Simple Case Study (4 Questions)

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University of Never Land Case Study

Division II Athletics According to Revenue and Expenses, 2004-2009, NCAA Division II Intercollegiate Athletic Programs Report, (www. ncaapublications.com/productdownloads/2008DIIRevExp. pdf), in 2010 the National Collegiate Athletic Association (NCAA) Division II comprised 290 active (and 5 provi- sional) members. This group included 141 private universi- ties and 154 publicly owned universities. The Division II schools with men’s football teams had on average 247 male athletes and 142 female athletes. Thus, the average program was hosting around 380 athletes and spending on average $11,900 on each athlete. The average grant for students at private universities in 2009 was $31,600 per student-athlete. These athletes are distributed on average between seven men’s and eight women’s teams. Most Division II programs sponsored 14 sports.

Total revenue in 2009 for Division II programs offering football was an average of $4,593,000, and the average expense was $4,522,000. The net generated revenue in 2009 averaged $541,000, which when compared with the average expense produced a loss of $3,907,000. The aver- age expense for Division II programs not offering football was $3,102,000. Revenues and expenses in 2009 are broken down in table 19.1.

Median Division II revenues in 2009 are shown in table 19.2.

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Table 19.1 Average Division II 2009 Revenue and Expenses on a Percentage Basis

Revenue (%) Expense (%)

Allocated revenue (87) Athletic aid (29)

Generated revenue (12) Coaches compensation (21)

Student fees (0.9) Administrative staff (11)

Contributions (0.4) Travel (0.8)

Medical (0.2)

Other (25)

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Total expenses are divided based on the gender of sport covered and gender-neutral expenses. Thus, the median expenditure on men’s sports in 2009 was $2,292,900 (46.7% of expenditures), women’s sports cost $1,358,700 (27.6%), and administrative (gender-neutral expenditures) were at $923,700 (18.8%), totaling a median expen- diture of $4,910,900. Based on revenue of $4,591,300 the median Division II program lost $319,600 in 2009. These expenditures are broken down further in table 19.3.

Table 19.2 Median Division II 2009 Revenue

Category

Revenue (percentage of generated revenue created by athletic programs)

Total ticket sales $30,100 (9.76%)

NCAA and conference distributions 12,700 (4.1)

Guarantees and options 11,500 (3.7)

Cash contributions from alumni 108,000 (35.1)

Concession, programs, novelties 6,300 (2.0)

Sponsorship and advertising 500 (0.16)

Sports camps 6,000 (1.9)

Miscellaneous (endowment, investment income, third-party support, etc.)

175,100 (56.7)

Total generated revenue 308,400

Allocated revenue:

Direct institutional support 3,912,900

Indirect institutional support 276,400

Student fees 0

Total allocated revenue 4,217,300

Total all revenues 4,591,300

Table 19.3 Median Division II 2009 Expenses

Expense category Men Women Admin Total

Grants-in-aid $1,274,400 $719,700 0 $2,019,500

Salaries and benefits 593,100 276,000 $345,100 1,236,700

Team travel 180,600 121,200 0 319,800

Recruiting 28,900 15,100 0 45,100

Equipment, uniforms 98,400 45,700 1,600 156,600

Fund-raising 0 0 2,600 16,700

Game expense 42,100 26,400 0 84,500

Medical 0 0 70,000 75,000

Membership dues 1,200 700 20,000 25,000

Spirit group 0 0 2,200 6,400

Other 24,200 8,700 207,900 390,900

Totals 2,242,900 1,213,500 649,400 4,376,200

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Other expenses can include compliance, human resources, utili- ties, insurance, maintenance, ticket office, information technology, purchasing and receiving, TV and radio coverage, and operational expenditures.

The median generated revenue (revenue produced by the athletic department) and expenses for selected sports are highlighted in table 19.4.

