Financial Resource Management Sport, Tourism, and Leisure Services

Russell E. Brayley and Daniel D. McLean

Publishers: Joseph J. Bannon/Peter Bannon General Manager: Doug Sanders Production Manager: Jose Hernandez Cover Design: Jose Hernandez Cover Images: Copyrigth tm-media 2008 used under license from Shutterstock, Inc. Interior Design: Michelle Dressen

Library of Congress Catalog Card Number: 2008930928 ISBN print edition: 978-1-57167-557-6 ISBN ebook: 978-1-57167-603-0

Printed in the United States.

Sagamore Publishing LLC 1807 N Federal Dr. Urbana, IL 61801 www.sagamorepub.com Dedication

To Our Families:

Renée, Doug, Austin, Erika, Natalie

– Russell Brayley

JoAnn, Donna, Jennifer, Suzanne, Timothy, Sally, Michael, Kristine

– Daniel McLean

TABLE OF CONTENTS

PREFACE ...... xv

SECTION A - FINANCIAL MANAGEMENT IN CONTEXT ...... 1 CHAPTER 1. Financial Management in Public, Private Not-for-Proﬁt, and Commercial Sport, Tourism, and Leisure Service Organizations ...... 3 Introduction ...... 3 Public Enterprises ...... 3 Legislative/Legal Parameters ...... 4 Social Roles/Expectations ...... 4 Market Management Techniques ...... 4 Indicators of Success ...... 5 Financial Management Opportunities and Challenges ...... 5 Other ...... 5 Private Not-for-Proﬁt Enterprises ...... 6 Legislative/Legal Parameters ...... 6 Social Roles/Expectations ...... 7 Market Management Techniques ...... 7 Indicators of Success ...... 7 Financial Management Opportunities and Challenges ...... 7 Other ...... 8 Commercial Enterprises ...... 8 Legislative/Legal Parameters ...... 8 Social Roles/Expectations ...... 8 Market Management Techniques ...... 9 Indicators of Success ...... 9 Financial Management Opportunities and Challenges ...... 9 Competition and Cooperation ...... 10 Summary ...... 11

CHAPTER 2. Financial Management in Public and Not-for-Proﬁt Leisure Service Organizations ...... 13 Introduction ...... 13 Public Leisure Service Enterprises ...... 13 Organizational Structure ...... 13 Operational and Fiscal Authority ...... 14 Financial Objectives ...... 15 Debt Management ...... 15 Accounting Management ...... 16 Reporting ...... 16 Performance Evaluation ...... 16 Not-For-Proﬁt Leisure Service Enterprises ...... 17 Organizational Structure ...... 17 Financial Objectives ...... 17 Debt and Account Management ...... 17 Reporting ...... 18 Performance Evaluation ...... 18 Summary ...... 19

CHAPTER 3. Financial Management in Sport Organizations ...... 21

Introduction ...... 21 Sport as an Industry ...... 22 Public Subsidization of Sport Facilities ...... 23

v Television Ratings and Broadcasting Fees ...... 24 Franchise Values and Player Salaries ...... 25 Attendance Costs of Sporting Events ...... 27 Summary ...... 29 References ...... 29

CHAPTER 4. Financial Management in Tourism and Commercial Recreation Organizations ...... 31 Introduction ...... 31 Financial Objectives ...... 32 Debt and Inventory Management ...... 32 Account Management ...... 33 Reporting ...... 33 Performance Evaluation ...... 34 Summary ...... 34

SECTION B - ORGANIZATION ...... 35 CHAPTER 5. Functions ...... 37

Introduction ...... 37 Financial Responsibility ...... 38 Financial Functions of the Organization ...... 38 Director of Finance ...... 39 Controller (also called “Comptroller”) ...... 39 Treasurer ...... 39 Assessor ...... 39 Purchasing Agent ...... 39 Auditor ...... 40 Summary ...... 40

CHAPTER 6. Departmentalization ...... 43

Introduction ...... 43 Organization for Financial Management in the Public Sector ...... 43 Organization for Financial Management in the Private-Not-for-Proﬁt and Commercial Sectors ...... 45 Program, Unit Involvement in Financial Management ...... 45 Politics and the Financial Management Organization ...... 49 Summary...... 50

SECTION C - ECONOMICS ...... 51 CHAPTER 7. Economic Principles ...... 53

Introduction ...... 53 Supply and Demand ...... 54 Estimating Supply and Demand ...... 57 Inﬂation ...... 60 Interest ...... 62 Future Value ...... 63 Present Value ...... 65 Depreciation ...... 65 Sensitivity to Changes in Price ...... 67 Economic Impacts ...... 70 Summary ...... 73

SECTION D - REVENUE MANAGEMENT ...... 75 CHAPTER 8. Revenue Sources ...... 77 Introduction ...... 77 Types of Income Sources ...... 77

vi Compulsory Income Sources ...... 79 Types of State and Municipal Taxes ...... 79 Other Sources of Compulsory Income ...... 84 Federal Government Sources ...... 87 Gratuitous Income ...... 88 Earned Income ...... 88 Investment Income ...... 90 Contractual Receipts ...... 91 Partnerships and Collaborations ...... 91 Revenue Structure Plan ...... 93 Summary ...... 94 References ...... 95

CHAPTER 9. Pricing ...... 97 Introduction ...... 97 Purposes of Pricing ...... 97 Pricing to Recover Costs ...... 97 Pricing to Create New Resources (Added Value Pricing) ...... 98 Pricing to Establish Value ...... 98 Pricing to Influence Behavior ...... 98 Pricing to Promote Efficiency ...... 99 Pricing to Promote Equity ...... 99 The Appropriateness and Feasibility of Pricing ...... 100 The Nature of Price ...... 101 Monetary Price ...... 101 Opportunity Price ...... 102 Psychological Price ...... 102 Effort Price ...... 102 Approaches to Establishing Price ...... 103 Calculating Costs for Unit Pricing ...... 104 Subsidization and Unit Pricing ...... 106 Other Considerations in Establishing Price ...... 107 Willingness to Pay/The Going Rate ...... 108 Sensitivity to Changes in Price ...... 109 Adjusting Prices ...... 110 Summary ...... 111

CHAPTER 10. Grantseeking ...... 113 Introduction ...... 113 Why Pursue Grants? ...... 113 The Granting Environment ...... 114 The Grantseeking Process ...... 116 Step 1: Identifying a Potential Idea ...... 116 Step 2: Discovery, Selection, and Contact with a Granting Agency ...... 117 Step 3: Preparation of the Grant Proposal ...... 121 Step 4: Submitting the Grant Proposal ...... 129 Step 5: Grantmaker’s Decision ...... 129 Step 6: Grant Administration ...... 130 Summary ...... 131 References ...... 131

