chapter 12 Sources and Methods of Financing

Financial Management Financial management is “the process of planning, acquiring, and using funds to achieve predetermined organization goals and objectives” (Sellers, Gladwell, & Pope, 2005, p. 493).

Sources of Revenue Revenue is all the money that comes into an organization. Five common revenue sources: 1. Compulsory comes from taxes 2. Gratuitous comes from grants or fund-raising 3. Earned comes from fees and charges for programs and services 4. Investment comes from interest or capital gains from money invested 5. Contractual comes from agreements with third parties

Compulsory Income Real property taxes are a common funding source for many parks and recreation agencies in North America. In addition to property tax, several other forms of taxation are used: –Tax incremental financing –Sales tax –Excise tax –Funds from lotteries and gaming

Property Tax System

Gratuitous Income Federal grants Fund-raising Sponsorships Individual donations Planned giving

Earned Income Earned income is a given in the commercial sector, but many nonprofits and public sector agencies also charge for some part of their services. Main areas of earned income: –Entrance and admission fees –Rental fees –User or program fees –Sales revenue –License and permit fees –Special fees (fees for unique services)

Investment Income Revenue received from money invested in stocks, bonds, or real estate is a common feature of commercial operations. This can also be an important revenue source for a well-managed public or nonprofit organization.

Contractual Receipts Revenue derived from agreements with outside organizations that provide services and monetary resources.

Table 12.1 Contracts of the Austin Parks and Recreation Department ContractCommission paid to city city revenue from contract Contract 1: Barton Springs Food and Beverage in Zilker Park $90,000 annually ($7,500 per month), 8% of gross annual sales up to $265,000, and 28.5% of gross annual sales exceeding $265,000 $75,762 Contract 2: Butler Pitch and Putt short irons golf course $13,200 annually ($1,100 per month), 1% of gross annual sales up to $80,000, and 1.5% of gross annual sales exceeding $80,000 $12,300 Adapted from City of Austin Parks and Recreation Department (2005).

Expenditures: Two Broad Categories Operating expenditures are the money going out of an organization as a recurring part of doing business. Capital expenditures are costs incurred through large-scale purchases. –General obligation bonds –Revenue bonds

Table 12.2 General Obligation Bonds Versus Revenue Bonds AdvantagesDisadvantages General obligation bonds Taxes are used to pay back the debt, resulting in a more secure guarantee, and these bonds have a lower interest rate than many other nonguaranteed debt options. Voter approval is required through a bond referendum. Funding sources through tax levies results in virtually no risk of default. All taxpayers pay regardless of any direct benefit from the project. Debt ceiling limit. (continued)

Table 12.2 General Obligation Bonds Versus Revenue Bonds (continued) AdvantagesDisadvantages Revenue bonds Reflects a user pay philosophy— those who use will pay. Higher interest rates because of nonguaranteed status. Voter referendum is not required.Restricted to facilities that can generate a profit. Used with permission of Fitness Information Technology, Inc. (2004).

Pricing Pricing is done for several reasons: To recover costs To generate additional resources for an agency To establish value based on the price–quality relationship connected with marketing To influence behavior through fees such as damage deposits To promote efficiency and shift demand patterns

Approaches to Pricing Arbitrary pricing Market-based pricing Pricing based on what competitors charge Cost recovery pricing

Cost Recovery Pricing Process Determine pricing variables. Determine the cost of one unit of production. Determine the subsidy rate.

Table 12.3 Cost Allocations of a $100,000 Salary Allocation method TennisGolfFitnessBowling Equal share$25,000 Percentage of budget 40%25%30%5% $40,000$25,000$30,000$5,000 Time-budget study 10%25%45%20% $10,000$25,000$45,000$20,000

Table 12.4 Tennis Center Cost Summary Cost Months or hours SubtotalTotal Fixed costs General obligation bond payment $3,50012$42,000 Facility maintenance$1,70012$20,400 Head professional$50,0001 Administrative overhead$1,20012$14,400 Total fixed costs$126,800 (continued)

Table 12.4 Tennis Center Cost Summary (continued) Cost Months or hours SubtotalTotal Variable costs Utilities$155,600$84,000 Front-desk staff$75,600$39,200 Custodial staff$85,600$44,800 Total variable costs$168,000 Total fixed and variable costs $294,800

Table 12.5 Youth Clinic Unit Cost Cost Months or hours SubtotalTotal Fixed costs Tennis balls (1 case)$ Court time$55.282$ Total fixed costs$ (continued)

Table 12.5 Youth Clinic Unit Cost (continued) CostMonths or hours SubtotalTotal Variable costs Supplies$ instructors$25.004$ Total variable costs$ Total costs$ Cost per person$9.85 Demand: 30 kids on 6 courts. P = ($ $125.00) / 30, P = $9.85.

How to Determine a Subsidy Rate Based on program type: Public: These programs benefit everyone and are usually completely subsidized. Merit: These programs benefit the users but also provide some benefit to nonusers. They are usually partially subsidized. Private: These programs benefit the user only. They provide full cost recovery or a profit.

Table 12.6 Subsidy Levels and Hourly Rates ProgramProgram type Subsidy rateCourt price Open court timePublic100%Free Adult team tennisPrivate–25%$69.10 Youth beginner lessons Merit60%$22.11 Teen traveling teamPrivate–20%$66.34 Youth intermediate league Private0%$55.28

Differential Pricing Differential pricing is charging a different price to different populations. Differential pricing variables include the following: –Age: reduced fees for children –Product level: lower cost for those new to an activity –Distribution: lower cost at less busy times, days, or locations

Creative Ways to Bring in Revenue Carefully examine investment income. Develop creative programming to attract multiple markets. Lease space for cell phone towers. Get corporate sponsorships and grants. Partner with like-minded agencies. Attract events. (continued)

Creative Ways to Bring in Revenue (continued) Use variable pricing of sport events for premier and value games. Focus on being more efficient. Closely look at the mission of the organization and eliminate services not focused on the mission. Establish a foundation for increased charitable giving.