Table 19.4 Median Generated Revenue and Expenses

Sport (men/women)

Generated revenue Expenses Scholarships Athletes

Baseball (M) $28,100 $231,200 9 27

Basketball (M) 35,000 381,800 10 14

Basketball (W) 20,500 332,200 10 12

Field hockey (W) 9,600 190,900 6.3 16

Football (M) 89,600 993,100 36 82

Golf (M) 4,700 67,100 3.6 11

Golf (W) 3,300 62,700 5.4 10

Gymnastics (W) 30,800 145,200 6 12

Lacrosse (M) 11,600 209,500 10.8 15

Lacrosse (W) 14,700 146,400 9.9 19

Soccer (M) N/A N/A 9 23

Soccer (W) 13,400 191,200 9.9 23

Softball (W) 17,700 147,700 7.2 22

Tennis (M) 4,500 127,300 4.5 6

Tennis (W) 3,800 137,200 6 12

Track and field (M) 10,700 50,900 12.69 30

Track and field (W) 13,600 199,700 12.69 28

Volleyball (W) 6,700 139,200 4.5 26

Wrestling (M) 24,000 95,800 8 12

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The salary and benefit amounts for head coaches (and all assistant coaches) in a median Division II athletic program are shown in table 19.5.

Table 19.5 Median Division II Athletic Salaries and Benefits for Coaches

Sport (men/women) Head All assistants Total

Baseball (M) $46,800 $12,800 $61,600

Basketball (M) 80,100 39,900 119,700

Basketball (W) 67,900 34,800 102,800

Field hockey (W) 44,300 5,200 52,000

Football (M) 89,900 212,600 305,200

Golf (M) 9,800 N/A 10,400

Golf (W) 9,500 6,400 9,900

Gymnastics (W) 71,100 6,400 77,400

Lacrosse (M) 40,100 4,500 44,000

Lacrosse (W) 47,600 3,900 53,700

Soccer (M) 33,900 6,200 42,800

Soccer (W) 40,300 6,200 50,100

Softball (W) 40,200 7,000 48,900

Tennis (M) 12,500 N/A 13,600

Tennis (W) 13,000 N/A 13,200

Track and field (M) 22,200 3,900 29,300

Track and field (W) 22,800 5,700 31,800

Volleyball (W) 45,800 10,200 61,100

Wrestling (M) 49,400 13,100 65,900

The median amount spent on coaching salaries in 2009 was $593,000 for men’s teams and $276,000 for women’s teams. The median administrative salary for Division II athletic programs in 2009 was $345,100.

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History of the Program The University of Never Land (UNL), located in Fairy Tale, Cali- fornia, is a comprehensive university that offers both bachelors and masters degrees. It has a world-renowned graphic arts program, as well as a cinema school. The university has a rural campus that includes a number of athletic fields, a gym, and athletic offices. The gym where the basketball and volleyball teams play can hold 1,500 people. It has an equipment room, laundry area, athletic trainer’s room, and a small concession stand. A separate student recreation center serves the approximately 2,600 students on campus. Only 100 graduate students are enrolled, and they pay fees that amount to $1,000 a year. Tuition at the university is $25,000 per year. Room and board ranges from $9,000 to $12,000 per year. Every student is charged $1,500 a year for fees, but none of the fees go expressly to support athletics on campus. The university has been generous in supporting athletics from its general funds, which can come from tuition, fees, and other sources because the university uses a centralized budget and all money goes into the same revenue pool.

The university was founded in 1930. Some of its famous support- ers were among the top executives in the movie industry. Mr. Walt Disney himself is rumored to have given the initial money to start the institution. Athletics at the university started in 1949. UNL is a Division II member of the NCAA and a member of the Fighting Eight Conference. All the schools in the conference are located in California to hold down travel costs. The university has produced a number of star athletes. The most famous is “Slammin” Sammy Davis Jr., who went on to NBA fame in the 1970s. The athletic director for the last 15 years has been Rocky Balboa, who attended UNL in the 1970s and is passionate about the program. He is proud of the strong academic reputation of the Tinkerbells, or Bells for short. His program provides athletic competition for 296 students, many of whom would not have come to the university were it not for the athletic program. There are 81.19 full scholarships available for men’s sports and 57.69 for women’s sports, totaling 138.88 full scholarships, which would equate to $4.86 million in grants-in-aid (covering tuition plus room and board) in 2012. Based on 296 student-athletes and 138.88 full scholarships, the university had 157.12 student-athletes paying the entire tuition (not including any aid based on financial need or merit scholarships). Many of the student-athletes had partial scholarships, so the aid was pretty well dispersed in 2012. Based on 157.12 nonscholarship equivalent athletes, the athletic department would generate around $5.5 mil- lion in tuition and room and board. In total, the athletic department generated $10.36 million in tuition revenue in 2012. Thus, athletics helps the university survive and is a strong revenue producer for the university. Athletics also serves as a strong alumni retention tool, and the homecoming game is a major event for big donors.

