Financial and
Economic
Principles Applied
to Sport
Management
Chapter 4
Introduction
• The sport industry is a multibillion dollar industry.
• Financial aspects of sport industry 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.
• Financial boom has created a great need for people
with training in finance.
“Sales” vs “Value-Added”
• There is a difference between an industry’s “sales”
and its “value-added.”
• “Value-added” is a more accurate statistic.
• Cost of raw materials and manufacturing are
considered when calculating “value added.”
Key Concepts: What Is Finance?
• No single, universally agreed upon definition
• Generally refers to two primary activities of an
organization:
1. How an organization generates the funds that
flow into that organization
2. How these funds are allocated and spent once
they are in the organization
Key Concepts: Revenues vs Expenses
• Revenues:
– Funds raised by an organization through a variety
of sources including tickets, merchandise,
services, sponsorships, etc.
• Expenses:
– Funds spent to operate an organization such as
salaries, equipment, utilities, food, travel,
insurance, etc.
Key Concepts: Profit
• Profit: More revenues than expenses
• Can be enhanced by increasing revenues, decreasing
costs, or both
• Income Statement: Summarizes an organization’s
revenues, expenses, and profits over a given time
period (fiscal year)
Key Concepts: Assets
• Assets: Anything an organization owns that can be
used to generate future revenues (facility,
equipment)
• Teams can fund or “finance” assets in many ways:
– Owners’ Equity: The amount of their own money
owners have invested in the firm
– Debt: Money an organization borrows (bonds)
– Franchise ownership groups
– Corporate conglomerates (See Table 4-1)
– Publically traded sport companies (See Table 4-2)
Key Concepts: Debt
• Define Debt (*liability)
– The amount of money an organization borrows
from banks or other lenders in the market (bonds)
– Organization is legally obligated to pay back the
original amount borrowed (principal) plus
interest.
• Bonds
– Financial instruments that allow the borrower to
both borrow large dollar amounts over an
extended period of time (20 or more years)
– Issued by government and/or corporate entities
– Often used to fund stadium construction
Key Concepts: Credit Facilities
• Define Credit
– Some professional leagues maintain “credit
facilities” (loan pools) backed by league revenues.
– Individual teams can borrow from the loan pools
at better interest rates.
– NFL debt has highest credit rating = lowest credit
risk = can borrow at lowest interest rate
Key Concepts: Balance Sheet
• Balance Sheet: A financial statement that
summarizes an organization’s assets, liabilities, and
owner’s equity at any given point in time
Key Concepts: Return on Investment (ROI)
• Define Return on Investment
– The expected dollar value return on each
alternative investment, stated as a percentage of
the original cost of each investment
– Example: ROI of 9% = the organization would
recover all of the initial investment plus an
additional 9%
– Note: There is “risk” associated with all
investments
– Example: Professional Sport Franchise Values
Key Concepts: Risk
• Define Risk
– Because the future is uncertain, the future benefits
of any investment cannot be known with certainty
at the time the investment is made.
– Level of risk must be considered by sport
managers prior to any future investment.
– Significant risk associated with how to fund
significant investments
– Equity vs. Borrowed money?
Key Concepts: Economics of Sports
• The general field of (micro) economics examines
how an industry organizes itself and how this
industry structure affects competition and profits
among firms in the industry.
• Example: Spectator Sport Industry
- Teams compete on the field but cooperate
financially off of the field; more like partners.
- Mutual existence has positive financial impact
on the other (Red Sox and Yankees)
Key Concepts: Economics of Sports
– Sport leagues considered legal monopolies
• 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
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 healthrelated issues have grown.
• For individual segments of non-spectator sport
industry, predicting trends is a factor. Capital
investments are made now, payoff occurs 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: Can Growth Continue?
• Increasingly large capital investments are needed to
be able to continue to generate revenues and growth.
• Concern: 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 all other sports.
Current Issues: Can Growth Continue? (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
Summary
• The past two decades have been very financially
lucrative for many facets of the sport industry.
• The financial “boom” has increased the need for
sport managers with specialized financial skills.
• Analytical skills and tools will be needed by sport
managers of the future to help create new revenue
streams and solve financial problems faced by sport
organizations.