CHAPTER 11. Philanthropy and Fundraising ...... 133 Introduction ...... 133 Philanthropy ...... 133 Why Fundraising is Important ...... 134 The Role of Fund Development ...... 135

vii Why People Give ...... 136 Charitable Organizations ...... 136 Activities of a Charitable Organization Established to Support the Park System ...... 137 Fund Development ...... 137 Fundraising Sources ...... 140 Goal Setting, Relationships, and the Gift Pyramid ...... 141 Goal Setting ...... 143 The Gift Pyramid ...... 143 Fundraising Strategies ...... 144 Annual Campaigns ...... 145 Planned Giving ...... 146 Special Events ...... 148 Support Organizations ...... 149 Selecting Fundraising Strategies ...... 150 Summary ...... 150 References ...... 151

CHAPTER 12. Sponsorship ...... 153 Introduction ...... 153 Causes of Sport Sponsorship Growth ...... 155 Setting Sponsorship Objectives ...... 158 Sponsorship: The Corporate Perspective ...... 160 Sponsorship Acquisition: The Sport Organization’s Perspective ...... 161 Selling the Sponsorship Opportunity ...... 162 The Sponsorship Proposal Document ...... 163 Marketing Beneﬁts of Sponsorship ...... 163 Cross Promotions ...... 164 Virtual Advertising ...... 164 Hospitality ...... 164 Evaluation ...... 164 Summary ...... 166 References ...... 166

SECTION E - EXPENDITURE MANAGEMENT ...... 169 CHAPTER 13. Budgeting Basics ...... 171 Introduction ...... 171 Budget Construction Guidelines ...... 171 Gathering Information ...... 172 Identifying the Budget Goal ...... 173 Essential Information ...... 173 Gathering New Information ...... 173 Organizing the Data ...... 173 Determining Costs ...... 174 Organizing the Data ...... 175 Organizing the Data ...... 176 Organizing the Data ...... 179 Budgeting for Contingencies ...... 179 Summary ...... 179

CHAPTER 14. Budget Preparation ...... 181 Introduction ...... 181 Budget Processes ...... 181 What is a Budget? ...... 181 The Budget Cycle ...... 182 Funds...... 186 Government Funds ...... 188

viii Proprietary Funds ...... 190 Fiduciary Funds ...... 190 Budget Preparation Format ...... 191 Budget Preparation Activities ...... 191 The Relationship of Strategic Planning to Budget Preparation ...... 191 Budget Preparation Philosophies ...... 194 Preparing the Departmental Work Plan ...... 195 Estimating Personnel Service Requirements ...... 195 Staﬃng Issues ...... 197 Contractual Service Requirements ...... 198 Materials, Supplies, and Equipment Costs ...... 199 Reviewing Budget Estimates at the Departmental Level ...... 200 Summary ...... 201 References ...... 201

CHAPTER 15. Budget Formats ...... 203 Introduction ...... 203 Common Budget Formats ...... 203 Object Classiﬁcation and Line Item Budgets ...... 204 Program Budget ...... 208 Performance Budget ...... 212 Running Budget ...... 215 Zero-Based Budgeting ...... 217 Summary ...... 221 References ...... 221

CHAPTER 16. Capital Budgeting ...... 223 Introduction ...... 223 Beneﬁts of Capital Budgeting ...... 223 The Capital Budgeting Process ...... 225 Capital Improvement Revenue Sources ...... 230 Bonds ...... 230 Other Capital Improvement Revenue Sources ...... 235 Capital Budgeting in the Commercial Sector ...... 237 Decision Processes ...... 237 Income Sources of Commercial Capital Projects ...... 240 Summary ...... 240 References ...... 240

CHAPTER 17. Budget Presentation ...... 243 Introduction ...... 243 Purposes of Budget Presentations ...... 243 The Written Budget Document ...... 244 Presenting the Budget ...... 246 Principles of Eﬀective Presentation ...... 246 Presentation Tips ...... 250 Summary ...... 251

CHAPTER 18. Accounting and Reporting ...... 253 Introduction ...... 253 Stock and Flow ...... 254 The Balance Sheet ...... 255 The Income Statement (a.k.a. Proﬁt/Loss Statement) ...... 256 Internal Control ...... 257 Petty Cash ...... 257

ix Reporting ...... 260 The Budget Statement ...... 260 Project/Event Report ...... 261 RevPAR (Revenue Per Available Room) ...... 261 Daily Operations Report ...... 262 Summary ...... 262

SECTION F - PLANNING ...... 265 CHAPTER 19. Business Planning ...... 267 Introduction ...... 267 Format of the Business Plan ...... 268 Title Page ...... 268 Front Matter ...... 269 Executive Summary ...... 269 The Enterprise ...... 270 The Industry ...... 270 Product/Service Oﬀering ...... 271 Market Analysis ...... 272 Marketing Plan ...... 272 Development Plan ...... 273 Production/Operations Plan ...... 273 Management Team ...... 274 Financial Plan ...... 275 Appendices ...... 279 Summary ...... 280 References ...... 280

APPENDIX...... 281

INDEX...... 285

x LIST OF TABLES

1.1. A summary of finance-related similarities and differences among public, private, not-for-profit, and commercial sport, tourism, and leisure service organizations ...... 11 2.1. Public and not-for-profit organizations compared on structure, revenue, and measures of success ...... 14 3.1. Highest valued professional sport franchises in 2006 ...... 26 3.2. Item costs ($) and Fan Cost Indexes (FCI) for selected Major League Baseball Teams (2006) .. 28 3.3. Item costs ($) and Fan Cost Indexes (FCI) for selected National Basketball Association Teams (2006) ...... 28 3.4. Item costs ($) and Fan Cost Indexes (FCI) for selected National Football League Teams (2006) ...... 29 4.1. Funding sources and measures of success for tourism organizations in the public, private-not-for-profit, and commercial sectors ...... 32 7.1. Summary of supply and demand data for proposed marina ...... 58 7.2. Common influences on supply and demand for leisure and sport services ...... 61 7.3. Excerpt from Interest Table A (1+ i)n ...... 64 7.4. Excerpt from Interest Table B 1/(1+i)n ...... 66 7.5. Annual starting values, depreciation, and remaining book values after straight line depreciation ...... 66 7.6. Annual starting values, depreciation, and remaining book values after declining balance depreciation (150%) ...... 67 7.7. Comparison of depreciation amounts and remaining book values for straight line declining balance (150%) and declining balance (200%) depreciation of a $6,000 asset ...... 68 7.8. Sample price and attendance data for four market segments ...... 69 7.9. Sample data and computed elasticities for four market segments ...... 70 8.1. Income sources and their level of importance to the three sectors ...... 78 8.2. Comparison of Alabama state parks sources of revenue compared to national trends ...... 80 8.3. Amount and percentage of state and local government revenue from selected sources ...... 81 8.4. Example of a revenue structure for a municipality ...... 94 8.5 Revenue structure for enterprise funding for Indy Parks ...... 95 9.1. Sample subsidy rates and hourly prices for ice rink rental ...... 107 10.1. Foundation statistics for 2005 ...... 115 10.2. Grantseeking selection criteria ...... 120 11.1 Population titles and characteristics as donors ...... 139 11.2. Example goal setting using a budget ...... 144 11.3. Rule of thirds – example of gifts/prospects needed for a $2,500,000 capital endowment campaign ...... 144 11.4. Overview of some planned giving instruments ...... 147 11.5. Suggestions for utilization of fundraising strategies ...... 151 14.1. A detailed example of a public budget preparation cycle ...... 185 14.2. Types of government-based funds ...... 188 14.3. Comparison of commonly used budget formats ...... 192 14.4. Example salary ranges ...... 196 15.1. Example object classification codes and definitions ...... 205 15.2. Example classification codes by object (partial listing) ...... 206 15.3. Partial object classification/line item budget ...... 208 15.4. Summary budget data ...... 209 15.5 Example program budget ...... 213 15.6. Performance budget format ...... 215 15.7. Decision unit worksheet example ...... 219 16.1. Projected capital budget costs for a water playground ...... 227 16.2. Comparative data to help in estimating costs of and revenue from a family aquatic center ..... 228 16.3. Basic cash flow analysis ...... 228 16.4. Revenue sources used by public agencies. (adapted from the Urban Park Institute and Trust for Public Land) ...... 231