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Sports Offered The sports currently offered by the athletic department and the number of athletes participating in each are shown in table 19.6. There are 185 male athletes and 111 female athletes, resulting in a total of 296 athletes.

Table 19.6 Sports Offered (Number of Athletes) at the University of Never Land

Men’s sports Women’s sports

Baseball (24) Softball (21)

Basketball (12) Basketball (11)

Football (84) Lacrosse (19)

Volleyball (23) Volleyball (13)

Soccer (23) Soccer (22)

Track and field (30) Track and field (25)

Mission Statement and Goals The following was the mission statement of the athletic department for many years. A consultant who was brought in liked the mission statement but wanted to change the goals to be more concrete and measurable. The new goals suggested by the consultant are listed after the existing goals.

Mission Statement The Athletic Department supports and endorses the goals and objec- tives of the university and serves to

1. meet the competitive and educational needs of the student- athlete;

2. unify the extended university community of students, faculty, staff, alumni, and townspeople;

3. generate a positive image of the university; and

4. promote student health and wellness for life.

Goals

1. Provide the necessary resources to field competitive teams in all sports within the Fighting Eight Conference and the NCAA Division II.

2. Provide the resources to help our student-athletes maintain high academic standards and become better students and citizens of the campus and the community.

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3. Bridge the gap between athletics and the campus community by fostering a communicative and inclusive relationship between faculty, staff, coaches, and administrators.

4. Foster dialogue with the general student population to rekindle pride in Tinkerbell Athletics and support for their fellow stu- dents, the athletes.

5. Generate community pride and support for Tinkerbell Athletics, thus creating a positive image of the university through athletics.

Proposed Goals

1. Generate at least one sold-out basketball and football game each year.

2. Comply with Title IX to the best of the university’s ability through financial or numerical equivalency by either reducing the number of men’s sports or adding a new women’s sport.

3. Have at least four of the teams break even by covering their expenses.

4. Reduce the athletic department’s reliance on direct institutional support by 5% per year over the next three years.

5. Reduce coaching and administrative expenses by 10% over the next three years.

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Revenue and Expenses Revenue Table 19.7 displays the revenue for the University of Never Land in 2012.

Table 19.7 University of Never Land 2012 Revenue

Category Revenue

Total ticket sales $27,750 (see below)

NCAA and conference distributions 12,500

Guarantees and options 12,000

Cash contributions from alumni 300,000 (see below)

Concession, programs, novelties 8,300 (see below)

Sponsorship and advertising 2,500

Sports camps 8,000

Golf tournament 60,000

Field and gym rental 11,300

Miscellaneous (endowment, investment Income, third party support, etc.)

105,100

Total generated revenue 547,450

Allocated revenue:

Direct institutional support 4,182,000 (see below)

Indirect institutional support 250,800

Student fees 0

Total allocated revenue 4,432,800

Total all revenues 4,980,250

Ticket Sales 5 home football games—300 tickets average at $5.00 a ticket =

$7,500

15 men’s basketball games—150 tickets average at $3.00 a ticket = $6,750

15 women’s basketball games—100 tickets average at $3.00 a ticket = $4,500

20 soccer games (men’s and women’s)—100 tickets average at $3.00 a ticket = $6,000

25 baseball games—40 tickets average at $3.00 a ticket = $3,000.

Total ticket sales average $27,750 a year.

Cash Contribution from Alumni The athletic department currently generates $300,000 a year in dona- tions earmarked for athletics. These donations come from 450 alumni, but one alumnus gave a gift of $100,000. The $100,000 gift is an annual gift. Thus, the additional $200,000 needs to be raised every year. Mr. Balboa and the university’s president, Sally “Babe” Didrikson, want to launch an aggressive capital campaign for athletics to endow four

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coaching positions. The school would need to raise $1,000,000 for each position. The endowed coaching positions would use the interest from the escrowed money to pay the coach’s salaries. The money would not be used for any purpose other than salaries and benefits.

