Finance in Sport and Rec Midterm
Financial and Economic Factors Affecting Sport
- Current economic cycle - Television revenues - Relationship between team and real estate holidays - Push for sustainability - Impact of politics on sport governance
Goals of Budget Preparation Process
- Define financial objectives - Establish goals for achieving objectives - Identify activities and quantify elements needed to achieve goals - Describe factors and situations that may affect planned activities
Methods for completing a financial transaction
- Direct transfer - Investment banks - savings
Sources of risk
- Economic conditions - Political developments - Global issues
Influence of Government on Business - Fiscal Policy
- Governmental decisions to collect and spend money in order to influence the economy - Taxes: Flat tax, fair tax, value added tax, depreciation, jock taxes
Typical ownerships in Pro Sports
- In North American Pro Sports, the owners of most teams are individuals or groups of individuals - Green Bay Packers: Owned by the community - Some large Fortune 500 companies: Disney
Four approaches to budgeting
- Incremental - Program planning - Zero based budgeting - Modified zero based budgeting
Public financing sources - indirect
- Land donations - Infrastructure improvements - Tax abatements
Inflation
- Loss of purchasing power - Real value vs. nominal value of money
Key aspects of loans
- Maturity - Interest rate - Pre-payment provisions
Investment risk
- Measurement of the likelihood of low or negative future returns - What is the future performance of a company's stock likely to be? - Stand alone risk: one approach to analyzing investment risk
Risk
- Measures the chance that an unfavorable event will occur - Affects many areas of finance
Issues in a public/private partnership
- Ownership of facility - Voter approval - Payment terms - Responsibility for cost overruns - Management of future revenue streams - Financing sources
Calculating public payments for stadium financing
- Payment schedule table - Annual payments of principal plus interest - Divided by population
Dividends
- Periodic payments made to shareholders of a company as a way of distributing profits - Tied to earnings - Value of a stock is based on expected future dividend payments
Influence of Government on Business - Monetary Policy
- Policy the government sets to control the supply, availability, and cost of money - Federal reserve: sets interest rates, monitors the money supply
Private financing
- Private return on new facilities - Sources and techniques
Reasons for investing public money in new sport facilities
- Provide economic impact - Increase awareness of and tourism for the city/region - Provide a cornerstone for economic development - Generate civic pride - Provide quality-of-life services - Provide positive externalities - Generate political capital for local politicians
More public financing sources - Direct revenue
- Revenues from tickets and parking - Lotteries/gaming revenues - Player income taxes - Utility and business license taxes - Reallocation of existing budget
Risk and deferred compensation
- Salary is delayed under contractual terms - Buy now, pay later: Arizona - Diamondbacks, Pittsburgh Penguins and Mario Lemieux, New York Mets and Bobby Bonilla
Types of Equity Financing
- Shares - Retained earnings - Government funding - Gifts
Reasons for Building New Facilities - Who Benefits?
- Sports teams and owners - Leagues - Fans/patrons - Cities/municipalities
Stock Markets
- Stocks of publicly held companies are listed for sale (e.g. New York Stock Exchange, NASDAQ, Bombay Stock Exchange) - Pro Sport Franchises: Manchester United - Athletes selling stock on themselves - Dow Jones
Depreciation
- The allocation of an item's loss of value over a period of time - Methods for determining: straight-line, sum-of-years digits, double-declining balance, units of production - IRS can help determine which method to use
Relationship between risk and return
- The lesser the risk, the lower the return - The greater the risk, the greater the return
Future value
- The value of money after an interest rate is applied over a specified period of time
Public/Private Partnerships
- Trend in funding is away from tax increases and toward new courses of capital - Taxes generated directly from the facility, the team, the players, and other facility users or vendors - Taxes generated from redevelopment surrounding the facility
Sustainability
- Venue construction and and usage - Overbuilding of publicly financed areas - Uses for venues built for Olympic games and the World Cup
Annuities and perpetuities
- When the value of an investment is paid or received over time, in multiple payments
Size and structure of the sport industry
- methods for measuring sport industry size: GDP, GDSP - structure of sport businesses: franchise owner models, league structure
Advantages / disadvantages of publicly traded equity financing
- taking a company public can offer numerous advantages to the company's owners - but going public is not always a good idea; there are disadvantages as well
Debt ratio
A measure of an organization's leverage, sometimes referred to as the debt-to-assets ratio
Total asset turnover ratio
A measure of how efficiently a company is utilizing its assets to make money
Inventory turnover ratio
A measure of how often a company sells and replaces its inventory over a specified period of time, typically a year
Net profit margin ratio
A measure of the effectiveness and efficiency of a company's operations
Return on equity ratio