xi 16.5. Cost of an $8 million serial bond on interest rate of 4.0 ...... 233 16.6. Cost of an $8 million straight serial bond on interest rate of 4.0% ...... 233 16.7. Sample data for NPV decision using unequal returns (8% interest) ...... 238 19.1. Sample enterprises from selected North American Industrial Classiﬁcations ...... 278 19.2. Comparison of selected ratios reported for three types of sport, tourism, and leisure industries ...... 279 Interest Table A: (1+ i)n ...... 282 Interest Table B: 1/(1+i)n ...... 283 Interest Table C: ((1-(1+i)-n)/i) ...... 284

xii

TABLE OF FIGURES

Figure 5.1. Financial management functions and roles within the organizational structure ...... 38 6.1. Basic organizational chart emphasizing financial management unit ...... 44 6.2. Units within a public leisure service agency that are involved in managing financial resources (shown as unshaded blocks) ...... 46 6.3. Units within a school athletic department that are involved in managing financial resources (shown as unshaded blocks) ...... 47 6.4. Units within a private not-for-profit organization that are involved in managing financial resources (shown as unshaded blocks) ...... 48 6.5. Units within a hotel/resort organization that are involved in managing financial resources (shown as unshaded blocks) ...... 48 7.1. The supply curve for athletes in a professional sport ...... 55 7.2. The demand curve for athletes in a professional sport ...... 56 7.3. Examples of supply and demand curves ...... 56 7.4. The supply/demand equilibrium point ...... 57 7.5. Supply/demand curve graph ...... 58 7.6. Illustration of shifts in the demand curve ...... 60 7.7. Illustration of shifts in the supply curve ...... 61 7.8. Comparison of demand curves for elastic, inelastic, and unitary elastic markets ...... 70 7.9. Transaction series showing local re-spending and leakage ...... 71 7.10. Flow of exogenous funds through the local economy ...... 73 8.1. Conversion factors for three expressions of the tax rate ...... 83 8.2. Example revenue structure for state parks ...... 93 9.1. The varied elements of the price tag for going swimming ...... 103 9.2. Sample cost summary for ice rink ...... 105 9.3. Relationship of reference price to subjective price ...... 111 10.1. Steps of the granting process ...... 116 10.2. Example of a search result ...... 119 10.3. Funding prospect worksheet ...... 121 10.4. Grant guidelines from a typical foundation ...... 122 10.5. Comparative analysis of elements of a grant proposal ...... 123 10.6. Sample grant budget ...... 127 11.1. The donor pyramid ...... 138 11.2. Goal relationships in fundraising ...... 142 13.1. Example of Employee Classification for Life Guards ...... 173 13.2. Example Spreadsheet ...... 174 13.3. Data Organized for Example 1 on a Spreadsheet ...... 175 13.4. Data Organized for Example 2 on a Spreadsheet ...... 177 13.5. Data Organized for Example 3 on a Spreadsheet ...... 180 14.1. Three-year budget calendar ...... 183 14.2. Budget preparation cycle ...... 184 14.3. Portland Metro budget cycle ...... 187 15.1. Object classification code ...... 207 15.2. Example program budget ...... 210 15.3. Program budget goals and objectives for Figure 15.2 ...... 210 16.1. Cost items associated with a capital development project ...... 226 16.2. Parks and recreation bonds, 1987-1997 ...... 234 16.3. Net present value timeline ...... 239 17.1. Illustration of a well organized slide using minimal text and supporting graphics ...... 247 17.2. Principles of simplicity focusing on the background, text, and graphic all in support of each other ...... 248 17.3. Use of background, with large or small text detracts from the readability and understandability of the presentation ...... 248

xiii 17.4 Information overload makes it difficult for viewers to comprehend content ...... 249 17.5 Poorly designed data set resulting in confusion for the viewer ...... 249 17.6 Property Tax History represented by a line chart showing two data points: percentage and year ...... 250 17.7 The same data represented two different ways. A bar chart and a pie chart ...... 251 18.1. The relationship of balance sheets and the income statement in detailing stock and flow ...... 254 18.2. Placement of information on the balance sheet ...... 255 18.3. Sample balance sheet (February 1, 2007) ...... 256 18.4. Sample income statement (February 1–29, 2007) ...... 257 18.5. Sample balance sheet (February 29, 2007) ...... 258 18.6. Example of a petty cash voucher ...... 259 18.7. Sample petty cash reconciliation statement ...... 259 18.8. Sample budget statement ...... 260 18.9. Sample project report...... 262 19.1. Sample business plan cover page ...... 269 19.2. Sample format for reporting results of ratio analysis ...... 279

