The Sport Industry

January 16, 2007

What is the Sport Industry?

Never been answered clearly Define Industry:

1. Similarity of Products

2. Similarity of Economic activities Term has been used at the discretion, whim

of people in the industry.

Will look at various definitions, segments

The Sport Industry: Basics of Sport Finance A big part of any industry is:

MONEY

No less true in the sport industry

On what basis do YOU decide to spend money?

Who made a sport-related purchase over $200 lately? Describe what went into your decision

Decision-making Process

Sport Businesses make decisions similarly Often, more sophisticated, financial analysis Any business needs trained financial analysts

-look at where the money is, or how to get it. Businesses usually take a different view of $$

$ than individuals, however.-in most cases exist solely to make money-all businesses need to focus on the bottom-line, what comes in and what goes out.

Making and Managing Money Provides for future growth Aids in determining sales patterns/purchases Product launches Secure investors, venture capitalists Key to financial success, therefore is:

Financial Planning

The Sport Industry

January 22, 2007

Look at Outline of Project

Distribute project outlines

Discuss project outlines

Intended to be a guide, would expect to see some variation based on the organization

Constraints

Decisions require comprehensive review of:

Internal constraints

External constraints

Important to know and understand

How to make Money in Sport

Ticket sales Licensing Television rights Lower costs

Sell the team!

Asset backed security

Why I asked you if you ever bought a car

Collateral

NFL offer (p. 12)

Most dynamic topic in 1990’s

Stadium construction deals

Text focus is on pro stadiums, but…

Image

Other important aspects?

Funded through municipal bonds

True of False?

The General public can purchase interest (shares) in certain professional sport teams

True The method used to fund most pro stadium

construction during the boom of the 1990’s was municipal bonds

True Most collegiate recreation centers were funded

through student fees

True

Basic Financial Concepts

Will now look at basic terms and principles Distribute discussion items Write down ideas, information you read about

in Chapter 2 of text. Then, as before, get with same group number Discuss and appoint spokesperson Share ideas with class

Revenues and Expenses

List some revenues for a collegiate recreational sports department

List some expenses for a collegiate recreational sports department

Define financial “debt”

-the owing of money to others When expenses exceed revenue…Then what R & E are often similar across industries

Budgets

Includes revenues and expenses

Used by all to help make decisions

Several types, incremental, zero-based, etc.

Critical analysis financial statements

Documentation

Stockholder concerns Not end in itself, rather a tool Can get bogged down Often required by law Analyze financial “Doability” of projects Helps with backing Can you trust the numbers?

-Thinking about buying a business?

Financial Objectives

Primary might be making highest profit possible

Keep stockholders happy

-earnings per share

-stock price appreciation or total earnings Increased stock value Example earnings vs. appreciated value

Other Factors of Interest to Investors How often dividends are paid

Risk, uncertainty of future earnings

Debt of company

Corporate policies that influence decisions

Other Useful Analyses Considerations Where was the entity (financially) in the last

year

What is projected for the current year

What its financial goals are

Measurement of financial success vs. failure

Some Basic Accounting Concepts Definition

Definition of Accounting

According to Fried et al., accounting is defined as: “ the art of processing the revenue and expense numbers to develop appropriate reporting procedures upon which financial decisions are made” (p. 28).

Some Basic Accounting Concepts Definition T-Accounts Understanding cash management (receiving

and processing) Methods of tracking and monitoring

Basic Accounting Requirements Identification

Measurement

Recording

Communication…of financial information associated with

various critical events in the business.

Objective of Accounting

Decisions about limited resources

Effective directing and controlling the organization’s human and material resources

Maintaining and reporting on the custodianship of resources

Contributing to the org’s. overall effectiveness

The Emphasis of Finance

Recording Monitoring Controlling

…the financial consequences of various activities within the business and analyzing the need for additional funds to meet current and future demands.

Controllers

Mainly internal to business Accounting is most often performed by a

controller

-documents what happened, not what should have happened

Focus is on accuracy and industry-defined rules

Usually involved in Managerial Accounting

Managerial Accounting

The process for forecasts and monitoring

Data that facilitates communication between a business’ departments

Facilitates internal success

Treasurer

Focus mostly on external factors Bonds, stockholders, etc. Takes information from the accounting

process Uses information as leverage Word of caution

-note the glowing terms: “linchpin” (p. ix)

T-Accounts

Right side is credit Left side is debit

Key is to keep in mind what goes on left and on right (Debit=Left, Credit=Right)

Multiple accounts are changing, referred to as double-entry bookkeeping

Cash vs. Accrual Basis

GAAP Accrual is preferred technique

-recognizes revenue when earned, recognizes expenses when incurred-key is record income when you perform the service whether it is paid for or not at the time

