Financial Planning in Sport


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  • Celtics, once they know the cost of energy, can allocate that cost to a luxury suite so that the expense is passed through to the customer A Pass through expense is any item that can be calculated separately and added to a client’s bill Perhaps give the incentive to cancel 24 hours in advance and receive $25 back Understanding these expenses helps the club determine ticket prices (cost based; though market based needs to take the lead)
  • One study concluded that the departure of an NBA team from a city results in no measurable impact on a region’s per capita income – does not make sense for economic development Municipalities argue that luring a new team or keeping an existing team should be paid by taxpayers b/c entertainment dollars are brought in from outside the community, infusing new dollars into the local economy Older arenas with little debt and numerous scheduled events tend to make the highest profit At times two different studies of the same situation have shown polar opposite results (studies by SF and SJose regarding a move of the Giants) Take away – numbers are only as good as their source and how they are applied Various funding techniques used Private contributions Municipal bonds and notes Various tax additions (i.e. hotel, sales, etc.)
  • Entertainment value is believed to be the highest motivator Rules changes Experience enhancers Eustress – exciting to the senses Aesthetic – beauty of athletic performance
  • Game Attractiveness: Players participating Importance of game – team records, standings Opening day; championship; bowl game Stadium Factors: Newness of stadium, access, aesthetics, seat comfort, cleanliness, scoreboard quality, perceived crowding / layout accessibility and space allocation Pride in where you live: value of sport to the community Fan Identification – the personal commitment and emotional involvement customers have with a sport org – sense of community fan builds due to team Situational factors – business meetings, etc. Economic factors – price, players on team, win pct Competitive factors – television, other sports, other entertainment Demographic factors impact attendance
  • Release of tension or relaxation Sense of accomplishment Skill mastery Health and fitness Personal pride and growth Enjoyment of risk taking Enjoyment of the game, sport competition, thrill of victory Time spent with family or friends and sense of being part of a group
  • Important as a marketer to understand a customer purchase cycles (including decision to repeat purchase) Problem Recognition – result of a discrepancy between a desired state and an actual state – large enough and important enough to activate the entire decision making process (desire to resolve a problem and to reach goals) Marketers can offer activities and events that will fill these needs and eliminate problems Information Search – participant seeks relevant info that will solve problem Internal sources – memories, previous exposure External sources – environmentally based Personal sources Marketing sources Experiential sources Evaluation of Alternatives – each choice will be based on criteria Marketers must ensure their sports are included in the alternative; consumers must be aware of it as an alternative Marketers must understand the evaluative criteria and develop strategies to meet consumer needs based on them Participation – how to make this experience the best experience possible Evaluation – followup to ensure the experience was positive
  • Financial Planning in Sport

    1. 1. Financial Planning in Sport Sport Finance
    2. 2. Financial Planning <ul><li>What is financial planning? </li></ul><ul><ul><li>Projecting future income and expenses to help guide the direction of the company </li></ul></ul><ul><li>What is the value of financial projections: </li></ul><ul><ul><li>Ensuring that company is positioned effectively financially to execute against its strategic plan; </li></ul></ul><ul><ul><li>Contingency planning for unexpected events; </li></ul></ul><ul><ul><li>Maximizing the value of every dollar in the company; </li></ul></ul><ul><ul><li>Enables allocation of expenses and pass-through charges </li></ul></ul>
    3. 3. Why Financial Plan? <ul><li>Maximize the current value of the organization. </li></ul><ul><li>Link together the organization’s goals and objectives with short- and long-term financial goals. </li></ul><ul><li>What goals exist in different sport contexts? </li></ul>
    4. 4. <ul><ul><li>The foundation upon which an organization can build a successful future. </li></ul></ul><ul><ul><li>An integral part of any strategic plan. </li></ul></ul><ul><ul><li>Creates trust in investors </li></ul></ul><ul><ul><li>This includes: </li></ul></ul><ul><ul><ul><li>All revenue </li></ul></ul></ul><ul><ul><ul><li>All expenditures </li></ul></ul></ul>Why Financial Plan?
