General Financial Concepts and Economic Principles Applied to Sports

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General Financial Concepts and Economic
Principles Applied to Sports
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• Accounts payable
• Accounts receivable
• Accrual accounting
• Ambush marketing
• Amortization

• financial obligations owed for merchandise
  received
• money owed by a customer for a credit purchase
• system for recording expenditures and revenues as
  they occur, not when money is paid or received
• when a corporation uses advertising closely
  related to a sporting event to make consumers
  believe that it is a sponsor of the event without
  paying to become a sponsor
• expensing the acquisition cost less the residual
  value of intangible assets

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Amortization vs. Depreciation

• Amortization is an accounting process for
  expensing the acquisition costs of intangible
  assets, less their residual values, over their
  estimated useful economic lives.
• Depreciation is the accounting process of
  charging against earnings for the deterioration
  of a tangible asset over time.
• Amortization and depreciation are reductions in
  the value of assets on the balance sheet and
  expenses on the income statement.
• Goodwill and certain brands cannot be amortized
  because they have an indefinite useful life.

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Example of a Players Contract

• Three-year contract signed by Jones in 2006 for
• Year one for 1,150,000
• Year two for 1,120,000
• Year three for 1,150,000
• Signing bonus 2,000,000
• Team has option for fourth and fifth years at
  1,150,000 each year
• Performance bonuses
• 30,000 if team plays in conference championship
• 20,000 if Jones makes the Pro Bowl
• 50,000 if Jones is defensive Player of the Year

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Teams Annual Amortization
It is assumed that the higher salary in year one
represents a disguised first-year payment of
50,000 for the team getting two option years.
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Valuation of a Professional Sports Team

• Example
• 600 million for the franchise
• Seller and buyer agree to 300 million in player
  contracts
• 100 in goodwill and intangibles
• 200 million allocated to the franchises
  property rights

• Cash and cash equivalents
• Season ticket advance payments
• Receivables
• Player contracts
• Lease agreements
• Fixed assets
• Goodwill (and other intangible assets)

• Entire sports franchise
• Specific assets
• Historical and future income streams

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• Breach of contract
• Bond
• Book value
• Capital or fixed assets
• Cartel
• Common stocks

• failure to perform a duty imposed under a
  contract
• a debt security or an obligation of a company to
  repay borrowed money
• purchase price minus depreciation total assets
  minus total liabilities
• permanent assets such as equipment, buildings,
  stadiums, arenas, and fields that can be
  depreciated
• an agreement or collusion among a small number of
  business entities with similar products to
  increase their profits by reducing competition,
  such as through the allocation of territories or
  outputs
• equity value or partial ownership in a company

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• purchase of one product is tied to the purchase
  of another product
• A oral or written agreement between two or more
  parties that is enforceable under law
  requirements include an offer or a conditional
  promise, acceptance by the party to whom the
  offer was made, consideration or an exchange of
  something of value, legality, capacity to
  understand one's acts, and precision or
  specificity of terms.
• a legal and separate ownership model without
  personal liabilities

• Complements
• Contract
• Corporation

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• giving of financial benefits or favorable
  treatment to corporations or wealthy individuals
  by the public or government
• purchase made and paid for at a later date it is
  listed on the right side in a T-account system
• assets that can be converted to cash in one year
  or less
• decrease in revenue or net worth it is listed on
  the left side in a T-account system
• relationship between the price of a product and
  the amount of product consumers want to buy
  quantity of goods or products to purchase at
  different prices

• Corporate welfare
• Credit
• Current assets
• Debit
• Demand curve

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• Depreciation
• Dividend
• Discount rate
• Economic impact
• Economies of scale

• accounting write off for the deterioration of an
  asset over time is a charge against earnings
• return on investment
• interest rate to be earned from an investment is
  used to determine the present value of an
  investment option
• the net change in the city and surrounding
  metropolitan area resulting from the spending
  associated with a sports facility
• savings associated with increases in size,
  operations, or scale

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• Economics
• Free market economics
• Sports league economics
• Economic assumption 1
• Economic assumption 2
• Electronic fund transfers

• the study of market systems sport managers need
  to understand how to make sound financial plans
  and decisions
• seeks to drive competitors out of business
• seeks to keep teams in business
• is that everyone in sport acts rationally in
  seeking to make himself or herself better off
• is that the supply and demand markets work
• funds withdrawn automatically from a customers
  bank account

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• Elasticity of demand
• Elastic demand
• Inelastic demand
• Income elasticity of demand
• Equilibrium price