On top of the annual campaign, Balboa and Didrikson want to refurbish the athletic field because the bleachers are in need of repair and the turf field does not drain as well as it used to. Thus, the total capital campaign for 2012-2014 will be for $8 to $10 million. If that amount cannot be raised, the university may need to borrow money to make the needed repairs. The university believes that it has a 50% chance of raising the required amount, but it does not want to solicit from its annual donors for fear that they might not continue to make such donations if they make a capital contribution.

Concessions The university can generate more novelty sales than most Division II programs because of its endearing cartoon characters, and each game program has the original work of one of its students on the cover, which helps drive sales.

Direct Institutional Support The university has committed at least $4 million per year in institu- tional support as long as the total number of athletes is at least 290 a year. At that rate, the university believes that it can keep attracting a nice percentage of students to round out its student body, and with the combined tuition and room and board, it will break even (i.e., its institutional support will be offset by incoming additional tuition and other revenue).

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Expenses Expenses in 2012 for the University of Never Land are shown in

table 19.8.

Table 19.8 University of Never Land 2012 Expenses

Expense category

Men Women Admin Total

Grants-in-aid $2,840,400 $2,020,000 $0 $4,860,000

Salaries and benefits

613,000 378,000 472,000 1,463,000 (see below)

Team travel 170,000 111,000 0 281,000

Recruiting 31,000 17,500 0 48,500

Equipment, uniforms

98,900 47,800 1,600 148,300

Fund-raising 0 0 14,500 14,500

Game expense 44,000 28,000 23,000 95,000

Medical 0 0 115,000 115,000 (see below)

Membership dues

1,200 700 20,000 21,900

Spirit group 0 0 7,200 7,200

Sports camp 0 0 7,500 7,500

Golf tournament 0 0 20,000 20,000

Other 24,200 8,700 207,900 390,900 (see below)

Totals 3,822,700 2,611,700 888,700 7,472,800

Administrative and Coaching Staff The athletic department staff is composed of the following people (total compensation in salary and benefits is shown in parentheses):

Athletic director ($110,000)

Associate AD ($85,000)

Assistant AD ($60,000)

Administrative assistant ($40,000)

Director of sports medicine ($60,000)

Two athletic trainers (part-time) ($25,000 each)

Sports information director ($48,000)

Equipment manager ($40,000)

Strength and conditioning coach (part-time) ($29,000)

Baseball head coach and two assistant coaches ($64,000 total)

Softball head coach and two assistant coaches ($53,000 total)

Basketball head coach and two assistant coaches, men’s ($129,000 total)

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Basketball head coach and two assistant coaches, women’s ($110,000 total)

Football head coach and eight assistant coaches ($317,000)

Lacrosse head coach and one assistant coach ($62,000)

Volleyball women’s head coach and one assistant coach ($63,000)

Volleyball men’s head coach ($23,000)

Soccer women’s head coach and one assistant coach ($60,000)

Soccer men’s head coach and one assistant coach ($50,000)

Track and field head coach and two assistant coaches ($60,000)

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Medical Expenses Medical expenses include the salary and benefit for the director of sports medicine and two part-time athletic trainers. Also included is a medical operating budget of around $5,000 broken down as shown in table 19.9.

Table 19.9 2012 Medical Expenses

Item Cost

Tape: white tape, stretch tape, pre-wrap, Quick Dry, skin lube, etc.

$3,545.45

Band-Aids: strips and knuckle dressings 74.65

Disinfectant products: hand and surface 101.78

Emergency care: splints, slings, crutches, etc. 130.65

Equipment: disposable cups 104.95

Instruments: scissors, clippers, blades, tape cutters, etc. 48.25

Modalities: hot and cold packs, classic wraps, ice bags, etc. 440.40

First aid products: alcohol wipes, Betadine, gauze, steri- strip, Second Skin, tongue depressors, Bio-Bags, etc.

329.25

Felt and foam (mole skin, adhesive felt) 195.15

Total $4,967.53

Other Some expenses are covered by the general university such as human resource, information technology, facility maintenance, and utilities. Purchasing and receiving, ticketing, and TV and radio operations are paid for by the athletic department.

