Chapter 4

Financial and Economic Principles Applied to Sport Management

Introduction

• Financial aspects of sport world 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.

• There is a difference between an industry’s sales and its value-added.

• Financial boom has created a great need for people with training in finance.

Key Concepts: What Is Finance?• No single, universally agreed upon definition• Generally refers to two primary activities of an

organization:– How an organization generates the funds that

flow into that organization– How these funds are allocated and spent once

they are in the organization

Key Concepts: Financial Flows in Sport Organizations

• Profits/Income– Difference between financial inflows (Revenues)

and outflows (Expenses)• Assets: Anything an organization owns that can be

used to generate future revenues• Teams can fund or “finance” assets in many ways:

– Owners’ Equity: The amount of their own money owners have invested in the firm; stocks

– Debt: Amount of money an organization borrows; bonds

– College sports are nonprofit. Use budgetary transfers from the university and other innovative methods

Key Concepts: Some Typical Financial Decisions• Many financial decisions ultimately revolve around

management of assets• Return on Investment (ROI): Expected dollar-

value return on each alternative investment• Risk

– Future benefits of investment cannot be known at time of investment

– Owners must decide how much they will finance with their own money and how much with borrowed money• Debt carries more risk than equity does

Key Concepts: The Economics of Sports• Spectator sport industry is organized much differently

from nonspectator industry and from rest of American business.– The existence of one franchise benefits the others.

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Key Concepts: The Economics of Sports (cont.)– Sport leagues considered monopolies

• They face no direct competition from rival leagues• Gives them greater bargaining power when dealing

with stakeholders (e.g., players, broadcasters, corporate sponsors, and local governments) and allows them to potentially charge higher prices

• Allows them to earn much higher profits than would otherwise be the case, as well as enact financial policies (e.g., salary caps, revenue sharing) that would not be possible with direct competition

• Only legal monopolies in United States

Key Skills• No matter what type of sport organization involved,

the finance function is crucial• Those interested in a career in sports should have

solid grounding in:– Corporate finance– Managerial and financial accounting– Advanced use of spreadsheet software

• For those interested in working in spectator sports, familiarity with sport economics is beneficial

Current Issues: Can Growth Continue?• There has been an explosion of spending on recreational

and fitness activities.– The U.S. population has aged, overall affluence has

increased, and societal concerns about health-related issues have grown.

• For individual segments of nonspectator sport industry, predicting trends is a factor. Capital investments are made now, but payoff does not occur until later.

• Spectator sport industry has had tremendous revenue growth in past 15 years as the result of increased popularity, premium ticketing, broadcast contracts, sponsorship sales, stadium naming rights, and so on.

Current Issues: Challenges• Increasingly large capital

investments are needed to be able to continue to generate revenues.

• College athletics, taken as a whole, continues to be unprofitable.– The revenue-generating

abilities of football and men’s basketball are insufficient to compensate for deficits of other sports.

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Current Issues: Challenges (cont.)

• 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