xiv PREFACE

Effective managers in sport, tour- of planning was not required of resource ism, and leisure service organizations are managers. In fact, experience has shown required to have a wide variety of skills that a lack of planning reduces flexibil- and a good understanding of all of the ity, as choices are replaced by externally resources that they manage. Not only controlled consequences. Budgeting and should they be competent as personnel long-term financial planning are areas of managers, but they also need to know understanding and skill that every sport, how to manage their physical facilities. tourism, and leisure service manager In addition, they need to be effective in must develop and magnify. their management of time, for time is one This book has been written with the resource that cannot be renewed. Good needs of the sport, tourism, and leisure managers also need to know how to use service manager in mind. It has been their financial resources effectively. written by two people who have worked Throughout the history of our profes- in a variety of sport, tourism, and leisure sion, there have never been times of such settings in several different parts of the great prosperity that decisions could be United States and Canada and who have made or practices maintained without discovered that there is no place to hide consideration of their financial implica- from the opportunity or responsibility to tions. Certainly, there have been situa- know about budgets, finance, and fiscal tions where financial constraints have management. It has been written for the been minimal, but even then, some mea- mathematically challenged, for the pre- sure of financial accountability has been professional, for the professional who required of those who receive and spend received on-the-job training, and for the an organization’s money. professional who is keenly interested in Similarly, there has never been a and dedicated to continuous improvement. time of such flexibility that some degree

xv Readers will learn important princi- ment and day-to-day operations. Dis- ples of economics and ﬁnance. They will cussions include examples from the “real also learn the skills necessary to prepare, world” and oﬀer illustrations to facilitate present, and manage budgets, as well as the learning of some of the more complex generate revenues for capital develop- or technical points.

xvi S E C T I O N A

Financial Management in Context

The first four chapters present a discussion and comparison of the types and settings of organizations that most need the principles and practices explored in this book. After an introductory examination of the general differences between sport, tourism, and leisure service organizations that operate in public, private, not-for-profit, and commercial environments, complete chapters are dedicated to special financial management concerns in public and private not-for-profit recreation and sport organizations, and in tourism and commercial recreation enterprises.

C H A P T E R 1

Financial Management in Public, Private Not-for-Proﬁt, and Commercial Sport, Tourism, and Leisure Service Organizations

Introduction on competition and cooperation between sport, tourism, and leisure service orga- Approaches to the management of fi- nizations of different types. In devoting nancial resources in sport, tourism, and this discussion to the unique characteris- leisure service organizations vary greatly, tics and differences among public, private depending on the mandate and goals of not-for-profit, and commercial sport, the organizations, as well as the politi- tourism, and leisure service organiza- cal environments in which they operate. tions, there is a danger that their many However, almost every sport, tourism, or important similarities will be ignored. leisure service organization can be classi- Such is not the intent of this chapter. fied as either a public, private not-for-prof- Although it is important to understand it, or commercial enterprise, and each type the differences, it is just as important to of organization has unique and uniquely acknowledge the common principles, common features that relate directly to practices, structures, and competencies financial management and budgeting. associated with financial management. This brief chapter examines the fi- Those similarities will receive ample at- nance-related differences between the tention in subsequent chapters. three types of sport, tourism, and leisure enterprises and explores related legisla- Public Enterprises tive/legal parameters, social roles/expectations, market management techniques, A sport, tourism, and leisure service indicators of success, and particular finan- enterprise operating in the public sector cial management opportunities and chal- generally has a broad mandate to provide lenges. A concluding discussion focuses services that directly or indirectly benefit 4 Financial Resource Management: Sport, Tourism, and Leisure Services

an entire community. The organization already has enacted appropriate enabling is usually an arm of government (e.g., a legislation. municipal recreation department, a public educational institution, or a conven- Social Roles/Expectations tion and visitors bureau) that is charged Public sport, tourism, and leisure ser- with enhancing the quality of life of its vice organizations exist for the purpose patrons by providing enriching experi- of meeting social needs. The taxpaying ences and remedying social problems. public expects sport, tourism, and lei- The “public” nature of the organization is sure service organizations to be engaged not only emphasized in its nondiscrimi- in enterprises and programs that use natory offering and delivery of services, public funds for the common good and but also in the nondiscriminatory way for community betterment. Within the by which its operating funds are expro- community, there is general acceptance priated. Public sport, tourism, and lei- and tolerance of certain services receiv- sure service organizations receive their ing tax subsidies, and many low-cost or base financial resources from the public free (i.e., completely subsidized) services through taxation. They may also charge (e.g., neighborhood parks) are expected, fees and receive gratuitous income from demanded, and even required as basic el- private sources; but the foundation of ements of social order and as important their support is the ability of government tools in social engineering. to meet its operational goals by taxing its constituents or those who fall within its Market Management Techniques taxation jurisdiction. Modern practices of sport, tourism, and leisure service organizations include Legislative/Legal Parameters market segmentation and target mar- In order for the governing body of a keting. Public organizations use “need” public sport, tourism, or leisure service rather than “profit potential” as the pri- organization to compel its constituents mary segmentation criterion in their to contribute funds to support the op- marketing efforts. Products, prices, and eration of that organization, it must first promotional strategies are established in win a legal right to levy taxes and to use consideration of the desire to appeal to as those taxes for such purposes. The U.S. many as possible in the community who Constitution sets the legal parameters need the service. Distribution consider- for the federal government to collect and ations also reflect the priority of the pub- use public funds for sport, tourism, and lic sector organization to ensure service leisure services. The federal system also delivery to as broad a market as possible. provides for the establishment and public For example, when faced with a new pri- funding of state and local governments vate or commercial sector competitor, a and government programs. State govern- public agency may choose to withdraw ments must have their own constitutional from the marketplace—not because it provisions for taxation and public fund- is unable to compete, but because the ing of sport, tourism, and leisure services. competitor has demonstrated that it can Local (i.e., municipal) governments, on meet the same needs without tax support the other hand, may extend public finan- and, perhaps, with greater efficiency. The cial support to sport, tourism, and lei- marketing objective of the public sport, sure services only if the state government tourism, or leisure service organization Chapter 1 5 is either to provide the benefit or to ac- tiny of and accountability to the public commodate its provision by another ap- and to other legislative/regulatory bod- propriate supplier. ies. True to the democratic ideal, citizens voice their views about how their taxes Indicators of Success are being used, and there is always some- Financial managers in the public sec- one who was not elected who is certain tor measure their success by comparing that he or she could do a better job. The their achievements to their goals. That close scrutiny of financial management is also true of financial managers in the also comes from other formal organiza- private not-for-profit and commercial tions or agencies whose job it is to ensure sectors, but the goals of the latter orga- that the public treasury is being properly nizations are more precisely associated managed. This close scrutiny is usually with financial returns on financial invest- facilitated by seemingly countless forms ments. Public financial managers focus and reports which the financial manager on achieving targeted levels of revenue must take time to complete. A second and expenditure and on the social and challenge comes in the form of changing economic benefits realized by those ex- political winds. Financial management in penditures. the public sector requires sensitivity to the political environment, and changes in Financial Management Opportuni- political priorities may require readjust- ties and Challenges ment of financial plans or management Public sport, tourism, and leisure ser- structures. vice organizations enjoy several opportunities that are unique to their sector. One Other opportunity is that of tax exemption. By Two other aspects of financial man- convention, no government may charge agement in the public sector require a taxes to a government at another level, brief mention before looking at finan- which means that the local public agen- cial management in the private not-for- cy has greater purchasing power due to profit sector. One aspect concerns the being exempt from state or federal sales advantage that comes to the public sport, taxes. Another opportunity lies in the tourism, or leisure service organization ability of the public institution to borrow by virtue of its taxing authority—an ad- money for capital projects. The govern- vantage over competitors or would-be ment is a low-risk borrower, primarily competitors that cannot compete because because it can use its taxing power and its they must raise capital funds at market access to the taxable wealth of the com- prices and pay taxes to their competi- munity as collateral. A third opportunity tor, the public agency. In many cases, the enjoyed by the public sector is the good- charge of unfair competition leveled at will and altruistic behavior of people in the public sector may be well deserved. the community. Actively encouraged and The second aspect concerns the belief supported volunteer programs provide in the private sector that, because of human resources without the loss of the the seemingly unchecked taxing power sport, tourism, and leisure service orga- of government, the public sport, tour- nization’s financial resources. ism, and leisure service organization has A challenge experienced by financial “deep pockets.” Therefore, the reasoning managers in the public sector is the scru- goes, only public agencies can or should 6 Financial Resource Management: Sport, Tourism, and Leisure Services