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Facilities The facilities are over 35 years old, so they need repair, similar to any facility of such age. The athletic department operates several facilities:

Dumbo Arena The Dumbo Arena is the home of UNL’s basketball and volleyball programs. The arena seats 1,500 spectators for athletic events but can be con� gured for everything from concerts and speeches to dinners, meetings, and graduation. The facility has four restrooms, batting cages, athletic trainer’s room, equipment room, laundry facilities, of� ces, and storage. The total area of the arena (including all ancillary activity areas) is 29,000 square feet (2,700 sq m).

Pluto Athletic Complex The Pluto Athletic Complex accommodates facilities for all UNL outdoor sports. The 3,000-seat Goofy Field is home to UNL’s foot- ball program, women’s lacrosse, and men’s and women’s track and � eld teams. The natural grass � eld was resodded 10 years ago and has excellent drainage.

UNL’s softball and baseball teams play on two of the nicest � elds in the state. The � elds are named after Steamboat Willie and have a steam horn that blows when players hit home runs. The softball � eld features a crushed red-brick in� eld and an agrilime warning track in the out� eld. The baseball � eld has a crushed red-brick and natural turf in� eld and an out� eld fence lined with beautiful trees.

Gumby Soccer Complex The Gumby Soccer Complex seats 1,800 fans in its bleachers. The � ve-year-old Astroturf � eld allows the men’s and women’s soccer teams to play and host conference tournaments on a yearly basis. UNL often rents the � elds for local soccer tournaments whenever the school is not using the � elds. The � eld is lighted, unlike the Pluto Athletic Complex, so it can be used at night for both athletics and intramurals.

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Administrative Resources Many of the resources used by the athletic department come from across the university. For example, heat during the winter comes from the power-generating plant that services the entire university. UNL pays all the electrical expenses for lights, equipment, and ventilation. The university also pays for janitorial care of the arena and landscap- ing care for the fields and surrounding areas. The athletic department does not need to pay for janitorial supplies, cleaning supplies, paper goods, water for watering lawns, care of landscaping equipment, and all fertilizer and related lawn care chemicals. The value of such services is estimated at over $500,000. All other expenses come from the athletic department’s budget.

ASSIGNMENTS The following questions can be researched by the reader to help provide a broader perspective and real-world application of the material.

▶ Chapter 1. Compare what is going on at UNL compared with other Division II NCAA schools. What do you think is the future of similar Division II programs? Do you think that UNL’s expendi- tures, revenues, or sport offerings are out of line?

▶ Chapter 2. Identify 10 additional revenue sources that UNL could pursue. How much could they reasonably expect to make from such new activities (estimated revenue minus estimated costs), and how would you go about trying to gen- erate this additional revenue?

Do you think that UNL expenses are reason- able? What is and what is not reasonable about such expenses? How would you go about reducing expenses if you have to reduce expenses by 10% next year?

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▶ Chapter 3. If you were to advise the athletic department on financial planning for the future, what information would you need and where would you obtain it? Using such information, develop your ideal pro forma budget for the athletic department based on your plan for the future. If they were to drop one men’s sport and add another women’s sport, what do you recommend they undertake, based strictly on a financial analysis?

▶ Chapter 4. What environmental systems or conditions (government grants for students, downturn in the economy, donors not giving, and so on) could affect the future financial success of the athletic department? How can UNL prepare for such possibilities?

▶ Chapter 5. Because UNL is a nonprofit, what are some of the legal concerns (for example, paying for lobbying, unrelated business income tax) that could affect their financial status?

Do you think that the athletic department could go bankrupt? What is bankruptcy? Can UNL use it to avoid paying some of the bills associated with the athletic department?

▶ Chapter 6. What type of financial analysis could be beneficial for analyzing UNL’s athletic budget? What benchmarks or comparative finan- cials could be used to help determine whether the athletic department is doing well compared with similarly situated athletic departments?

If you were conducting a break-even analysis for the athletic department, what revenues and expenses would you use and how could you attempt to break even?

▶ Chapter 7. A wealthy local person loves the Bells and is willing to give the university $1,000,000 to name the basketball court Darth Vader. She is willing to give $1,000,000 today for that right or, if the school can wait two years, she is willing to give $1,100,000. Based on currently prevailing interest rates, how would you advise Mr. Balboa to act, and what issues should he consider when making this decision?