Cash basis less likely to be used, less likely to be allowed by IRS-allowed to use when receiving and paying cash-does not recognize sales made on credit or bills owed until they are paid

Financial Systems

Definition

-”mechanisms that allow anything of value to be exchanged between different parties” (Fried, p. 36)

Systems work in a cyclical manner Businesses work in a cyclical manner, also

-constant exchange occurring, receiving and paying out money

Markets as part of Financial Systems Sometimes a sport business needs funds Several markets, discuss the “primary” listing

-Tangible -Financial asset -Spot

-Futures -Money -Capital

-Mortgage -International -Primary

-Secondary Use these to sell or obtain (buy) assets Sport business limited to certain ones? Y/N?

Money

Paper/metal money Needed monetary vehicle, instruments In place of money Checks, credit cards More modern: EFT Deeds Ownership of stocks, bonds: marketable

securities

Marketable Securities

Widely accepted, like cash Liquidity of common stock Hard assets are opposite extreme: factory A/R and inventory are marketable Factoring makes some assets more liquid

-selling assets-without recourse-with recourse

More expensive than bank borrowing

Marketable Securities (continued) Liquid because of:

-shorter maturity period (CD)

-ability to sell on a daily basis (stock)

-relatively risk free (gov’t. securities) Text examples of more common M.S.’s

-T-bills -Treasury notes

-Government agency securities

-CD’s -Commercial paper

Financial Institutions

Entities facilitate the transfer of capital Banks, long history

-can influence markets-finite amount of cash in system-capital, think of as money on hand-capital reserve, prevent run (A Wonderful Life?)-borrowing, banks borrow, too-The Fed, raise or lower bank reserves

-Not Alan Greenspan-Ben Bernanke, 1st anniversary

Chapter 3 Wrap-up

Bank lending rules

-loan-to-deposit ratio

Protecting deposits

Quasi bankers (TIAA-CREF)

Stock Exchanges, image

Sole Proprietorship

Owned by a single person No formal paperwork to start up Cost of organizing is low Control and profits are not shared Limited ability to raise capital Unlimited personal liability No support, you are alone Ends at death

In Sport

Many businesses are sole proprietorship

Sporting goods, bowling alleys, etc.

Independent contractors

Can incorporate

General/Limited Partnerships

More than one person running business Minimal formation costs Few Governmental regulations Limited ability to raise capital Unlimited liability for all partners Immediate termination with death/withdrawal Two types: General and Limited

General

Combine resources Share operating, managing and controling Share in profits and liabilities Greater access to capital Profits taxed only once Enhanced business decision making Limited longevity Joint liability Still have limited access to capital Limited human resource talent

Limited

One general partner who manages One or more financial only partners Limited shares profits, but not management Liability is only financial, an incentive Ability for greater capital than sole prop. Profits not taxed until reported Allows for even more investments Lacks managerial involvement General still subject to unlimited liability

Subchapter S Corporations

Many organized under this structure Up to 35 shareholders Can own subsidiaries Tax-exempt can own shares Income flows to shareholders who pay taxes Avoids double taxation Insulated from liability through sub. Owner One form of stock Based in US, no foreign investment, corporation

ownership, partnerships Can not own 80% or more of another’s stock

C Corporations

The Corporation Delaware friendliest state to Corporations More than half formed in DE Increased value of Delaware companies Corporation takes on liability Double taxation; profits and shareholders Government compliance, organization Shareholder rebellion

LLC

Agile, inexpensive, timely Gaining favor in US because of simplicity Classification as partnership for tax reasons Liability protection given corporations Can be owned by corp. or partnership Newness, few standards, each state governs File articles of partnership in state SEC keeps their distance, unless publicly

held

Financial Statements

Balance sheet

-financial state at given point

Income Statement

-profit/loss over a given time

Statement of Cash Flows

-change in cash position over given time

Balance Sheet

Snapshot of business at single point Assets = Liabilities + Capital prov. by owners Listed according to length of time to liquidate Asset = nature of business Current Assets = Most liquid, 1 yr or less

-cash, short-term assets

-accounts receivable

-inventory

Balance Sheet (con’t.)

Fixed assets

-Least liquidity

-Real estate

-Plant

-Equipment Not normally converted to cash for day-to-day …Let’s visit Nike now

Balance Sheet (con’t.)

Liabilities

-listed in the order they must be paid

-current, pay in one year or less

-long-term, time period?