be expected to raise the capital necessary associations, recreation clubs, Boys and to build and maintain such major facili- Girls Clubs, Boy Scouts of America, Girl ties as a 100,000-seat sports stadium or Scouts, Chambers of Commerce, Histori- domed arena. Financial managers in the cal Societies, and Destination Marketing public sector are, however, quite aware Organizations. of the limitations of public tolerance for Private not-for-profit organiza- taxation and have shortened their reach tions receive financial resources from into the taxpayers’ pockets. Sometimes membership fees, fundraising projects, this restraint has been self-imposed, and donations, grants, and user fees. Their sometimes it has resulted from public need for money from such sources is pressure and sentiment, such as that ex- reduced considerably by the ability of pressed in several landmark propositions private not-for-profit organizations to passed by voters in recent years. attract and keep committed volunteers. After religious organizations (which also offer many recreational programs), com- Private Not-for-Profit munity sport and leisure organizations Enterprises receive the greatest share of volunteer support in the United States and Canada. The private not-for-profit sector is composed of organizations that provide Legislative/Legal Parameters sport, tourism, and leisure services with- Private not-for-profit organizations out the direct support of public funds are permitted to operate because of sev- and without the requirement to gener- eral important laws that free them from ate increased personal wealth for any some of the restrictive controls that oth- owners or investors. These organizations erwise encumber public and commercial are private in the sense that they are not operations. For example, most private owned or directed by government. They not-for-profit sport, tourism, and leisure are not-for-profit in the sense that they service organizations enjoy a tax-free must generate income to at least cover status. Additionally, the U.S. Postal Ser- their expenses, yet do not generate profits vice and most commercial retailers and for the purpose of making anybody rich- service suppliers offer specially reduced er. They may make a profit from certain rates for recognized not-for-profit or- enterprises, but overall profit is not the ganizations. Federal and state income goal, and any profits that are realized are tax laws also encourage individuals and used to maintain or enhance the viability corporations to donate to charitable not- of the organization. Private not-for-profit for-profit organizations by recognizing sport and leisure service organizations tax deductions or offering tax credits ac- exist to meet the service needs of selected cording to the amounts donated. In order consumers in situations where the pub- for a donor to apply for such a tax ben- lic sector is either unwilling or unable efit, the donation must go to an organi- to function, and where commercial or- zation that is registered with the Internal ganizations are also either unwilling or Revenue Service as a 501(c3) Charitable unable to conduct business. Well-known Organization. Other state and federal tax examples of private not-for-profit sport, law provisions also exist to support the tourism, and leisure service organiza- valued work of private not-for-profit or- tions include the YMCA, local church ganizations. groups, community sport and athletic Chapter 1 7

In addition to filing with the IRS, Indicators of Success all private not-for-profit sport, tourism, Financial managers in the private and leisure service organizations need to not-for-profit sector measure their suc- be properly constituted and registered cess by comparing their achievements to as corporate entities. This registration their goals. That is also true of financial may need to be with local, state, and/or managers in the public and commercial federal agencies that regulate the opera- sectors; however, the goals of the public tions of commercial and not-for-profit organizations are not at all associated organizations. with financial returns on financial investments, while the overarching goal Social Roles/Expectations of commercial sector organizations is to Like public agencies, private not-for- make as much money as possible for the profit sport, tourism, and leisure service owner(s). Private not-for-profit financial organizations exist to meet social needs. managers focus on achieving social ben- However, they are more selective in the efits while generating enough revenue needs that they try to meet. Usually, a and other resources (e.g., volunteers) to private not-for-profit organization is stay in operation and continue benefiting identified with a single “cause” or specific their specialized markets. interest, such as helping at-risk youth, strengthening families, promoting mass Financial Management Opportuni- involvement in camping, developing ties and Challenges coaching skills for basketball, promoting Public sympathy and affection are literacy, encouraging historic preserva- two important advantages enjoyed by or- tion and interpretation, or promoting ganizations in the private not-for-profit visitation. sector. This factor is particularly helpful both in fundraising efforts and the re- Market Management Techniques cruitment of volunteers. Tax breaks and The relatively narrow focus of the discounts also provide opportunities for not-for-profit organization tends to re- private not-for-profit sport, tourism, and strict the scope of its market and dictate leisure service organizations to get the the techniques it must use to effectively most out of their financial resources. and appropriately manage the consump- One challenge that smaller private tion process. The identity of the client not-for-profit organizations have is the base is readily established by the needs lack of staff (or at least highly qualified or the shared interactions of the people staff) that can manage the financial re- with the target needs. Pricing decisions sources in a consistent, accurate, and reflect the requirement to break even or timely manner. Reliance on volunteers generate modest profits when additional for financial management functions can, money is needed for other service activi- occasionally, have disastrous results for ties of the organization. Service allocation the organization. Another challenge is for private not-for-profit sport, tourism, the relative risk associated with extend- and leisure service organizations is based ing credit to an enterprise that depends primarily on need, with little regard for so much on the popularity of its cause merit or profit potential. and the generosity of its supporters. Credit is based on confidence, and confidence is something that most small 8 Financial Resource Management: Sport, Tourism, and Leisure Services

