Lonni Steven Wilson, Medaille College chapter 7 Approaches to Financial Planning

Key Chapter Objectives Define financial planning. Describe how to acquire financial data from internal and external sources. Understand how to utilize financial data to make business decisions. Distinguish between long-term and short-term financial planning.

Financial Planning Steps Gathering information Forecasting sales Projecting profits and losses Comparing with industry norms Determining capital needs

Financial Planning Case Study: Alex Rodriguez In December 2000, Alex Rodriguez signed with the Texas Rangers for $252 million over 10 years. Shortly after, the Rangers announced a ticket price increase; now only the Yankees and Red Sox had higher ticket prices. Why did they raise prices? Was the team just savvy in thinking people would pay to see the best ballplayer in baseball? (continued)

Financial Planning Case Study: Alex Rodriguez (continued) As the table shows, signing Rodriguez led to no measurable difference in attendance. However, the Rangers signed a 10-year $250 million contract with Fox to broadcast games that same year. Their broadcast fees essentially covered the Rodriguez contract. YearAverage attendance , , , , , ,818 Average Attendance at Ameriquest Field (Data from baseball-almanac.com. Available: )

Data Data gathering Companies cannot plan without appropriate data. Planning data should be compared with internal and external projections. Internal data: Often referred to as primary data since these are data generated by the business itself. External data: Data obtained from other sources, usually already developed and published; often referred to as secondary data.

Sources of Internal Data Personal observation or conversations Fan surveys Past balance sheets and income statements Audited financial records Annual reports Research and development reports Countless other documents generated by employees or consultants

Sources of External Data Monitoring international terrorist activities to determine if an event needs to be canceled Analyzing industry trends to develop appropriate pricing for concession items Tracking culinary advances to determine the most effective means of packaging and selling food items Reading current articles in trade publications to stay abreast of industry changes Attending conferences to hear what other executives are saying about the industry Reviewing government census reports to understand demographic changes in the possible fan base

Benchmarking Allows one business to compare itself to others and see if it is paying more for similar work or results Regardless of the type of external data, the reader of such reports needs to compare apples with apples, not apples with oranges. Comparing data that have been obtained using different equations will lead to inaccuracies.

Benchmarking with Revenues Thus, we might compare NCAA Division I athletic programs using expenses and revenues. This table shows the revenue streams for a typical Division 1-A program. CategoryPercentage of income Home gate receipts30.9 Cash gifts13.7 Radio & television12.6 Postseason compensation 7.1 Auxiliary income7.0 Institutional support7.0 Student fees6.6 Away-game guarantees 5.8 Other income5.7 Investment income2.0 State aid1.5 Data from "Fiscally friendly football," 1996, Sidelines: 2

Benchmarking with Expenses Looking at expenses, we could benchmark where one institution is spending money compared with others. This table shows the expenses for a typical Division 1-A program. CategoryPercentage of income CategoryPercentage of income Salaries and benefits 28.9Capital expenses 3.2 Grants-in-aid16.5Recruiting2.3 Other expenses9.2Publicity2.2 Operations and maintenance 6.5Fund-raising1.8 Team travel6.4Insurance1.1 Opponents’ payments 6.1Nonathletic expenses 1.0 Equipment and supplies 5.5Taxes0.9 Contract services 3.9 Administrative travel 0.6 Debt service3.9 Data from "Fiscally friendly football," 1996, Sidelines: 2.

Benchmarking Revenue by Sport We might also compare the revenues various sports in the athletic program are generating. CategoryPercentage Football63.3 Men’s basketball20.2 Student fees, state and institutional aid 15.2 Other men’s sports 0.8 Women’s sports0.5 Data from "Fiscally friendly football," 1996, Sidelines: 2.

Benchmarking Expenses by Sport Or we might compare the expenses various sports in the athletic program have. CategoryPercentage Football23.9 Support staff12.9 Women’s sports11.8 Other expenses9.2 Other men’s sports8.8 Operations & maintenance6.5 Men’s basketball6.3 Contract services4.0 Debt service3.8 Other12.8 Data from "Fiscally friendly football," 1996, Sidelines: 2.

The Financial Planning Process There are two major activities: –Forecasting potential revenues –Budgeting for future expenses, commonly called budgeting The most common managerial decisions have to do with maximizing revenue sources and minimizing expenses. Financial planning is often based on behavior learned from previous bad habits or mistakes.

Economic Conditions Affecting Financial Planning Inflation Inflation represents an increase in the price level of products that could be due to increased demand. The increased demand for products can force prices to increase, which leads to a chain reaction of increasing wages and material costs. Inflation and prosperity typically cause a sharp need for corporate capital so that the company can continue to produce more. Interest rates: Affect a business’ interest in borrowing money and its ability to do so.

Short-Term Planning Time frame usually less than two years Based on specific research Requires individuals to meet specific goals Requires close scrutiny of internal variables (e.g., cash flow and debt-related issues) Some key aspects: How to effectively understand and make decisions based on working capital, net working capital, current ratio, acid test ratio, and the cash budget

Long-Term Planning More oriented toward the future Allows executives to be creative because of uncertainties Long-term goals less clear (future uncertainty) Greater emphasis on external variables (e.g., industry trends and technological advancements) Backbone for developing the proper documentation needed to secure capital support

Key Terms budget—First and foremost a financial plan for the future. For example, if you want to buy a car, you might examine your financial position and discover that you can afford only $100 a month for a car. pro forma budget—A future budget based on past financial results and expected future financial results. It contains a financial plan for the business, and the two are often combined to help complete the business plan.

Questions for In-Class Discussion 1.Discuss a rough budget for your finances. What hurdles might you face in preparing the budget and following the budget? 2.Discuss a short-term plan for a perennially losing team, and identify specific steps that could be taken to increase income or generate victories. 3.Discuss a long-term plan for a perennially losing team, and identify specific steps that could be taken to increase income or generate victories.