Chapter 4
Finance and
Budgeting
Chapter Objectives
1. Define capital projects and explain why
both for-profit and nonprofit organizations
undertake them
2. Identify equity and debt funding sources
available for a sport organization’s capital
projects
3. Distinguish between general obligation,
revenue, and special tax bonds
4. Compare line-item and program budgets
5. Discuss advantages and disadvantages of
zero-based versus incremental budgeting
6. Explain what variance analysis is and how
it is used by managers
7. Describe the role of fundraising in charity
athletic events
Capital Projects
• Capital refers to the funds needed to finance
an organization’s assets.
• A capital project is a long-term investment
project that will increase the organization’s
assets.
• If an organization wants to build a new
facility (or renovate an existing facility),
there are many upfront costs, including costs
associated with land acquisition,
construction, and infrastructure
development.
– A capital project typically requires large
up-front cash outlays.
Is the Capital Project Worth it?
• Managers need to determine whether the project will
increase the value of the organization.
• In for-profit sport organizations, managers can
estimate the present value of all revenues that are
expected to be generated by the facility (cash
inflows) and the present value of all expenses
expected to be incurred by the facility (cash
outflows).
– As a simple decision rule, if the present value of
the cash inflows is greater than the present value
of the cash outflows, then undertaking the facility
project will increase the value of the firm.
• In nonprofit and public sector sport organizations,
decision-making about capital projects is
complicated by the public service orientation of
these organizations.
Equity Finance
• Equity is ownership interest in an organization, and
sport facilities may pursue several different forms of
equity financing for capital projects, including:
– Sale of stock
– Retained earnings
– Gifts
Debt Finance
• In order to procure the capital necessary for facility
projects, an organization will increase either its
liabilities or equity.
• Forms of debt finance include:
– Loans
– Bonds (including municipal bonds)
Municipal Bonds
• Municipal bonds are a special type of bond that may
be available for sport organizations that need to raise
funds.
• Municipal bonds can only be issued by state and local
government, and they are usually issued for the
purpose of financing capital projects.
• Municipal bonds are an attractive means of debt
finance because they are tax-exempt.
Security for Municipal Bonds
• Once the bond is issued, the sport organization must
raise sufficient funds to cover the amount owed to the
bondholder.
• While there are numerous municipal bond
arrangements, we will focus on three types of
municipal bonds commonly used for sport facility
projects:
– General obligation bonds
– Revenue bonds
– Special tax bonds
Facility Budgeting
• An organization’s budget is a key component of its
financial management.
• The operating budget refers to those activities that are
ongoing and necessary to maintain the current
capabilities of the organization to produce, sell, and
service its core products and services provided to the
customer base.
• An operational budget authorizes the funds necessary
for the day-to-day operations of the facility or event.
• The specific categories of expenses vary depending
on the type of facility or event.
Formatting Facility Budget
Financial Information
• The first option is a line-item budget. In a line-item
budget, revenues and expenses are broken down into
specific categories.
– Revenues are estimated for each category, and
expense limits are established for each category.
• The second format for an operating budget is a
program budget. In a program budget, funds are
allocated for specific programs or projects.
– Whereas the operating budget is focused on what
the organization buys, the program budget is
focused on programs that meet the organization’s
strategic goals.
Budgeting Approaches
• An organization’s budget should be aligned with the
company’s strategic plan.
• Budgeting decisions can be made using a variety of
budgeting approaches, of which the most commonly
used are incremental budgeting and zero-based
budgeting (ZBB).
• In incremental budgeting, management makes an
allocation decision based on the previous year’s
allocation.
• In ZBB, managers must evaluate all spending
decisions on a regular basis, with the intent of
adapting to a changing business environment and
maximizing efficiency.
Variance Analysis
• An organization’s budget is set at the beginning of the
fiscal year and is based on estimates of revenues and
expenses.
• An organization may realize unexpected savings or
encounter unexpected increases in expenses.
• Because estimates are likely to deviate from actual
revenues and expenses, it is important that
organizations periodically compare budgeted figures
with actual figures.
Financial Issues in Charity Athletic
Events
• The idea behind charity athletic events is that
nonprofits outsource fundraising to individuals who
either (1) have a personal connection to the
nonprofit’s mission, (2) have an interest in the athletic
activity, or (3) have some combination of the two.
• The event organizer, which is typically the nonprofit
organization, produces the event, and participants
raise awareness and money for the nonprofit
organizations through a combination of their own
contribution and peer-to-peer fundraising.
• The financial commitment required of participants
varies depending on the event.