nonprofit organizations enjoy from organizations do not exist out of a need conservative lenders. A third significant for a particular type of service. They exist financial management challenge is that of because satisfying the need for a particu- protecting the financial resources of the lar type of service is profitable. Commer- organization from short-term govern- cial sector organizations do not receive ing bodies that do not always act with tax revenues—they pay taxes. Commer- long-term wisdom. Many nonprofit sport cial sector organizations do not typically and leisure service organizations have receive operating grants or other forms of failed or struggled because a new board gratuitous income—they are called upon of directors decided to use their carefully to make donations. Commercial sector developed cash reserves for an immedi- organizations do not use volunteers—they ate program expansion or initiative that support them. Because the commercial did not result in sustained or enhanced sector exists to benefit certain individuals financial strength. (investors), it does not have access to the major revenue sources utilized by pub- Other lic and private not-for-profit agencies. Financial management in the private Commercial sport, tourism, and leisure not-for-profit sector requires many of the businesses must cover most or all of their same skills and involves many of the same costs of operating by charging fees, sell- activities as those in the public sector. ing goods and services, and making other Sports, tourism, and leisure in the private types of investments. Examples of com- not-for-profit sector is likely to continue mercial sector sport, tourism, and leisure as a strong and viable part of community service organizations include profes- life. It will, however, need more sophisti- sional sports teams, resorts, amusement cation in the management of its financial parks, meeting management companies, resources as every aspect of operating in a bowling centers, movie theaters, outdoor modern society becomes more complex. outfitters, and travel managers.

Legislative/Legal Parameters Commercial Enterprises There are many laws aimed at supporting and regulating commercial ac- Sport, tourism, and leisure service tivity. Profit-motivated sport and leisure enterprises operating in the commercial service organizations are subject to those sector are distinguished from the oth- laws that apply to their particular situa- ers previously discussed by their profit tions. The application of some laws will motivation. It is important to note that vary depending upon whether the sport “profit motivation,” rather than “profit or leisure business is set up as a corpora- generation,” is given as the defining char- tion, syndicate, or partnership, or is indi- acteristic. Commercial sport, tourism, vidually owned. and leisure enterprises may not always produce profits (especially in the early Social Roles/Expectations stages of development or during off-sea- The primary social role or social sons), but the commercial enterprise will expectation of the commercial sport, only stay in business if, over a reasonable tourism, and leisure enterprise is to period of time, an expected return on the contribute to the economic well-being investment is eventually realized. These of the community. Proposals for new Chapter 1 9 commercial enterprises often highlight ible in pricing than organizations in the community benefits such as diversity in public and private not-for-profit sectors. leisure options, opportunities for social For similar reasons, the commercial sec- interaction, promotion of health, de- tor is also more inclined than other types velopment of community pride, and of organizations to use advertising (both educational enrichment, but the benefit institutional and product) to promote de- that is most eagerly sought is described in sired consumer responses. terms of jobs created, household income produced, sales activity, and tax revenue Indicators of Success generated. Of course, there is the basic Financial managers in the com- expectation that the enterprise will be mercial sector measure their success by consistent with community social stan- comparing their achievements to their dards, but the economic impact of the goals. Unlike their counterparts in the venture is regarded with the most interest public and private not-for-profit sectors, and concern. managers of commercial enterprises set goals that focus on the financial growth Market Management Techniques of the enterprise and on the return on the Market management in commercial investment made therein. The balance sport and leisure services is designed to sheet and the income statement serve as do one thing: tap consumer spending the primary evaluation documents rather power. Therefore, the only market that than participant evaluation surveys. There is of interest is the market that can pay is concern for the quality of consumers’ enough and is willing to pay enough to experience, but only so far as it affects the help the organization realize its financial financial bottom line. The commercial goals. sport and leisure service organization Responsiveness to market condi- also measures its success by comparing tions is a key to success in commercial its financial ratios with standards estab- enterprises, and this responsiveness is lished for the industry. Financial ratios often reflected in pricing strategies and are discussed further in Chapter 19. in the use of advertising as a major promotional tool. Pricing strategies in the Financial Management commercial sector focus on the total bot- Opportunities and Challenges tom line. That is, variation in pricing is Commercial sport, tourism, and lei- frequently used to attract consumers by sure service organizations enjoy several responding to price sensitivity on cer- opportunities that are somewhat unique tain elements of the total service pack- to this sector. Because they are profit mo- age. In a movie theater, for example, the tivated, they are not required to prop up admission price may be reduced to a socially beneficial but financially ineffec- point where it barely covers the costs of tive programs and services and can, as providing the cinematic opportunity, and a result, concentrate on maximizing the yet, the price of the popcorn may be kept utility of their assets. They can more eas- at a level that consumers can accept and ily identify and avoid products that do that make the whole movie-going event not meet their standards of success. The (movie + snacks) profitable for the the- entrepreneurial spirit has free rein in the ater operator. The commercial sector is commercial sport, tourism, and leisure usually more responsive and more flex- business environment, and managers find 10 Financial Resource Management: Sport, Tourism, and Leisure Services

excitement in the many opportunities to are competing directly for customers. On move resources from areas of low pro- the other hand, the city and the YMCA ductivity to initiatives that offer greater may also have an agreement that youth results. soccer leagues will be offered exclusively Challenges associated with financial by the YMCA, while the city recreation management in the commercial sport, department will offer all softball and tourism, and leisure service organization baseball programs in the community. include developing the knowledge and Furthermore, a commercial local sport skill competencies required in order to management firm might be contracted be effective. Foremost among the skill re- by both agencies to train and manage quirements are investment management, the officials and the umpires for both the bookkeeping, and financial forecasting. soccer and baseball leagues, or cooperate Effective financial managers continually with public and not-for-profit organiza- add to their store of management abilities tions in hosting a tourism-generating re- by reading and studying, attending con- gional or national tournament. ferences and workshops, and furthering Competition among public, private their formal education in this discipline. not-for-profit, and commercial agencies Although public, private not-for- provides a number of benefits. They in- profit, and commercial sport and leisure clude the following: service organizations are alike in many ways, there are important differences • Greater choice for consumers (e.g., among the three sectors with respect to variety in program features, schedul- financial management goals and prac- ing, location, price) tices. The foregoing discussion of differ- • Greater attention to high-quality ences is summarized in Table 1.1. service (necessary for maintaining competitive advantage) Competition and Cooperation • Greater ability to respond to increasing demand Although there are important differ- • Greater opportunity to focus on spe- ences among sport, tourism, and leisure cific market segments (i.e., establish service organizations operating in the a market niche) public, private not-for-profit, and commercial sectors, this does not mean that Cooperation among public, private these sectors never relate to each other. not-for-profit, and commercial sport In one respect, they may be competitors and leisure service agencies also pro- trying to serve the same markets, provide vides some benefits. They include the the same kinds of services, or compete in following: other ways. In another respect, they may be cooperating in enterprises and activi- • Operational efficiency (by reducing ties that provide mutual benefits. It would duplication of physical and human not be unusual, for example, to see simi- resources) lar aquatics programs offered to a com- • Synergism (i.e., the total benefit of munity by the YMCA, the local college, agencies working together can be and the city recreation department. In greater than the sum of the benefits this case, the three agencies (representing provided by each alone) public and private not-for-profit sectors) • A coordinated approach to the de- Chapter 1 11