    5. 5. What else is planning needed for? <ul><li>Develop new products </li></ul><ul><li>R&D expense </li></ul><ul><li>Borrowing or selling equity for expansion (such as a new or renovated stadium) </li></ul><ul><li>Buying or selling assets </li></ul><ul><li>Moving a business (or team!) to another location </li></ul><ul><li>Mergers and acquisitions </li></ul><ul><li>Essentially every new activity a business undertakes requires a budget and a plan </li></ul>
    6. 6. Cash Planning <ul><ul><ul><ul><li>Determining the amount of cash needed at a particular point in the budget year. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Internal data: </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Past budgets </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Sales records </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Human resource data </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Personal observation </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>External data: </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Local, State, & National Economics </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Government Laws & Regulations </li></ul></ul></ul></ul></ul>
    7. 7. Data Gathering <ul><li>Internal Data – must be reliable </li></ul><ul><ul><li>Other qualitative and quantitative data can be important too (i.e. customer surveys) </li></ul></ul><ul><li>External Data – can often be more objective </li></ul><ul><ul><li>Statistical abstracts </li></ul></ul><ul><ul><li>Industry analyst reports </li></ul></ul><ul><ul><li>Industry pubs (i.e. SBJ) </li></ul></ul><ul><ul><li>Industry associations </li></ul></ul>
    8. 8. Short & Long Term Planning <ul><li>Short and Long term planning need to take the other into consideration when planning for the future; </li></ul><ul><li>Short term planning includes managing key ratios </li></ul><ul><ul><li>Working capital, current ratio, acid test ratio, cash budget </li></ul></ul><ul><li>Long term planning requires an understanding of short term impacts and capital structure impacts. </li></ul><ul><li>Example: Hiring a coach </li></ul><ul><ul><li>In the short term there are recruiting and ticket sales impacts </li></ul></ul><ul><ul><li>A coach is hired to build a program over time – not just this year; be careful making long term investments until you know the coach will bring success </li></ul></ul>
    9. 9. Pro Forma Budgets <ul><li>Budgets are the cornerstone of financial plans. </li></ul><ul><li>Aids in establishing goals and objectives for the business. </li></ul><ul><li>A forecast is an estimate of anticipated operations (i.e. revenue generated by a marketing activity). </li></ul><ul><li>A budget is a target agreed on by mgmt. as an indicator of success. </li></ul>
    10. 10. Pro Forma Budgets <ul><li>Built around a focused strategic plan and entails 5 steps: </li></ul><ul><ul><li>Develop projected financial statements, showing how the operating plan will affect project profits; </li></ul></ul><ul><ul><li>Determine the funds necessary to help fund the long term plans; </li></ul></ul><ul><ul><li>Forecast what funds will be available over the long term and how much funding will be generated internally vs. externally; </li></ul></ul><ul><ul><li>Establish and maintain a system of controls how the funds are allocated and used; </li></ul></ul><ul><ul><li>Examine the results and develop procedures for adjusting the plan if forecasts are not met. </li></ul></ul>
    11. 11. <ul><li>Seasonal nature of sport: </li></ul><ul><ul><ul><li>Uneven income </li></ul></ul></ul><ul><ul><ul><li>Must be smoothed out </li></ul></ul></ul><ul><ul><ul><li>In-season </li></ul></ul></ul><ul><ul><ul><li>Off-season </li></ul></ul></ul><ul><li>Cash Flow: The difference between the number of dollars that came in and the number that went out. </li></ul><ul><li>Operating Cash Flow: Cash Flow at a given time. </li></ul>Cash Flow Issues
    12. 12. Capital Budgeting <ul><ul><li>Investment decisions involving fixed assets: </li></ul></ul><ul><ul><ul><li>Equipment </li></ul></ul></ul><ul><ul><ul><li>Buildings </li></ul></ul></ul><ul><ul><ul><li>Long-term Planning </li></ul></ul></ul>
    13. 13. Evaluating the Environment <ul><li>Political Environment </li></ul><ul><li>Marketing Environment </li></ul><ul><li>Demographic Environment </li></ul><ul><li>Forecasting Sales </li></ul><ul><ul><ul><li>SWOT </li></ul></ul></ul><ul><ul><ul><li>Situational Analysis </li></ul></ul></ul>
    14. 14. Revenue Sources <ul><li>Traditional Sources: </li></ul><ul><li>Ticket Sales </li></ul><ul><li>Concessions </li></ul><ul><li>Membership Fees </li></ul><ul><li>Leases/rentals </li></ul><ul><li>Media rights </li></ul><ul><li>Parking </li></ul><ul><li>Merchandise sales </li></ul><ul><li>Tax Support </li></ul><ul><li>Fundraising </li></ul><ul><li>Non-traditional (new) Sources: </li></ul><ul><li>Sponsorship Partnerships </li></ul><ul><li>Luxury Boxes / Club Seats </li></ul><ul><li>Naming Rights </li></ul><ul><li>Licensing Agreements </li></ul><ul><li>Personal Seat Licenses </li></ul><ul><li>Endowments </li></ul>
    15. 15. Revenues <ul><li>Other revenues for a high school: </li></ul><ul><ul><ul><ul><li>Fund-raising efforts </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Advertising revenue </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Participation fees </li></ul></ul></ul></ul><ul><ul><ul><ul><li>State taxes & local/city school taxes </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Federal tax subsidies for education </li></ul></ul></ul></ul>
    16. 16. Revenues & Expenses <ul><li>Expenses – costs incurred; examples: </li></ul><ul><ul><ul><ul><ul><li>Player salaries </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Equipment and uniforms </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Travel and lodging </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Executive Salaries </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Rent, insurance, overhead </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Event related costs (i.e. officials, ushers, etc.) </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Advertising and promotion </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Facility repair and maintenance </li></ul></ul></ul></ul></ul>
    17. 17. Revenues & Expenses <ul><li>What happens if expenses are growing at a rate faster than revenues? </li></ul><ul><ul><ul><ul><ul><li>Budget cuts </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Pay to play </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Program elimination </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Move the team (professional) </li></ul></ul></ul></ul></ul>
    18. 18. Revenues and Expenses <ul><li>Revenues - sources of funds </li></ul><ul><ul><li>Generated when an exchange of goods or services has occurred </li></ul></ul><ul><li>Expenses - costs that are incurred </li></ul><ul><ul><li>Fixed vs. Variable </li></ul></ul><ul><ul><li>Required vs. Discretionary </li></ul></ul><ul><ul><li>Expected vs. Unexpected </li></ul></ul>
    19. 19. Revenue and Expenses <ul><li>A unique element of the sport industry is that a number of variables can change revenue/expense in a moment </li></ul><ul><ul><li>Player injury </li></ul></ul><ul><ul><li>Weather postponements </li></ul></ul><ul><ul><li>Player performance </li></ul></ul><ul><li>Understanding what is causing changes to revenue and expense over time is a critical skill to develop as a financial manager </li></ul>