Intro to Sport Finance

all right welcome to our first

video lecture this introductory lesson

is really focused

on just giving us a review

background on some of the basic

terminology related to finance and sport

we're also going to look at ways in

which sport organizations are

financed and how they spend money so

we're going to

identify common revenues and expenses

and then finally we're going to look at

some of the external factors that might

impact the financial health of a sport

organization so those are our main

objectives for this unit

again this introductory lesson is really

focused on making sure that everyone has

kind of the same foundational knowledge

so that when we move on to the more

technical concepts later in the semester

we all have that same

base foundation of information so

some of this might be review for some of

you others that might be completely new

and that's fine we're going to use this

lesson to even the playing field if you

will

all right

okay first things first and i like to

say this at the beginning

of courses for sport management

graduate students because i think it's

an important thing for you to take into

account

in all of your classes not just sport

finance

but i want you to think about this

change of perspective that is needed

as you're moving from undergraduate

student to

graduate student slash practitioner

right many of you have grad

assistantship

so you're transitioning now uh from a

consumer of sport to now a practitioner

of sport and and that really does

require a change of perspective

particularly when we think about the

financial management of sport

you know at this point in your life

you've probably only thought about sport

and recreation from the perspective of a

consumer

right how much is it going to cost me to

join this fitness center i want to join

what is the price for the tickets to get

into the sporting event

so on and so forth so you know what

you've

looked at in terms of finance and sport

previously is probably more focused on

you know how does it impact me or how

does it directly relate to me

but again i want us to use this class as

an opportunity to

shift that perspective a little bit i

want us to

think about how finance might impact us

from the perspective of a practitioner

and how that might impact the decision

making that occurs once we are

in the role of a practitioner so whether

it's through your ga

experience now or maybe the next job

that you have in the sport industry

i want us to work on shifting that

perspective

so that as we look at each of these

financial issues throughout the semester

we're not just looking at them from the

outside or from the perspective of a

consumer but that we're actually looking

at them

from the perspective of a practitioner

okay i think it's important before we

get into some of these

basic concepts this week is to

acknowledge the elephant in the room

right the coronavirus is happening it's

still

very much a real thing that's impacting

both us

as citizens in this country but also as

practitioners in the sport industry

and certainly you're all feeling that

firsthand through your ga experiences

this semester

it's undeniable that the coronavirus is

having a major financial impact

on the sport industry so what i wanted

to mention in this first lesson is just

that

i'm not going to spend every class

period only talking about

covet 19 and how it's impacting sport

even though that's

sort of the main topic in the news every

day

you know obviously the hope is that

eventually and hopefully sooner rather

than later

we have a vaccine we can get back to

normal

or some semblance of normal and while

that's certainly going to take some time

i do want to acknowledge that the

financial concepts you learn in this

class will hopefully

help you beyond what we're currently

living through right now

so i'm certainly going to acknowledge

the coronavirus and

sort of some of the day-to-day impacts

of sport and i'm going to infuse that in

some of our lessons this semester and

as you can see on the syllabus we have

an entire week dedicated to it at the

end of the semester

but i also want to acknowledge that

there are some basic financial concepts

that i want to make sure that we cover

from a content perspective

so i don't want you to think that i'm

ignoring that this is happening it's

definitely real and it's definitely

going to be impacting us for a while in

this industry

but i also want us to be able to

identify and learn about some of these

other basic concepts but you will see it

in fused

lessons throughout the semester

okay so some basic concepts for us to be

aware of

right off the bat finance certainly a

term you've heard before but let's kind

of look at the textbook definition here

and hopefully this will give you an idea

of what to expect

this semester when we talk about finance

and sport

so you can see here that the definition

of finance is the science or art of

managing money within an organization

okay i want you to think of this term

finance in the context of this class as

really this

general umbrella term that also includes

the application of several other

financial concepts

so from budgeting economics accounting

all of these concepts which we will

cover throughout the semester are going

to be included in this kind of bigger

broader umbrella topic of finance

but ultimately what we're talking about

is the managing of money

in an organization and typically that

involves two main

concepts right one as we have listed

here how the organization

generates the funds that go into that

organization

and then to how those funds are then

used or allocated

once they're in the organization so

again kind of a broad

concept here as we identify finance

but i think it's important for us to

have this kind of broad landscape

so that as we move forward and we start

to identify

specific concepts whether it's revenues

and expenses that we're going to look at

here

later today or you know later on this

semester we start talking about

budgeting

we know that this is kind of our

baseline or our starting point

and i think it's also important to note

that you know

ultimately at the end of the day

organizations are trying to

make sound financial decisions right and

we'll talk about

the various types of sport organizations

and how that might differ for each one

