Sport Funding and Finance

Second edition

Bob Stewart

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9780415839839
• eBook ISBN: 9781134470846
• Edition: 2
• Topic: Business
• Subtopic: Finance
• Index: Business

Sport Funding and Finance provides a complete introduction to the macro-level and micro-level aspects of sport finance. It describes the evolution of sport from a kitchen-table operation into the sophisticated, boardroom-driven global financial industry that it is today. It uses the professional sports leagues of the US and Europe as an international benchmark, and explains why the financial context is so important for all managers working in sport. The book also provides a step-by-step introduction to the principles and practice of effective financial management, providing the reader with a complete set of professional tools and skills for use in the sport industry.

Now in a fully revised and updated new edition, the book develops the reader's understanding by first explaining basic concepts in finance and accounting before progressing to more complex issues and ideas. It covers every key topic in financial management, including:

• Planning and strategy
• Budgeting
• Financial projections
• Fundraising
• Pricing
• Costing
• Feasibility studies
• Economic impact analysis
• Ratio analysis

Every chapter includes a blend of theory, contextual material and real-world data and case studies from around the world, clearly linking principles to practice, as well as review questions and problem-solving exercises to test the reader's understanding. Sport Funding and Finance is the perfect foundation text for any degree-level course in sport finance, and an invaluable reference for any sport management professional looking to deepen their understanding of funding and finance.

ANALYSIS

Critical
capabilities

CHAPTER 11

Interrogating the accounts

LEARNING OUTCOMES

At the end of this chapter readers will be able to:

• explain why it is so important to have a method for accurately and succinctly assessing the financial performance of sport enterprises

• understand the importance of using multiple data sets to assist in this process

• explain what is meant by the term ‘ratio analysis’

• calculate ratios for profitability, liquidity, long-term indebtedness, efficiency and net worth.

CHAPTER SUMMARY

This chapter provides a detailed discussion of the ways in which the financial performance of sport enterprises can be analysed using the financial statements. It makes the crucial point that more than one performance indicator is needed to get a clear and unambiguous under-standing of how well a club, association or league is trending from a financial perspective. It thus follows that the balance sheet, profit and loss statement and cash flow statement must all be interrogated, both separately and conjointly. The remainder of the chapter focuses on specific measures for gauging an enterprise’s financial well-being and future prospects. Special attention is paid to the use of ‘ratio analysis’, which involves the use of at least two sets of data to calculate a specific performance indicator. The main indicators addressed are profitability, liquidity, long-term indebtedness, efficiency and net worth. Customized measures to suit the special requirements of different sport organizations are also discussed.

THE STRATEGIC IMPORTANCE OF MEASURING FINANCIAL PERFORMANCE

The ability to measure financial performance is fundamental to the proper management of sport enterprises. Two equally important approaches need to be taken, though. The first is a ‘rating’ approach, where the financial health of an enterprise is compared to some historical benchmark. The second is a ‘ranking’ approach, where the financial performance of one enterprise is compared to the performance of other enterprises that deliver similar products. So, for instance, a semi-professional netball club may have earned 10 per cent more revenue per year for the last five years, and increased its operating surplus for each of these years. By historical standards this would represent a highly successful outcome. However, when compared to other similar clubs, its performance may have been substandard, since they may have increased their revenues by 15 per cent per annum over the last five years. Thus, everything is relative.

With these two principles in the backs of our minds, it becomes crystal clear that one needs to do far more than just compile a few accounts, keep an eye on how much credit a sport club or association has built up, and monitor revenue and expenses from time to time. It is also essential to calculate precise measures of a sport club’s financial performance over time. This second task requires exposure to a number of tools for measuring profitability, short-term financial stability, long-term financial stability and, finally, the club’s or association’s level of net worth or wealth. A discussion of these four approaches to financial analysis will follow.

As noted above, in order to make sense of financial information it is necessary to establish some sort of reference point or benchmark. At first glance the revelation that a club has secured $20 million in annual revenue may seem to be a good result. However, it may be only 5 per cent more than the revenue earned five years ago when the economy was depressed. In addition, annual expenses have increased by 10 per cent over the same time period, thereby cutting into club surpluses. Moreover, it is found that a majority of clubs in the same sport league are earning in excess of $25 million, with two clubs earning more than $30 million. This immediately places the club’s or association’s financial performance into a specific context. It is consequently important to measure a club’s financial position using reference points and benchmarks that give a stronger sense of relative financial well-being.

There are three reference points that need to be identified before any effective analysis can take place. The first is a sport club’s previous performance. In this instance the question to ask is what happened last year, five years ago or even ten years ago. This is called horizontal analysis, but is also referred to as longitudinal or trend analysis. Trend analysis can highlight significant increases or falls in broad items such as annual revenue and total expenses, or even more specific items such as sponsorship income, merchandise sales, player payments and advertising expenses. The second reference point is a base figure in the accounts such as total assets or total revenue. In this instance it is possible to examine one figure in relation to another. So, instead of just identifying a profit or surplus, it will be possible to view it in relation to some other item. A profit of $2 million, for example, can be viewed as a proportion of total revenue of $50 million to give a profit ratio of 4 per cent. If your asset base is $25 million, the return on assets calculation will be 2 over 25, which is 8 per cent. The final reference point is the performance of clubs similar to yours. In this instance the question to ask is: did we do better or worse than the club in the next suburb or local competition, or indeed a similar club in another region or country? For example, a county or state cricket association may have just posted a record level of annual revenue, made a handsome surplus and smugly concluded that it had done very well. However, if all other county or state governing bodies had exceeded its bottom line results, then its comparative performance would be viewed as dismal.

Each of the above three reference points can be used to strengthen the analysis by providing comparative data, and encouraging a more contextual examination of the figures. However, whatever approach is taken, it is crucial to understand the variety of measures that can be used to assess both broad and specific financial issues within a sport club or association. This involves undertaking some form of ratio analysis that has as its focus profitability, short-term financial stability, long-term financial stability and, finally, the club’s or association’s level of wealth or net worth.

MEASURES OF PROFITABILITY

Profit (or surplus) is superficially easy to measure since it is straightforward to calculate the difference between aggregate income and aggregate expenditure. However, we also need to clearly distinguish between operating profit and net profit. There can sometimes be a substantial difference between the two since, as was noted in the previous chapter, depreciation, abnormal and extraordinary items on both the income and expenditure side need to be taken into account. Moreover, the relationship between revenue (aggregate income), expenses (aggregate expenditure) and profits can be examined from a number of perspectives.

Return on revenue

First, we can look at profit in relation to revenue...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of figures and tables
• List of simulation exercises and case studies
• Preface
• Notes on second edition
• About the author
• Currency conversions
• Backdrop: cultural and commercial context
• Basics: Foundation competencies
• Analysis: critical capabilities
• References
• Index