• percentage change in quantity demanded divided by
  the percentage change in price
• a given percentage change in price leads to a
  larger percentage change in quantity demanded
• a given percentage change in price leads to a
  smaller percentage change in quantity demanded
• the percentage change in quantity demanded
  divided by a percentage change in income
• when the price of the amount demanded equals the
  amount supplied

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• Equity
• Fixed costs
• Future value
• Goodwill
• Hidden costs
• Independent contractor
• Law of diminishing marginal utility

• the value of a company (includes investments and
  retained earnings)
• costs remain the same, such as player rosters and
  management
• value of a sum of money after being invested for
  a specified period of time
• difference between the book value and the market
  value
• not anticipated real costs
• a non-employee who is his or her own boss and
  makes own decisions
• with more of a product, the marginal utility of
  each extra unit gets progressively smaller that
  is, each incremental unit has less utility

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Time Value of Money the value of money
decreases over time because of reduced buying
power

• An owner plans to sell a piece of property and
  has two potential buyers which offer should be
  taken?
• Buyer 1 will pay 102,500 in 12 months
• Buyer 2 will pay 100,000 immediately
• If the first option is taken, the present value
  of the money actually is 97,619 because of the
  loss of buying power after 12 months
  (102,500/1.05, assuming a 5 interest rate or
  discount rate)
• So, is this really the better offer?

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Time Value of Money the value of money
decreases over time because of reduced buying
power

• An owner plans to sell a piece of property and
  has two potential buyers which offer should it
  take?
• Buyer 1 will pay 102,500 in 12 months
• Buyer 2 will pay 100,000 immediately
• If the second option is taken, the owner can
  invest the 100,000 at 5 interest and after 12
  months will have 105,000
• Since 105,000 is the future value of the initial
  lump sum amount that is invested over a period of
  time, this is the better option.

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Elasticity of Demand (Ed) Percentage change in
quantity demanded divided by the percentage
change in price

• Elastic demand (Ed gt 1) A given percentage
  change in price leads to a larger percentage
  change in quantity demanded (for example, a 10
  increase in the price of a ticket causes a
  greater than 10 decrease in quantity purchased,
  resulting in a loss in revenue)
• Example If the Kansas City Royals were to
  increase their season ticket prices by 10, the
  ticket demand would likely fall more than 10
  resulting in a loss of revenue.

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• Inelastic demand (Ed lt 1) A given percentage
  change in price leads to a smaller percentage
  change in quantity demanded (for example, a 10
  increase in the price of a ticket causes a less
  than 10 decrease in quantity purchased,
  resulting in an increase in revenue)
• Example If the Indianapolis Colt sold out their
  stadium for every game in 2006 and then decided
  to increase season ticket prices by 10 in 2007,
  the demand for tickets would likely drop but the
  decrease would be less than 10, thus resulting
  in an increase in revenue.

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• Limited Liability Corporation or Partnership
• Marginal revenue product
• Marginal utility
• Market shortage
• Market surplus

• a legal business entity with the benefits of a
  partnership and a corporation
• change in total revenue that occurs when there is
  a change in variable input (total revenue/change
  in variable input or marginal physical product x
  marginal revenue)
• additional satisfaction or benefit from each
  (next) unit purchased decisions are made based
  on marginal costs versus marginal benefits
• an insufficient supply that does not meet the
  demand
• excess supply or more than is demanded

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• Markets
• Market equilibrium
• Market value
• Monopoly
• Monopsony
• Net profit margin

• the interaction between buyers (their demand) and
  sellers (amount they will supply)
• the price at which the quantity demanded equals
  the quantity supplied
• price per share of common stock times average
  number of outstanding shares the price within
  the marketplace
• only one firm or seller controls the market and
  sets the price (absence of competition)
• only one buyer in a market
• income after payment of interest and taxes

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• Net worth
• Opportunity cost
• Partnership
• Present value
• Proprietorship

• difference between total assets and total
  liabilities
• the value of the next best alternative foregone,
  the value of actions not taken, or what you had
  to give up to get what you wanted the most
• two or more owners with personal financial
  liabilities
• current value of a future amount of money
• single ownership model with personal financial
  liability

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• Related party transaction
• Scarcity
• Sports agent
• State actor