okay so speaking of as we think about

the sport industry

and financial implications i think it's

important that we start by acknowledging

that there are certainly different

sectors of the sport industry and

the difference in sector is certainly

going to impact the way

those organizations look at finance

so if we think about sort of these three

broad

sub-sectors of the industry we have the

public sector

which is going to be you know

organizations that are connected to or

controlled by

the government in some way right so

public parks and recreation departments

local municipalities public schools

universities athletic departments

so that's sort of the public sector a

commercial sector is going to include

private entities generally and those

organizations are

going to focus primarily on making and

selling products

with probably the ultimate goal to

induce some kind of profit

and then finally we have kind of the

non-profit sector there

obviously this is a non-business entity

typically the goal here is to further

some kind of

social cause you know again it's

important for us to think about these

sub-sectors as we look at these

financial

concepts right so a city parks and rec

department is probably going to view

financial management in a very different

way than say

a non-profit clinical facility does or a

professional

sports team does right so again i'm not

going to focus on one

in particular this semester i'm going to

try to use a variety of examples

in my practice cases and in the lessons

because i know

you know we probably have a wide variety

of interests in terms of where folks see

themselves working eventually so i try

to do my best to kind of infuse

examples from all three sectors again i

think the one thing that they probably

all have in common is that

they're trying to make smart financial

decisions that lead to a healthy

financial

situation for their organization and

that's you know a common thread for all

of these

organizations despite what their kind of

budget might be

or their you know annual earnings might

be

okay so obviously we defined

finance in this cons context of money

coming in

and money going out so it's important

that we acknowledge some key terminology

here

first is going to be revenue okay so

this is the money coming

in and it for a sport

industry it's important for us to kind

of identify what the common sources of

revenue

are for sport and recreation

organizations

so we have five here that i've

identified for us to kind of do a deep

dive into

and then your book goes into another one

as well

so we'll talk about these we'll kind of

identify and define them

we'll give some examples and then from

there we'll do some practice cases as

well so you can really get

a good perspective on where the money is

coming from

in order to operate these sport

organizations

okay so we'll start with compulsory here

so

we'll come back to that one compulsory

revenue

is basically revenue that is required by

law

or policy or it's mandated

so compulsory revenue or income

excuse me is probably going to be used

primarily by

public organizations right so support

organizations that fall in that public

sector

so these are organizations that rely

heavily

on public taxes in order to fund their

operations

so some of the common forms of taxation

used for compulsory revenues or

obviously number one is going to be

property tax

you know primarily when you're looking

at something like public parks and

recreation

they're going to be focused on property

taxes as a huge form of revenue schools

are the same way

there are other forms of taxation that

we see used here

by public organizations particularly

when we're looking at compulsory so

tax increment financing is one that

we'll talk about in detail when we get

to our unit on facility financing

um sales tax another great example

that excise taxes these are additional

taxes placed on specific

goods and services and those are going

to be in addition to your standard

sales tax i thought we might

look at an example case here a practice

case here

just to get an idea of what this

compulsory revenue might look like

in real time or in real life so

here's a practice case and i'm going to

kind of give you some time to do it on

your own and then we'll we'll look at

sort of the answer together on the next

slide so

practice case here is the city of

bloomington has implemented a tourism

tax of 15 percent

on all hotel room stays in order to

generate more revenue to fund its parks

and recreation division

in 2019 the average cost of a room per

night was 150

and the hotels in bloomington saw a

total of 12 000

nightly stays so if the same number of

nightly stays can be predicted for 2020

how much does the city stand to generate

on its tourism tax

in 2020 so i'll give you a few minutes

to look at that and play a little bit

with that

and then on the other side here we will

look at the answer together

okay if you need more time go ahead and

just pause and then revisit

the slides but i'm going to go ahead and

move on to

the actual answer here so again our

question is

if the same number of nightly stays can

be predicted for 2020 how much does the

city stand to generate on its tourism

tax in 2020

all right so there are a couple

different ways that we can do this

first of all we can look at the average

cost of a hotel room in bloomington

which we know from the case is 150

we can multiply that by the 15 percent

which is

the added tourism tax that's been

initiated

so if we do that on a per nightly basis

we can see

that the city is going to generate 22.50

okay so that's per night we also know

that

last year the previous year there were

12 000 nightly stays

in the entire year so all we have to do

to get to the total revenue

is multiply that 22.50 per nightly stay

times 12 000. that gives us a total of

270 000 right that's money that's going

to go directly to the city

through that tourism tax on an annual

basis

so that's one way we can calculate that

the other is we can first calculate

how much revenue is generated in total

from these room stay so we can take 150

and multiply that times 12 000

we know that 1.8 million is going to be

generated overall

but of course we know that just 15

percent of that is going to go

towards the city as part of the tourism

tax so we just multiply that 1.8 million

