Midterm #1 Finance & Economics in the Sport Industry Flashcards
financial situation of U.S. professional sports
pro segment is growing financial problem (imbalance)
method against the financial problem and imbalance in U.S. pro sports
revenue share
luxuary tax
formula for profitability
profit = total revenues - total costs
biggest part of revenue in pro sports
media contracts
rising costs
salaries, travelling, facilities, equipment
tough financial future decision for athletic departments
conference afiiliation
which divisions to compete in
which teams to field
solution for rising costs
find ways to increase revenue
what deals economics of sport with
scarcity (limited recources)
efficacy
get job done
economic interaction
exchange of recources to willing party
one product of interst for another item of value
2 or 3 areas of study withing economics of sport
macroeconomics
microeconomics
behavioral economics
what is macroeconomics concerned with
performance and behavior of the entire countries´ economies
unemployment, interst rate, inflation…
what is microeconomics concerned with
behavior and performance of single industries or individual businesses
price, cost, revenue, profit
what does the microeconomics model explain
behavior of producers and consumers
how market operate
market
place where consumers and producers exchange goods and services - doesn´t need to be a physical place
what is behavioral economics concerned with
behavior and decision-making of individuel people
what does behavioral economics often throw out
old assumptions macro-and microeconomics had to make
e.g. individuals´ judgement aren´t random and “offsetting”
there are cognitive biases that affect everyone consistently
examples what behavioral assumptions help to understand
why NFL coaches punt on 4th and inch
why teams draft certain players
how much sport gamblers make
why is microeconomics given most of the attention in sport
dmand and law of demand
supply and law of supply
market equilibrium
market surplus and shortage
quantity demand
the amount consumers are willing to buy at various prices
law of demand
the cheaper the price - the higher the demand
demand
relationship between the price of a product and the amount of a product consumers are willing to buy
supply
relationship between the price of a product and the amount of a product a suppliers is willing to produce and sell
quantity supplied
the amount of a product suppliers are willing to produce and sell at various prices
law of supply
increase in production as price of product increases
decrease in production as price falls
market equilibrium
intersection of supply and demand
consumers are willing to buy as much of a product as supplier is willing to sell
market surplus
suppliers are willing to produce and sell more of a product than consumers are willing to buy
market shortage
consumers are willing to buy more of a product than suppliers are willing to produce and sell
economic impact of sport events and facilities
events and activity bring substantial amount of economic activity into community
spending of money can stimulate the local economy
what do sport economic impact studies etimate
changes in net economic activity in a community (revenue, tax dollars, jobs…)
methodology of sport economic impact studies
surveys
spending onhotels, cars, food, entertainment, merch…
software used for sport economic impact studies
RIMS II; IMPLAN
sport economic impact studies
collect info on spending patterns of visitors
suffer from disagreements and manipulation
economic impact
ex post
after an event
sport leverage
ex ante
before an event
functions of financial management
what to do with current financial resources
how to produce additional financial recources
key roles of financial manager
determine how much money an organization will need to meet long-term obligations
determine how the organization will procure (beschaffen) those funds
how to produce neede funds / extra money
four main revenue streams of pro sports
investments: PE/VC
offering equity in team
expansion teams
investments. PE/VC
PE -> private equity: riskless; sport teams invest in other companies
VC -> venture capital: sport teams invest into start-up; risky
offering equity in team
give % of ownership in return of capital (buying of shares/stocks)
expansion teams
ourchase of ownership for a new team added to a league
money gets shared in between owners
financial statements
balance sheet
income statement
expenses
balance sheet
financial condition at a point in time consistent intervals (often ones a quarter) made up of three parts
3 parts of a balance sheet
assets (things that are value) - current and long-term
liabilities (thing we have to pay for) - current and long-term
owner´s equity - capital and retained earning
current assets of a balance sheet
available within the next calender year
depreciation of assets
sth. becomes devalued (e.g. players when they get older)
can be positive because taxes are based on that
formular for total assets
liabilities + owner´s equity
income statement
results of doing business over a given period of time (profitability)
revenue included in income statement
income of noncash value )delivery of product not purchase)
expenses
direct - tied directly to cost of making product
operating - other normal expenses (slaries, rent…)
other - expenses related to outside of normal business operations
income tax - paid to state/federal government, based on revenue
net income
revenue - expenses
what do revenue and expenses depend on
type of the sport organization
nonprofit/for profit
sources of revenue unique to the sport industry
game attendance and ancillary purchase
media rights
sponsorships and endorsements
licensed merchandise
sources of expenses unique to the sport industry
cost of sport facilities (Public-Private Funded)
cost of salary (>50% of total expenses for sport teams)
what does an Economic Impact Analysis (EIA) study
“net economic benefit” coming from facility or sporting event
rationale of economic impact of a sport event
residents give money to govern. (taxes)
govern. spends money to put on sporting event
sporting event/facility attracts new money from outside
facility earn a ROI for city and residents
3 components involved in an EIA
of people that attend an event
the amount each visitor spent
an economic multiplier (their money gets spent more than ones within the community - on average how many times?)
two sides of an investment decision
sports related or otherwise
questions connected to investment decision making
should govern. be active investors or passive observers
who should pay for project
who does the investment benefit
stakeholders that favor govern spending for sport projects
fans, players, restaurant in location
stakeholders that don´t favor govern spending on sport project
non-sport fans
other industries
how should EIAs be conducted
scientifically rigorous
procedural
reproducible
unbiased
total economic impact
direct impact (initial money spent by visitors) + indirect impact (ripple effect of re-circulating direct impact $ (B2B)) + induced impact (employees´ spending additional wages from direct impact $ (P2B, P2P))
11 problems of EIA identified by Crompton related
- Using sales-based multipliers instead of household income-based multipliers
- Using employment multipliers
- Using incremental Multiplier Coefficients
- Defining the area of interest
- Inclusion of local spectators/residents
- Inclusion of ‘time-switchers’ and ‘casuals’
- Sketchy Multiplier coefficients
- Reporting ‘Total’ Economic Benefit
- Confusing Turnover and Multiplier
- Not discussing the opportunity costs
- Ignoring the costs (!!!)
what have sales mutipliers to do with
how new money ripples (rieseln) throughout the city´s business
what have income (profit) mutipliers to do with
how new money affects the actual income of residents.
what is higher sales or income multipliers
sales mutipliers are always higher
what do employment multipliers have to do with
how many full-time jobs will be created from the event or facility
least reliable multiplier
define the area of interest
city, state. national?
who are defined as “out of area visitors”?
city´s economy smaller than state´s
what kind of visitors should be included
only outside visitors whose primary intention was the event
“accidental” new money should not count
what kind of visitors should be included
only outside visitors whose primary intention was the event
“accidental” new money should not count
who are “time-switchers” and “casuals”
people who planned to visit area, but change time to combine visit with event
what do sketchy multiplier coefficients include
same multipliers as another event, because they are similar
rule of thumb to make statements
multipliers without math to back them up
problem with reporting total economic benefit
If a city contributes $2M towards a $100M facility, it should only be entitled to 1/50 of the economic benefit generated by the facility
intersted in “mariginal” economic benefit
ROI
benefits received/costs
what factors are part of a facility´s cost
build
maintain
service
update and renovate