A measure of the rate of return a company's owners or shareholders are receiving on their investment
Price-to-earnings (P/E) ratio
An estimate of how much money investors will pay for each dollar of a company's earnings, used widely to measure corporate performance and value
Owners' equity
An estimate of the ownership value of a company. Also called shareholders' equity or stockholders' equity
Market value
An estimate of the value of a company accord- ing to the stock market
Economic Depression
An extreme recession, lasting two or more years
Jock Taxes
An income tax levied against visitors (e.g. athletes) to a city or state who earn money in that jurisdiction
Credit
An increase to a liability or equity account, entered on the right-hand side of a ledger
Debit
An increase to an asset or expense account, entered on the left-hand side of a ledger
Macroeconomics
the study of forces that affect numerous sectors of the overall economy at the community, national, regional, or global level. Income, unemployment, and inflation
Cost of goods sold (COGS)
(COGS) Those costs that are directly attributable to the production of goods or products, including raw materials and labor costs
Bankruptcy
- A company is unable to pay its debts - Liquidation or reorganization of a insolvent firm - Priority of claims on a company's assets
Bonds
- A financial mechanism to raise capital through debt - A promise to pay back borrowed money plus interest: par value, coupon rate, maturity
Stocks
- All for-profit business have equity (stock) ownership - Common stock - Shareholders with a board of directors
Stand-alone risk
- Consider the investor's risk as if only one asset were held - examine the stand-alone expected rate of return and stand-alone risk in insolation from other investments
Major sources of debt financing
- Corporate bonds - Loans
Fiscal year
A 12-month period over which a company budgets its money
Sherman Antitrust Act
A 1980 law that forbids contracts or other actions among businesses that would restrict competition
North American Industrial Classification System (NAICS)
A classification system used by the U.S. Census Bureau to measure and track economic activity in the United States. The sport industry is not classified as a distinct industry and is scattered across at least 12 different NAICS-defined industries
Economic Cycle
A cycle consisting of four stages - growth, peak, recession, and recovery - and typically lasting for just under six years
Call premium
A fee assessed when the borrower pays off the principal prior to the maturity date
Current ratio
A formula that measures a company's ability to meet its current liabilities with its current assets
Single-entity Structure
A league in which owners purchase shares in the league rather than in an individual franchise
Quick ratio
A measure of a company's ability to meet its cur- rent liabilities with its current assets, not including inventory
Interest coverage ratio
A measure of a firm's ability to pay the interest on its debt. Sometimes called the times interest earned ratio
Debt Financing
A method of raising capital in which an organization borrow money that must be repaid over a period of time, usually with interest
Double-entry bookkeeping
A method of recording financial transactions where each transaction is entered or recorded twice, once on the debit side of the accounting records and once on the credit side
Retained Earnings
A portion of earnings that a firm saves in order to finance operations or acquire assets
Forecast
A prediction of future events for the purpose of budgeting
Sport application scarcity
A professional league does not expand into every metropolitan area that could potentially support a team. Leagues restrict franchise movement to prevent a team from moving too close to an existing team
Statement of cash flows
A report that tracks cash in and cash out of an organization and provides data as to whether a company has sufficient cash on hand to meet its debts and obligations
Financial Management
A sector within firms that is concerned with the acquisition and use of funds to meet the goal of wealth maximization
Balance sheet
A snapshot of the financial condition of an organization at a specific point in time
Generally accepted accounting principles (GAAP)
A standard set of guidelines and procedures for financial reporting
Income statement
A statement of a company's income over a specified period of time, typically issued on an annual or quarterly basis. Also called a statement of earnings or profit and loss statement
Earnings before interest and taxes (EBIT)
A useful measure of income or profit
Call provision
Allows borrower to pay off bond early
Accrual basis accounting
An accounting method that recognizes income when it is earned and expenses when they are incurred, rather than when the money is exchanged
Cash basis accounting
An accounting method that recognizes transactions when money is either received or paid out
Multiple Owners / Publicly Traded corporation Model
An ownership model in which a franchise is governed by a board of directors who are elected by shareholder vote. The board of directors appoints the team's senior management. With the exception of the Green Bay Packers, this model is not currently used in the United States
Multiple Owners / Private Investment Syndicate Model
An ownership model in which individuals pool their resources to purchase a franchise and incorporate as a partnership, LLC, or the like. The most common model of team ownership
Single Owner / Private Investor Model
An ownership model in which one individual owns the firm.
