examine specific statistical variables such as the cost per rebound or assist for each player.
Organizations regularly research specific industry benchmarks that can help establish criteria for success or failure. Although the data are only as good as the techniques used to retrieve them, the information can help shape many financial decisions. Numerous managers focus on the bottom line, and the bottom line can be examined by looking at what others in the same industry do to determine whether a facility is operating as effectively as similarly situated facilities.
Industry-related data come from a variety of sources and appear in a variety of formats. The Small Business Administration publishes free business plan formats online to help businesses understand what data they will need and what to do with the data. More specific data are often needed from specific industry groups or associations.
Regardless of the type of external data, the reader of such reports needs to compare apples with apples. Some publications calculate return on equity as net income divided by average common equity, but others divide net income by the year-end common equity. Comparing data that have been obtained using different equations will lead to inaccuracies. One example of inaccuracies could be when two teams are discussing a player transfer and have agreed on a price, but one team is thinking about dollars and the other team is thinking about euros. Similarly, incorrectly analyzing an internal rate of return or price–earnings ratio can destroy an investment decision. Thus, all financial statements should be carefully scrutinized to determine what equations and measurement techniques were used and when the data were collected to ensure proper comparisons.
Proper Documentation The key to success in data collection is proper documentation. Although record keeping is stressed throughout this text as an integral component of financial success, it should not be seen as an end in itself. It is simply a tool. If too much emphasis is placed on developing the right documents, managers will not be able to see the forest for the trees and may make decisions that look great on paper but become major disasters. Nevertheless, the documentation process is critical and is highlighted throughout this text. At the same time, documentation is only one of the many functions required by law or contract for obtaining necessary funds. For that reason, analyzing revenues and expenses is critical. Finance necessitates analyzing the financial feasibility of various projects based on the projected revenues to be gained, the expenses that will be incurred, and the availability of moneys to fund projects through to completion. When potential income from a project is properly documented, a potential investor is more inclined to back that project.
CONCEPTS INTO PRACTICE hen a sports organization examines a budget, managers must use the right information and compare apples with apples. Under the Equity in Athletics Disclosure Act of 1994, the U.S. Department of Education requires all colleges that receive
federal funds and have intercollegiate athletics to report their spending on an annual basis. The problem is that the information can have errors or omissions and is not specific. After years of work, a database called the financial dashboard is now available for NCAA Division I and II. The database uses the Equity in Athletics Disclosure Act data to examine 26 indicators in multiple formats and what-if scenarios (Goldstein & Alden, 2011). Colleges can examine other colleges in their conference or across the nation to get a better idea of how they are spending and earning money.
Comparison is critical to understanding what it takes to be competitive. Sport administrators can use the information to be proactive rather than reactive and to construct a better strategic plan. The numbers are useful, however, only if they are analyzed correctly. For example, one school might list every expense associated with recruiting in the recruiting budget, whereas another might put air travel for recruiting in a travel budget. Other differences include salaries that likely vary with the cost of living at colleges in large cities compared with those located in rural areas. Several other areas need to be carefully examined:
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Team travel. Some programs take buses everywhere, some take commercial air carriers, and others take chartered flights. Equipment and supplies. Although some schools need to pay a lot for equipment and supplies, other schools have a contract with a sports apparel company and would not have to buy any equipment. Ticket sales. Some schools have large facilities and huge ticket demand, whereas other schools let students in free. Donations. Some institutions let the athletic department record gifts, whereas others record the donations for a general institutional fund (Goldstein & Alden, 2011).
The ability to make appropriate financial decisions is predicated on proper documentation. Every publicly traded corporation, such as Nike or Under Armour, has to pay an accounting firm to develop an audited financial statement that could be shown to the government and other stakeholders. When a sport business finds itself in a financial plight, the only way that it can analyze the situation accurately is through proper documentation. Did someone fudge the sales numbers? Is someone embezzling money? Is the company carrying too much inventory? Are the costs of employee benefits out of control? Is extra cash just lying around in unknown accounts? Proper documentation enables you to find the answers to these types of questions because a company can trace when dollars come in and when they go out. Thus, when examining a balance sheet or income statement, people need