times

0.15 and gets us to the same answer

right so we're still looking at 270

000 in tourism tax revenue from this new

tax

so either way is fine either way you

want to calculate that

you know i start with some of these kind

of easier practice cases just to get us

in the habit

of properly using percentages when we're

multiplying and just kind of properly

showing work

so this probably feels a little bit easy

peasy

which it's kind of meant to be i want us

to be able to

have a basic understanding of how i want

you to calculate

problems when you're given these these

issues so

make sure that you're showing work like

we've done in this practice case on

future cases okay

before we move on to the next category

of revenue here i want us

to do a little pop quiz so if i were to

ask you

what you think the number one line of

revenue is

or was for division one fbs

schools in previous years what would you

say it is

so think about that for a minute what do

you think is the number one

revenue for division 1 fbs schools

if you said cash contributions from

alumni and others you would be correct

so you can see here that this is from

2016 25

of public division one fbs schools are

sorry 25 percent of their revenue came

from

cash contributions and alumni and you

can see that's more than ticket sales

broadcast rights

conference payments and so on and so

forth so

i bring up this data point because our

next

category of revenue income

is gratuitous income so we talk about

gratuitous income what we're really

talking about is giving okay so any kind

of giving or donation that is provided

to an organization would be gratuitous

income so for those of you working in

college athletics you're probably pretty

familiar with this line

of revenue and you know

as opposed to compulsory revenue which

was required by law obviously gratuitous

income is

kind of given free of charge from people

who want to give

and this doesn't just occur in college

athletics that can also

occur you know for recreation

organizations

as well but generally what we're looking

at here

is either planned giving so someone

plans to give

x amount of money each year or

maybe a university holds annual

fundraising campaigns where they raise

money for

specific projects when a university

raises money for a specific project

especially a facility we tend to call

that a capital campaign

so for those of you who've been around

or maybe even those of you that are new

you've probably seen hancock stadium

in the past five years hancock's gone

through some major renovations

and the bulk of that financing did come

from

gratuitous giving so they had a major

capital campaign to raise money

for that facility

all right next source of revenue that

we're looking at is called

earned revenue so as you can imagine

this is

direct revenue or sources of cash coming

into the organization and generally you

know

this is money that's coming straight

from

the companies or organizations users

right so

a lot of different examples of earned

income

in sport and recreation you know as we

saw on

a couple slides ago ticket sales is a

common earned

income or line of income for support

organizations

although and we're seeing sort of the

impact of not having that line of income

from covid

but other common sources of earned

income user fees that you might have

membership fees any kind of concession

or merchandise food and beverage sales

those would all be examples

of earned income for an organization

and one kind of unique thing about

earned income for sport organizations is

that generally they tend to have

quite a bit of control over earned

income right especially in terms of

pricing

those different sorts of inventory

so earned income an important source of

revenue

all right this next category or source

of revenue is equity and investment

and if we think back to kind of our

three areas of

the sectors for sport organizations

typically equity and investment is going

to

be falling into that commercial sector

right

so private sport organizations are the

types of organizations that tend to rely

on equity or an

investment financing so

you know obviously a good example of

this is you know

team owner investing by purchasing the

team or having a share in that team

and then of course there's also uh

groups of people that also invest in

teams as well

so you can either have kind of the

single owner private investor model that

the clippers have

um see bummer definitely the happiest

owner

probably on the planet in the history of

sports

and then multiple owner this more

private investment model

that the dodgers have and other

organizations have

the multiple owner model tends to be

more common

at least here in the u.s but that's

certainly a common form

of financing for support organizations

especially at the professional level

all right one other form of revenue

that's particularly important

across the different sectors is

contractual revenue

so this is fairly self-explanatory i'm

sure but basically what we're looking at

here are contracts that a sport

organization has with outside

organizations

that then provides services and monetary

resources

so these are contractual agreements that

are set up ahead of time and then

the revenue that comes in from those

generated contractual agreements is

contractual revenue

so much like compulsory income that we

looked at first

this line of revenue tends to be

guaranteed right so it's not required by

law

like compulsory income is but it is

technically held up by that contract

the nice thing about contractual revenue

is that

you know organizations can plan

accordingly right if you have

contractual income

you know when to expect that money to be

coming in

and that helps with overall financial

planning

so some examples here of some

contractual

income that support organizations might

use probably the most common is going to

be a sponsorship agreement

and we'll talk a little bit more about

those later in the semester and

certainly you'll spend time talking

more specifically about those in your

marketing class in the spring

the other sort of subcategory here of

contractual income

is contractual income with outside

agencies so basically you have a sport

or recreation organization

outsourcing certain services to another

company

other than their own internal operations