Table 1.1 A summary of ﬁnance-related similarities and differences among public, private not-for-proﬁt, and commercial sport, tourism, and leisure service organizations

Area of Contrast Public Private Not-for-Profit Commercial Ownership Usually government. Private organization. Private corporation. Legal Authority Through enabling Through enabling Through incorporation legislation. legislation and (state and federal designation of tax government recognition, status. regulation, and protection). Mandate Serve social welfare Serve specific social Realize maximum return and commonwealth welfare needs or on investment through needs of all citizens. leisure interests of a service to most profitable specific population. market. Source of Funds Taxes, grants, Grants, memberships, Investors, creditors, donations, earned donations, fundraising earned income. income. activities, earned income. Market Management Market limited to Market defined by Market composed of geographic/political particular need. those who can pay. constituency. Market Defined by merit. segmented on basis of need. Might not compete. Success indicators Social change. Social change. Profitability. Growth. Financial viability. Return on investment. Opportunities Tax exemption. Tax exemption. Entrepreneurship. Volunteers. Bulk Volunteers. Public Support for eliminating purchasing and concern. financially unsuccessful discounts. products. Challenges Public accountability Relative uncertainty. Developing and and scrutiny. Changing Reliance on gratuitous maintaining skills. political directions. income and volunteers. Limited qualified staff. Inconsistent leadership.

livery of sport, tourism, and leisure achieved through a system that includes services in the community (ensuring organizations operating in the public, that a full range of needs and inter- private not-for-proﬁt, and commercial ests are considered) sectors. Public agencies have a clear so- • Conversion of competitive energy to cial mandate and are supported by pub- service energy lic funds, especially tax revenues. Private not-for-proﬁt agencies do not receive Summary tax dollars to fund their operations, but rather seek funding through donations The delivery of sport, tourism, and and enterprise activities. They may, leisure service in the community is through service fees and other fundrais- 12 Financial Resource Management: Sport, Tourism, and Leisure Services

ing activities, generate profits; but those sport, tourism, and leisure organization profits are used to maintain the orga- are ultimately expected to generate a nization and sustain other non-profit- profit. Although the three sectors differ able activities or services. Commercial in other ways, those differences do not sport, tourism, and leisure service or- deny them the opportunities for direct ganizations are motivated by profit and competition and cooperation in service an expected return on investment. All delivery. business activities in the commercial

NOTES C H A P T E R 2

Financial Management in Public and Not-for-Proﬁt Leisure Service Organizations

Introduction ture is a combined parks and recreation department or division under municipal, This chapter discusses the unique county, or regional government admin- characteristics of public and not-for- istration. Separate, autonomous park or profit leisure service organizations with recreation organizations are declining respect to financial management process- in number. In a few states, park districts es. Financial management in sport orga- are organized with separate taxing pow- nizations and in tourism and commercial er and, in some areas, the park districts recreation enterprises is discussed in have an elected board. In other cases an subsequent chapters. As an introduction, appointed board provides the policy di- Table 2.1 provides an overview of types rection for the public leisure service or- of organizations, sources of funding, and ganization. The park board typically has measures of success for public and not- decision-making authority for organiza- for-profit organizations. tional structure. State park organizations exist in all 50 states and are structured in a variety of ways. They may appear under Public Leisure Service a tourism umbrella or, more commonly, a Enterprises natural resource structure. It is unusual to find sport organiza- Organizational Structure tions as a part of the public leisure ser- There is no single organizational vice structure. More often they operate structure that is required of public leisure as not-for-profit organizations that have service entities. The most common struc- formal and informal links to public en- 14 Financial Resource Management: Sport, Tourism, and Leisure Services

Table 2.1 Public and not-for-proﬁt organizations compared on structure, revenue, and measures of success

Sector Public Nonproﬁt

Examples of Organizations State park systems, county Boys and Girls Clubs, YMCA park systems, community YWCA, swim club, scouting park and recreation agencies organizations, conservation organizations, support groups for public agencies

Sources of Revenue Primarily taxes (property Grants, membership fees, tax), dedicated taxes, fees fundraising, donors, fees and and charges charges, government grants

Financial Measures of Fees and charges generated, Achievement of goals, objectives, Success ﬁnancial accountability and outcomes

tities. The Indiana Sports Corporation, tities report to policy or advisory boards. for example, is a not-for-profit organi- Policy boards typically carry decision- zation dedicated to bringing national making authority and advisory boards and international sport championships provide input into operations and make to Indianapolis and Indiana. When put- endorsements, suggestions, and recom- ting a bid package together, they work mendations to the decision-making au- closely with the city government and the thority. Public entities are authorized to local and regional tourism office. The expend money only after the legislative sporting events they try to attract may body has formally approved a budget. use professional sport areas (e.g., FIFA Oversight authority for budget opera- World Basketball Championship), pri- tions remains with the legislative body, vately owned sport facilities (e.g., a pro- and day-to-day fiscal operations and fessional golf tournament), public facili- management is delegated to the leisure ties (e.g., NCAA Swimming and Diving service organization. Championships), or a combination of Mandates or expectations of ser- the three (e.g., World Police Games). vices and programs are articulated in Sport organizations are discussed fur- the organization’s enabling legislation at ther in Chapter 3. both the state and/or local level, the leg- Tourism and commercial recreation islative body’s vision and mission state- enterprises do include some public or- ments, and the leisure service organiza- ganizations, such as city or state tourism tion’s long-range plans. Fiscal operations development offices and local destina- are codified in state and local legislation tion marketing organizations. However, and the public entity is reviewed, at a these public organizations typically op- minimum, by a state auditing body on erate as if they are commercial entities a regular basis. Organizations must op- and are discussed further in Chapter 4. erate within appropriate state and local codes that apply to fiscal operations. Operational and Fiscal Authority Almost all public leisure service en- Chapter 2 15

