(An actual vignette, anonymous)
A professional sports team gains revenue from stadium ticket sales, broadcasting rights, food and drink concession sales, and sales of sports attire. Expenses include player and staff salaries, concession supplies, and depreciation on stadium and training facilities. The team plays to booked out crowds but, with escalation in players’ salaries, the operation just breaks even.
In 2005, a consultant advises on strategy to enhance profits: Sell multiple-year season tickets to enthusiastic fans, payment upfront. Modify the stadium to incorporate luxury boxes sold to corporations on multiple-year contracts, cash up front. Sell concession rights to franchisees, cash up front. Require longer payment terms from suppliers of sports and other equipment. Modify player contracts with a deferred payment element in the form of a pension.
The consultant presents a pro forma balance sheet to the team owners who balk at the increase in liabilities with deferred revenues, accounts payable, and player retirement liabilities. But the consultant points to the increase in cash from the upfront payments and longer-term payables, cash that the owners can invest, not only in securities but also in the stadium modifications. Indeed, the consultant advises the construction of a new stadium with more capacity for season ticket revenue and up-market concession franchises. Sensibly, the owners also ask for a pro forma income statement. That forecasts higher revenue with fan participation and higher concession revenue. Expenses increase because of higher stadium depreciation, but bottom-line income increases.
The increase in cash comes without additional investment by the owners. They are using cash from customers and suppliers; operating liability leverage finances the business with added value. Perhaps the consultant should demonstrate the value added with increased RNOA and residual income.
