Basic Financial Concepts

1
Basic Financial Concepts

• Revenues and Expenses
• Budgeting
• Financial Goals
• Difference between finance and accounting
• Difference between cash and accrual accounting
• Economic analysis impact on decision-making

2
Revenues Expenses

• Revenue money coming in examples
• Ticket sales
• Broadcast contracts
• Concession sales
• Sponsorship agreements
• Other revenues for a high school
• Fund-raising efforts
• Advertising revenue
• Participation fees
• State taxes local/city school taxes
• Federal tax subsidies for education

3
Revenues Expenses

• Expenses costs incurred examples
• Player salaries
• Equipment and uniforms
• Travel and lodging
• Executive Salaries
• Rent, insurance, overhead
• Event related costs (i.e. officials, ushers,
  etc.)
• Advertising and promotion
• Facility repair and maintenance

4
Revenues Expenses

• What happens if expenses are growing at a rate
  faster than revenues?
• Budget cuts
• Pay to play
• Program elimination
• Move the team (professional)

5
Revenues and Expenses

• Revenues - sources of funds
• Generated when an exchange of goods or services
  has occurred
• Expenses - costs that are incurred
• Fixed vs. Variable
• Required vs. Discretionary
• Expected vs. Unexpected

6
Revenue and Expenses

• A unique element of the sport industry is that a
  number of variables can change revenue/expense in
  a moment
• Player injury
• Weather postponements
• Player performance
• Understanding what is causing changes to revenue
  and expense over time is a critical skill to
  develop as a financial manager

7
Budgeting

• Revenues and expenses are part of various
  financial statements
• Budget a road map that exhibits an
  organizations plan for spending its
• Income statement (PL) measures a companys
  profitability over a stated period of time
• Balance Sheets shows the worth of a company at
  a specific point in time

8
Revenue Ex Boston Celtics

• For the Year Ended
• 
  ---------------------------
  --------------
• 
  June 30, June 30,
  June 30,
• 
  1997 1996
  1995
• 
  ----------- -----------
  -----------
• Revenues
• Basketball regular season -
• Ticket sales
  31,813,019 35,249,625
  22,036,880
• Television and radio broadcast rights fees
  23,269,159 22,071,992 20,956,405
• Other, principally promotional advertising
  7,915,626 7,458,651 7,418,487
• Basketball playoffs
  
  1,913,481
• 
  ---------------------------
  --------------
• 
  62,997,804 64,780,268
  52,325,253

9
Expenses Ex Boston Celtics

• Costs and expenses 1997
  1996 1995
• Basketball regular season-
• Team
  40,941,156 27,891,264
  31,203,697
• Game
  2,386,042 2,606,218
  2,880,566
• Basketball playoffs
  
  696,583
• General and administrative
  13,913,893 15,053,333
  14,085,982
• Selling and promotional
  4,680,168 2,973,488
  2,692,208
• Depreciation
  89,324
  140,894 86,347
• Amortization of NBA franchise intangible
  assets 164,702 164,703
  164,703
• 
  ---------------------------
  --------------
• 
  62,275,285
  48,829,900 51,810,086
• 
  ---------------------------
  --------------
• 
  722,519
  15,950,368 515,167
• Net Income is before interest and taxes and
  one-time dispositions

10
Financial Objectives

• What is more important total corporate profit or
  earnings per share of stock?
• Ex company 1
• 10M revenue
• 100M outstanding shares of stock
• Ex company 2
• 1M revenue
• 100K outstanding shares of stock

11
Financial Objectives

• The prior example assumes that the primary
  criterion for success analysis was EPS rather
  than stock appreciation or total earnings
• Ultimately the increase in share value will be
  the primary important variable, especially if the
  company does not pay dividends
• Ex 3 Two companies have earnings of 10M each
• Company 1 stock rose from 18 to 20 per share
• Company 2 stock rose from 4 to 5 per share

12
Financial Objectives

• Many factors contribute to the analysis of the
  value of a company that are not just earnings,
  EPS, and stock price
• How often are dividends paid?
• How risky are future earnings?
• How much debt does the company carry?
• What is the companys strategy?
• While the Celtics could raise new money in a
  number of different ways, each has pros and cons
  regarding its impact to the business

13
Overview of Accounting

• What is the difference between accounting and
  finance?
• Accounting is the tracking of revenue and
  expenses from all areas of the business to
  provide an accurate record of a business
  financial position
• Finance utilizes the numbers the accountant
  produces to make key business decisions and to
  plan for the future

14
Overview of Accounting

• Financial analysis cannot take place unless
  accounting systems have developed the numbers for
  analyzing performance
• But there is never any guarantee that it is right
• Internal and external audits
• However, the numbers only refer to components of
  the business that can be quantified
• Income may show a decrease, but the accounting
  doesnt explain why there was a decrease

15
Accounting Concepts

• Generally Accepted Accounting Principles,
  interpreted by FASB and AICPA
• T-system to document flow of monetary
  transactions
• Double-entry bookkeeping
• Debits vs. credits
• Assets vs. liabilities / owners equity
• Cash basis vs. Accrual basis of reporting income