CH 4
CH 4
Financial and
Economic Principles
Applied to Sport
Management
Introduction
• The sport industry is a multibillion dollar
industry
• Financial aspects of sport industry shown in the
media can seem staggering to the average person
• Sport industry is definitely a major force in
North American business, though it is difficult to
get an accurate, reliable measure of its
magnitude
• Financial boom has created a great need for
people with training in finance
Sales vs. Value-Added
• There is a difference between an industry’s sales
and its value-added
• Value-added is a more accurate statistic
• Cost of raw materials and manufacturing are
considered when calculating value-added
Key Concepts: What Is Finance?
• No single, universally agreed upon definition
• Generally refers to two primary activities of an
organization:
1. How an organization generates the funds that flow
into that organization
2. How these funds are allocated and spent once
they are in the organization
Key Concepts:
Revenues vs. Expenses
• Revenues
• Funds raised by an organization through a variety of
sources including tickets, merchandise, services, and
sponsorships
• Expenses
• Funds spent to operate an organization such as
salaries, equipment, utilities, food, travel, and
insurance
Key Concepts: Profit
• Profit: More revenues than expenses
• Can be enhanced by increasing revenues, decreasing
costs, or both
• Income statement (statement of activity or profit and
loss): Summarizes an organization’s revenues,
expenses, and profits over a given time period
Key Concepts: Assets
• Assets: Anything an organization owns that can be used
to generate future revenues (facility, equipment)
• Teams can fund or “finance” assets in many ways
• Owners’ equity: The amount of their own money
owners have invested in the firm
• Debt: Money an organization borrows (bonds)
• Franchise ownership groups
• Corporate conglomerates (see Table 4-1)
• Publicly traded sport companies (see Table 4-2)
Key Concepts: Debt
• Define debt (*liability)
• The amount of money an organization borrows from
banks or other lenders in the market
• Organization is legally obligated to pay back the
original amount borrowed (principal) plus interest
• Bonds
• Financial instruments that allow the borrower to
both borrow large dollar amounts over an extended
period of time (20 or more years)
• Issued by government and/or corporate entities
• Often used to fund stadium construction
Key Concepts: Credit Facilities
• Define credit
• Some professional leagues maintain “credit
facilities” (loan pools) backed by league revenues
• Individual teams can borrow from the loan pools at
better interest rates
• NFL debt has highest credit rating = lowest credit
risk = can borrow at lowest interest rate
Key Concepts: Balance Sheet
• Balance sheet: A financial statement that summarizes
an organization’s assets, liabilities, and owner’s equity
at any given point in time
Key Concepts:
Return on Investment (ROI)
• Define return on investment
• The expected dollar value return on each alternative
investment, stated as a percentage of the original
cost of each investment
• Example: ROI of 9% = the organization would
recover all of the initial investment plus an
additional 9%
• Note: There is “risk” associated with all investments
• Example: Professional sport franchise values
Key Concepts: Risk
• Define risk
• Because the future is uncertain, the future benefits
of any investment cannot be known with certainty at
the time the investment is made
• Level of risk must be considered by sport managers
prior to any future investment
• Significant risk associated with how to fund
significant investments
• Equity vs. borrowed money?
Key Concepts: Economics of Sports
(1 of 2)
• Competitive balance
– Entertainment value connected to “uncertainty of
outcome”
– Differences in market sizes cause differences in
revenue potential, which cause differences in ability
to pay players, which cause differences in on-field
performance
– Salary cap, revenue sharing, luxury tax
Summary
• The past two decades have been very financially
lucrative for many facets of the sport industry
• The financial “boom” has increased the need for
sport managers with specialized financial skills
• Analytical skills and tools will be needed by
sport managers of the future to help create new
revenue streams and solve financial problems
faced by sport organizations