• occurs when two entities, such as a professional
  sports team and media corporate owner, join into
  a special business relationship with each other,
  such as for broadcasting games
• not enough resources to give every person what is
  wanted
• the person who negotiates employment, endorsement
  deals, public relations activities, and
  oftentimes finances for an athlete
• a person or entity that is subject to the United
  States Bill of Rights and thus must not violate
  certain rights and freedoms, such as due process

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• Stock
• Statement of cash flows
• Substitutes
• Sunk costs
• Supply curve
• Tax-exempt bond

• the sale of a piece of a corporation in order to
  raise money
• a financial statement that shows revenue sources
  and expenses
• products filling similar roles
• pay-outs in the past that impact current and
  future decisions
• relationship between the price of a product and
  the amount of product suppliers want to sell how
  much suppliers will trade or sell at various
  prices the relationship is typically positive
  since as the price increases the quantity
  supplied increases
• investors receive interest-free income from
  government-issued bonds

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• Time value of money
• Utility
• Variable costs

• the value of money decreases over time because of
  reduced buying power
• amount of satisfaction, benefit, or enjoyment
• costs vary depending on circumstances, such as
  team operations and player development

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Financial Statements

• Balance sheet
• Income statement
• Statement of cash flows

• a financial report that gives a status report of
  assets, liabilities, and equity as of a specific
  date (used to show changes and the ability to pay
  debts)
• a financial report of revenues and expenses,
  typically on an accrual basis, for a time period
  (used to analyze success)
• a financial report, usually monthly or quarterly,
  that shows incoming and outgoing cash or cash
  equivalents as reflected in the balance sheet and
  income statement

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Financial Ratios as Measures of Liquidity, or the
ability to meet short-term obligations
current assets/total current liabilities (should
be at least 1 meaning ability to pay current
liabilities with current assets
Current ratio
(total current assets minus inventories)/current
liabilities ability to liquidate current assets
(excluding inventories) to pay current liabilities
Acid test ratio or quick ratio
Solvency ratio net worth/total assets
Net working capital current assets-current
liabilities
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Profitability (corporate earnings)

• Net profit margin net income/revenues
• Gross profit margin earnings before interest
  and taxes/revenues
• Return on assets net income/average total
  assets
• Return on equity net income/average
  stockholders equity
• Return on investment capital net
  income/long-term debt owners equity

Break-even analysis or earnings before taxes and
interest revenues minus variable costs and
minus fixed costs of production
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Time Value of Money

• Present value is the current value of a future
  amount of money
• Future value is the value of a sum of money after
  being invested for a specified period of time
• Compounding process of accruing a further
  return on earnings over an additional time period
• Annuities stream of payments to be received for
  a specified time period
• Perpetuities annual cash flow forever

PV /(1rate of return)
FV x (1 interest rate)t (t the number of
years the money is invested)
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Inventory Management

• Finished good turnover ratio cost of goods
  sold/average finished goods inventory
• Carrying cost cost of storing inventory also
  costs for ordering shipping and receiving cost
  of running out of inventory
• Replacement costs cost of goods sold method of
  inventory valuation
• LIFO last in, first out values inventory
  based on current replacement cost preferred by
  companies because it increases inventory costs,
  reduces income, and lessens tax obligation
• FIFO first in, first out values inventory
  based on earlier price paid for inventory
  preferred by shareholders because the increased
  price generates greater revenue and hence higher
  dividends

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Audited Financial Statements

• Independent auditor (not part of internal
  management)
• Types of opinion
• Unqualified financial statements conform to
  required accounting principles
• Qualified some reason for concern
• Adverse financial statements do not conform to
  required accounting principles
• Disclaimer the auditor was unable to complete
  the audit report because of the lack of certain
  information or data

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Components of a Business Plan

• Plan summary purpose product or service to be
  provided anticipated product and service
  extensions potential of the market initial
  financial projections funding needs exit
  strategy (write this section last and make it
  impress the reader)
• Industry section objective data and information
  about the economics of this industry or field
• Company section mission statement goals
  strategies owners or stockholders type of
  business structure
• Analysis of the product or service uniqueness
  of planned product or service anticipated risks

http//www.sba.gov/smallbusinessplanner/plan/writ
eabusinessplan/index.html)
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Components of a Business Plan

• Market section demographics of intended market
  relative to competition
• Marketing section place product price
  promotion
• Operations section how product and service will
  be developed, produced, and delivered financial
  and managerial control mechanisms
• Management and personnel section key personnel
  and their accomplishments describe compensation
  packages
• Financial projections section projected cash
  flow and anticipated return on investments
• Capital needs section required funds and how
  they will be invested