▶ Chapter 8. If you were Mr. Balboa and wanted to raise funds for the athletic department, what would you do? You can be creative, but you have to be realistic. There is little hope of winning the lottery or finding numerous donors with millions of dollars. Thus, assume that most traditional fund- ing sources for a school have been tapped and that you have to look at other options. Walk through all the steps you that would take and estimate the chances of succeeding.

▶ Chapter 9. Because the university is a non- profit organization, it cannot issue stock as a traditional corporation can. But the university’s president wants to explore all possible funding options, so she wants you to write a research paper about whether nonprofits can sell shares in anything to raise money. For example, some lighthouses have sold shares in the lighthouse and have given a beautiful lithographed print to the purchaser as a memento. Likewise, the Green Bay Packers and Boise State have made stock offer- ings. The memo should highlight what others have done, what success they have had, and how much money you believe could be generated by such a campaign.

▶ Chapter 10. UNL is thinking about joining with a local parks and recreation department to expand its playing fields and then to share such fields and their upkeep with the local government agency. The fields are already adjoining. UNL owns 50 acres (20 ha) and the city owns the adjoining 50 acres. If such an effort is undertaken, where can the two parties go to find additional funding to support this project? Explain your choice and the cost of raising such funds.

▶ Chapter 11. If UNL can borrow $1,000,000 from the bank at prevailing interest rates, pay- able in 15 years, how much debt service would they have on a yearly basis? What could happen if the loan was secured by the arena and the uni- versity defaulted on the loan? How would you advise the university, and how would you advise the bank?

▶ Chapter 12. The associate AD is in charge of finance. He seems to do a good job, but he has trouble with accounts payable and accounts receivable. Bills for tickets and the summer camp are often sent a month or two after services are provided. Invoices received for service bought by the athletic department often go unpaid for several months. These delays might be caused by confu- sion, but some of the suppliers are alumni and late payments have caused some negative reactions. Develop a policy and procedures statement about how account payables and receivables should be handled in the future. What should the policy be for late payment and aging of accounts?

▶ Chapter 13. The concession stand suffers from food going stale and snacking students. The amount of lost merchandise is costing the university around $1,000 a year. Develop an inventory management system that will help increase sales and reduce losses. How will this new system be implemented?

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▶ Chapter 14. If the athletic department had reve- nue in excess of expenses in any given year (because UNL is a nonprofit it cannot “earn” a profit), how would you use that money? Provide a specific plan for an excess of $500,000 for a given year.

▶ Chapter 15. The associate AD has had trouble balancing the books, but he keeps great records. Checks come in to the administrative assistant who does not record them but immediately deliv- ers them to one of the graduate assistants. The checks are processed by a GA and then the same GA takes them to the bank. Deposit slips are then given to the associate AD. He seems to think that there should be more money but does not know what is going on. What specific steps would you recommend that he undertake to investigate his concerns? Develop a process to avoid such concerns in the future.

▶ Chapter 16. If UNL wants to rebuild its arena, it will have to clear out the facility before demoli- tion and then rebuild on the same spot. If they were to clear out the facility, how could the university make money from such actions? How much do you think that they could get based on items that are likely housed in the arena (from training tables and whirlpools for therapy to toilets, video monitors, time clocks, and even the center-hung scoreboard). Think broadly and from a fund-raising perspective.

▶ Chapter 17. If you have a feeling that a reces- sion is coming that could affect the entire sport industry, how would you advise the AD? What specific suggestions would you offer to help weather the storm? How have other schools responded to similar situations?

▶ Chapter 18. Based on all the information that you have reviewed to date about UNL, what is your five-year projection for the athletic depart- ment? What steps would you take to correct any perceived problems or maintain growth? Assume that expenses will grow at 5% on average and that revenue will grow at 3%. Also, assume that you want to follow the goals set forth by the consul- tant and that you might have to change revenues and expenses accordingly. Thus, you will need to develop a budget for five years down the road.

CONCLUSION The questions raised in each chapter as applied to this case study highlight how financial issues discussed throughout the text can occur in every sport organization, whether public or private. Every organization has issues. The sport manager who has a good grasp of how financial decision making affects all facets of an organization will know how to respond to them.