Budgeting for Curve Balls
Dennis, Anita, Journal of Accountancy
For the Chicago White Sox, revenues are as unpredictable as next week's scores.
Every company's fortunes can be affected by a variety of unanticipated factors, such as weather, buying trends and national or international economic conditions. In professional sports, the variables can be particularly unpredictable. A winning player with a multiyear, multimillion-dollar contract might bring in sellout crowds one season and go into a slump the next, taking attendance figures with him. A team's revenues can surge or sag depending on how well it plays and how loyal the fans remain during losing streaks. "The baseball business isn't just about bottom lines--it's about winning," says Tim Buzard, vice-president of finance at the Chicago White Sox. "It's a challenge to predict anything." To produce an up-to-date and reliable financial picture, Buzard uses an ongoing, flexible process--with a modified zero-based budget--to ensure that the organization's plans are in sync with its current financial position. Financial managers facing variables in their own businesses may find the team's strategy can be adapted for their own circumstances.
WHO'S ON FIRST?.
While the team's largest expense is player labor costs, the greatest variable is attendance at games, which can have a significant financial impact. While some teams' fans turn out even during the worst slumps, "I think our attendance depends more on how the team plays than in most markets. The north side of our city [where the Chicago Cubs play] has more tolerance for a losing team than the south side [where the White Sox play]." The team's performance generally reflects player quality so "what we pay our players can have an impact on attendance." But high salaries are no guarantee of success, Buzard says. "Last year we had a very high payroll, but the team still didn't perform very well, so our attendance really didn't support that payroll."
"A company can usually look at its cost of goods sold and know what its margins are, but we're unable to predict some margins. At the same time, we have a number of competitors who want to win at all costs without regard for the bottom line; the focus is not necessarily to make an operating profit as in a typical business. We try to be fiscally responsible, but when you're competing with an organization that doesn't care how much money it loses, and your goal is to win games, that drives up your salaries." Teams pay between $10 million and $70 million in player salaries per year, Buzard says. "We're probably somewhere in the middle." Each year, the organization's chairman, Jerry Reinsdorf, sets a tolerance level for salaries based on expected revenues. The greatest financial challenge is to balance the salaries against the results high-paid players can achieve.
New stadiums also have an impact on attendance. For a number of years after the new White Sox stadium opened in 1991, "We were drawing about 2.9 million people annually--which we were quite pleased with. Up until last year, we had the best winning percentage record in the American League during the 1990s, but we're now out of the honeymoon period with the new stadium." Buzard hopes the new field has raised minimum attendance permanently. Before it was built, "we had years when we barely got to one million in attendance, and we hope those days are gone." However, when the team competes against other clubs that regularly draw three million people a year because of star teams or new stadiums or some other unpredictable factor, "Those teams have roughly double the gate revenue to spend."
FOOLED BY A "CHANGE UP"
In baseball, the players, coaches and finances are forever changing. To maintain a constant view of the team's finances, the team relies on a modified zero-based budget that is updated daily. This way, it can quickly revise its plans and spend more or less depending on its current situation. CPAs in a variety of industries can use this example to create their own plans for coping with the unpredictability of day-to-day business. …