Required rate of return
Annual return that an investor requires from an investment, whether in stocks or bonds
Government Financing
Funding provided by federal, state, or municipal sources, including land use, tax abatements, direct financing, state and municipal appropriations, and infrastructure improvements
Expenses
Funds flowing out of an organization as costs of doing business
Partnerships
General partnerships Express partnerships Limited partnerships Minority partners and limited partners
Gift Financing
Charitable donations, either cash or in-kind, made to an organization
Portfolio Return
Combination of assets held by investors to eliminate some risk
Yield curve
Created by graphing interest rates against the time to maturity for bonds within equal credit quality
Contingent liabilities
Debts that may or may not occur
Plan
Definition of actions to be taken
Measuring Risk
Determine the chance of making a profit or loss - level of risk and risk of time
Equity Financing
Financing in which an organization exchanges a share or portion of ownership for money
Leverage
How a company chooses to finance its operation with debt versus equity. A company that relies extensively on borrowing money is considered to be heavily leveraged. Such a company faces greater risk of financial problems than one not so reliant on debt
Revenues
Income generated from business activities, such as the sale of goods or services
Interim Year Compounding
Interest can be calculated and added to the principal annually (or quarterly, monthly, weekly, or even daily)
Accounts receivable
Money owed by a company's customers
Long-term liabilities
Liabilities due after one year
Current liabilities
Liabilities due within one year
Money Markets
Markets for highly liquid, short-term securities
Capital Markets
Markets for immediate or long-term debt, as well as corporate stocks
Wealth Maximization
Maximizing the overall value of the firm. This is the goal or outcome of financial management for most organizations.
Sustainability
Meeting today's needs without compromising future generations' ability to meet their own needs.
Interest Rates
Nominal interest rate: the real risk-free rate of interest plus multiple risk premiums
Calculating the value of a bond
Present value of a bond: price that a buyer would pay for it prior to maturity
Budget
Quantifies planned revenues and expenses for a period of time
Revenue sharing
Revenue sharing models: Increased revenue to teams with low local revenues, reward teams that generate higher revenue
Investments
Security choices made by individual and institutional investors as they build portfolios
Liquidity
The ease and speed with which an asset can be converted to cash
Liabilities
The financial obligations or debts owed by an organization to others
Gross Domestic Sport Product (GDSP)
The market value of a nation's output of sport-related goods and services in a given year. This includes the value added to the economy by the sport industry, as well as the gross product originating from the sport industry
Gross Domestic Product (GDP)
The market value of all final goods and services produced within the borders of a county, state, country, or other region in a year
T-accounts
The method accountants have historically used to track revenues and expenses and to create accounts to be entered on balance sheets and income statements
Economic Growth
The part of the economic cycle when the economy is increasing in real terms (faster than the rate of inflation)
Liquidity
The readiness with which an asset can be converted to cash
Finance
The science of fund management, applying concepts from accounting, economics, and statistics
Economic principals
The study of how people choose to allocate their scarce resources. Choices are influenced by demand, scarcity, surplus, price
Microeconomics
The study of issues that occur at the firm level. Supply, demand, pricing
Assets
What a company owns, including items such as cash, inventory, and accounts receivable
Rate of Return
the gain (or loss) of an investment over time
Business types
• Government operated organizations • Community owned entities • Non-profit organizations • Sole proprietorships • Partnerships • S corps • LLCs and LLPs • C corps