-reflection of decisions like debt vs. equity

Income Statement

Measures profitability over given time period

Income = Revenue – Expenses

Balance sheet provides snapshot

-income sheet, performance between the snapshots

Statement of Cash Flows

Direct cash flow into business Changes in a company’s cash holdings over

given period of time Three primary sources

-from operating activities

-from investing activities

-from financing activities

Difference between brought in and paid out

Cash Flow from Operating Activities Positive and negative cash flow Result from company basic operating activity Equal to all operating revenues less all

operating expenses other than non-cash Earn = positive Pay = Negative

Cash Flow from Investing Activity Additions to current or fixed assets Purchases of same lead to negative flow Selling leads to positive Increased liabilities increases cash flow here

Cash Flow from Financing Activity Flows to and from creditors and owners Changes in the firm’s debt and equity Increased borrowing increases cash flow Paying dividends results in negative Stock issue increases flow (like a loan?)

Types of Financial Ratios

Why calculate ratios? Financial Scorekeeping Liquidity ratios

-ability to meet short-term $$$ obligations Activity ratios

-effectiveness in managing assets Financial leverage ratios

-extent to which company relies on loans Profitability

-ability to make enough to grow, also keep shareholders happy

Worth of a Business

Market Value-Price per share of common stock X the average number of outstanding shares

Book Value-Total Assets – Total Liabilities

Book Value per Share-Owner’s equity / Total outstanding shares

PE Ratio-Price per share / Earnings per share

Time Value of Money

Money is sensitive to time How are changes in value calculated Time constraints Money received today worth more

Time value of money: money decreases in value over time

An investment over time

Better to have safe investment, or risk? Look at CD vs. junk bond

-CD more secure, needs to outpace inflation

-such return would exceed the time value of $

Consider another example, similar to text: Concept of Future Value (FV) Concept of Present Value (PV)

Perpetuities and Annuities

Wouldn’t even mention, except for Nike, ex.

-former discussion of FDIC, $$$ protection

-consols are something Nike, Microsoft might consider

Annuities

-problem with pensions, don’t know term

-more commonly used in U.S.

Risk

Accounting for risk in Messerly example

Pitino?

Financial Planning (C. 7)

Examine income and expenses, future

So, it’s trying to predict, provide appropriate solutions to financial issues

How does one go about it?

Steps

Gather data

-Internal (sound familiar?), primary

-External (sound familiar?), secondary Develop a process

-history

-short-term planning

-Long-term planning Pro Forma Budget, incorporate

Internal Data

Includes, but not limited to:

-past balance sheets

-past income statements

-audited financial records

-research and development reports

-other? Primary sources, primary data

Zero-based budgeting

Text: justify expense compared with others

Objective documentation

What it doesn’t say…

External Data

Includes but not limited to:

-analyzing industry trends

-tracking the rate of inflation, the cpi

-tracking benchmark businesses

-read

-utilize agencies

Process

Two major activities

-forecasting potential revenues

-budgeting for future expenses (budgeting)

Types of Planning

Short-term

Long-term

Pro Forma Budget

Forecast future from past Base year Calculate from base

A target agreed upon by management as indicator of success

Sections of plan

Obtaining Funding

How does one get money?

-who is most likely to use what funding?

-who uses commercial paper?

-who uses the various types of long-term borrowing?

-who uses mezzanine financing?

-who uses venture capital?

One more thing

Today in class we left with the idea that “factoring” was when a business sells its accounts payable to a factor. This is not the case. Factoring is where the business sells its accounts receivable to a factor.

PM

Stocks and Bonds

Types of stock

-Common stock

-Preferred stock

Shareholders

Business incorporation Corporate by-laws Participation Voting power Holding companies Defensive tactics

Taking a Company “Public”

Expensive and time-consuming Public vs. shares sold to public Institutional investors Preemption Flotation costs Employee equity interest ESOP

“Public” (con’t.)

Prospectus

Selling Shares

Private placement

Initial public offering (IPO)

Failed offerings

Increasing the Value of Stock

Purpose of management team P/E ratio High ratio External factors Internal decisions of company Cleveland Indians example

Sport Stocks

Some unique features Novelty purchase? Another Cleveland Indians example Public has been luke-warm

-“pure-play is riskier

-blended is safer Vertically integrated combination

Bonds

Corporate bonds

-Bond financing

-Secured versus unsecured bonds

-Debentures

-Issue size and maturity Cost of issuing bonds

Loan Repayment

Sinking funds

Serial Bonds

Bond redemption before maturity

Convertible bonds

Government Issued Bonds

Types

General obligation bonds

Revenue bonds

Repayment Sources

Stable and adequate repayment source

Bond Acquisition Process

Capitalization Problems/Issues What is capitalization?

Overcapitalization

Undercapitalization

Recapitalization