the two companies agree on terms

and then from there they determine a

contractual agreement

so some great examples of this certainly

college athletic departments work with

athletic apparel companies right

to ensure that their teams have

athletic apparel and equipment

concessions is another great example and

we're going to look at a practice case

here on the next slide

of what that might look like for a sport

organization

golf courses often will you know kind of

outsource their pro shop operations to

other companies so generally what

happens here with these outside agency

contracts

is there's a base monthly

fee that the support organization

charges to provide the

external company access and then there's

some agreement on percentage of sales so

that the support organization is getting

that monthly

fee plus a percentage of sales

and that will probably make a little bit

more sense when we look at the practice

case here on the next slide

but one thing that i want you to be

thinking about and i think a question

i'm going to bring up in our

in zoom session next week is kind of

what might be the benefits to

outsourcing services

and then what might be the risks so as

we're thinking about

these concepts and kind of applying them

i also want us to think more

from an abstract perspective of what

might be the benefits of doing this

versus the risks so think about that a

little bit

throughout the next week and then when

we get back together in our zoom session

we can discuss

all right so here's another practice

case for you

so here we've got a minor league

baseball team that's decided to

outsource its concession services to

sodexo

their contractual agreement states that

exo will pay them a monthly fee of two

thousand dollars for the duration of the

six-month season so that's

2000 a month in addition to 33 percent

of gross sales

in 2019 sodexo generated a total of 245

000 in gross sales from concession sales

at the stadium

and then in 2018 prior to outsourcing

its concession services the team spent

twenty thousand a month on payroll

staffing

and then eight thousand a month on

miscellaneous costs

uh finally they generated two hundred

forty two thousand in gross sales

so we got a lot of info there um kind of

set that aside and let's look at the

questions

one we want to know what is the

contractual income owed to the team for

2019

so we want to see kind of after we

consider the base monthly fee

and the percentage of sales how much is

the team going to get from sodexo

for outsourcing outsourcing that service

and then

part two of the case is did the team

make a sound financial decision in

outsourcing their

concession services so i'm going to

pause here for a minute and give you a

second to try

this practice case and again feel free

to pause

here if you want to do it yourself and

then come back

and we'll look at the answer and work

through it together

okay so what is the contractual income

owed to the team so part one

of the case well first of all we have to

figure out what that monthly

fee is going to generate so we know

there's this base fee of two thousand

dollars a month

is a six-month season so that means that

no matter what no matter what sodexo

generates an income the team is going to

get twelve thousand dollars for simply

giving the sodexo access to

their facility and the ability to sell

but we also have to consider that

there's also a percentage of sales piece

to this

and we know that in 2019

sodexo generated 245 000 in gross sales

so before they accounted for any of

their expenses

245 000 and the agreement or the

contractual agreement here is that 33

of that will go back to the team okay so

we do the math there

245 000 times 0.33 33

we get 80 850

so if we add those two together we can

see that the total contractual income

owed

from 2019 is 92 850

so that's the amount of money that

sodexo will write a check

and provide back to the team as part of

their contractual agreement to outsource

those concession services

obviously they keep what's left over all

right so that was part one

part two is did the team make a sound

financial decision and outsourcing their

concession services

okay so here we need a little bit more

information right we have to

look back at the data from what the team

was doing before they

outsourced their services okay

so we know from the case that prior to

outsourcing their services the team was

spending about 20 000 a month on payroll

right so just paying workers to work in

the concession stand

each game right so that's several hours

that they're

paying folks to work the stand so that

was about 120

000 for the six month period we also

know that they had about 8 000 in

miscellaneous costs a month

so that's another 48 000 they were

spending in terms of cost

so we add those together of course that

gives us a total of 168

000 in expenses we know from the case

that

in the prior year the team generated 242

000 in gross sales from the concession

stand so pretty similar

to what sodexo generated so that seemed

to be pretty stable

but of course if we account for their

expenses

basically what it cost them to operate

that concession stand when they were

doing it internally

we see that they actually only made 74

000

in actual revenue that year so if we

compare

what they generated when they were

operating it alone versus when they

outsourced it to sodexo

it seems like it was a sound financial

decision right because they're making

quite a bit more money at the end of the

day from

contracting and outsourcing that service

versus

doing it in-house and again i you know i

want we'll do another practice case like

this in class next week so you get a

little bit more practice

but i also want you to consider kind of

the risks versus benefits of doing this

because it is more than

kind of the financial numbers at the end

of the day there's also some other

factors we want to consider

so think about that and that could be

one of our points of discussion when we

return

all right i'm going to pause here and do

another video so that you get a little

bit of a break but when you go to the

next video we're going to talk

the other sort of piece of sport finance

that we identified at the top which is

the money going out so we've already

talked about money coming in now we're

going to talk about money going out

okay