Financial Objectives of their mandate. Public leisure service The purpose of public leisure service organizations, once almost wholly subsi- organizations such as park and recreation dized by compulsory income (see Chap- departments is to improve the quality of ter 8), now generate 15 to 100 percent life for residents, enhance the beauty of of their operational funds through fees, the community, and provide recreation charges, and entrepreneurial activities. and fitness based activities and programs Capital improvement funds for buildings for individuals and groups. In some com- and structures typically come from other munities, public park and recreation en- sources (see Chapters 8 and 10). tities are seen as social welfare agencies Major capital investments such as working in consort with other social parks, recreation centers, or specialized welfare enterprises to improve individual facilities are viewed as public commodi- opportunities for personal growth. The ties. Parks are typically not expected to Boulder, Colorado Parks and Recreation generate revenue; however, recreation Department mission statement is typical centers and specialized facilities within of many public entities and reflects the parks may be expected to produce vary- ideal of “public good.” ing levels of revenue (including profit) and are viewed as investment decisions. “The mission of the City of The decision to build a new facility is Boulder Parks and Recreation based on its revenue potential and the Department is to provide safe, public good that it represents. For ex- clean, and beautiful parks and ample, most public agencies that might facilities and high-quality lei- construct a family aquatic center would sure activities for the communi- expect the facility’s revenue to cover its ty. These services shall enhance operations, partially or wholly contribute residents’ health and well-being to the long-term debt incurred from con- and promote economic vitality struction, and provide additional funds for long-term community sus- to agency operations. By contrast, a skate tainability. We will accomplish park is seen as an opportunity to provide this through creative leadership, youths with a safer public outlet for their environmentally sustainable activities and may only be expected to re- practices, and the responsible use cover part of its operating costs and none of available resources.” (City of of its long-term debt. Boulder Parks and Recreation Department Vision Statement. Debt Management http://www.bouldercolorado. Simply stated, the two main goals of gov). the public leisure service organization are to serve the public and to maintain a Public entities serving the public sound financial foundation. Public agen- good traditionally were not expected to cies are dependent upon tax revenues, generate a profit or even large amounts of fees and charges, and enterprise opera- revenue. They operated as public agencies tions for their operating revenue. They are with some or all of their funding coming not allowed to engage in deficit spending. from tax revenue. Contemporary public Long-term debt is controlled by state and park and recreation departments, how- local legislation, and public organizations ever, do actively generate revenue as part may not engage in debt creating activities 16 Financial Resource Management: Sport, Tourism, and Leisure Services

outside of those specifically permitted. drives decision-making in the public sec- For example, state financial codes typi- tor. It is frequently seen as a conundrum cally limit the amount and type of debt for policy makers as they strive to pro- that a city or an independent park district vide for the public good and simultane- may incur. Public entities will engage in ously ensure sufficient funds are available activities and types of activities that com- for the public enterprise. mercial enterprises often will not, especially when it is justified as a public ben- Reporting efit. Parks, recreation centers, recreation Public park and recreation entities programs, and similar activities frequent- are strongly affected by seasonal varia- ly fit within the public benefit rationale. tions. Outdoor aquatic facilities typically Louisville, Kentucky Metro Parks oper- have a 90-120-day season. Indoor sport, ates 17 recreation centers, many of them recreation, and fitness facilities are af- in lower socioeconomic neighborhoods fected by seasonal shifts in sport, indi- where expectations of cost recovery are vidual preferences for being outdoors or low. The recreation centers are seen as indoors, inclement weather periods, and meeting a public good (benefit). public school calendars. For example, when public leisure service organizations Accounting Management prepare for summer operations they may Accounting management in pub- spend up to 75 percent of their annual lic entities is similar to that of the com- operating budget between May 1 and mercial enterprise, with some important September 30. differences. Public entities operate under Financial reporting usually occurs on generally accepted accounting practices a monthly basis and is supplemented by (GAAP) but, unlike in the commercial seasonal reports. Policy boards and ad- sector, the use of the revenue may be re- visory boards are trained to understand stricted according to the source of the seasonal influences on revenues and ex- revenue. For example, a special tax may penditures, and historical reports are be restricted for a single use, such as re- frequently provided to aid in that under- duction of long-term debt. Different than standing. In addition, program reports for commercial enterprises, revenue gen- are provided for each activity at the end erated from a public program or a facility of the season. The task of the chief ex- may go into the government general fund ecutive officer and chief financial officer and be made available for use anywhere is to interpret financial data, generate within the government, or it may go to reports, and educate staff, legislative of- a restricted fund that limits where the ficials, and lay board members about fis- funds are used. cal operations. Pricing in the public sector is becoming more sophisticated, yet it is frequent- Performance Evaluation ly based on a mix of intuition and cursory Serving the public good is the pri- analysis of limited measures of demand mary goal of public park and recreation and willingness to pay. In the public sec- entities. From a financial perspective, au- tor, pricing is more often seen as a tool ditors require assurance and proof that to recover partial rather than full costs. standard accounting practices have been The need to provide for the public good followed. Policy makers require proof and to maintain sound financial practices that funds expended have contributed Chapter 2 17 to the public good. Park and recreation ties in which members may swim, train, entities may respond to the two different and learn about nutrition. All not-for- reporting needs by providing data from profit organizations have a purpose and performance goals and objectives, atten- a focus that are stated in their articles of dance reports, outcome measures, and incorporation. other forms of data. Application of measures of effectiveness and efficiency are Financial Objectives becoming more common, and it is gen- The financial objectives of a not-for- erally believed that measuring outputs profit organization are linked to its stated (such as the number of people served) is purpose. All not-for-profit organizations no longer an adequate substitute for mea- strive to generate sufficient revenue to suring how people benefited from partic- pay for their annual operations. They are ipation in programs and use of facilities not expected nor encouraged to gener- or services. Performance measurement ate a profit. The Internal Revenue Service is becoming more sophisticated and it is provides guidelines for how not-for-prof- more important than ever that public lei- it organizations might use their funds. sure service organizations provide effec- For example, there are restrictions on the tive evaluations. amount of money allowed for political lobbying. In moving beyond the Internal Revenue Service guidelines, not-for-prof- Not-For-Profit Leisure Service it organizations jeopardize their not-for- Enterprises profit tax status. The vast majority of not-for-profit Organizational Structure organizations do not have major capital Not-for-profit organizations typically investments, but those that do must man- operate with a board of directors provid- age them as efficient enterprises. Not- ing policy oversight to the organization. for-profit organizations might also have An executive director may be hired, espe- unique cash-flow circumstances, such cially in a larger organization, but in the as would a Boy Scout camp that gener- absence of full-time staff, the president of ates 85 percent of its camping revenue the board and executive committee may in the three month summer period but provide day-to-day operational direction. has year-round expenses. Not-for-profit Not-for-profit enterprises come in all siz- organizations are frequently dependent es, from the large National Parks Founda- upon the good will of members or donors tion with tens of thousand of members, to to provide funds for ongoing operations. the small local swim club with 30 or less A Boys and Girls Club, operating in the members. Not-for-profit organizations inner city probably cannot charge suffi- typically have a narrow focus or purpose. cient revenue to cover the operating costs For example, the Appalachian Mountain of the programs and facilities, so donors, Club focuses on conservation, education, the United Way, and revenue from pro- and outdoor recreation, with further con- grams are used to cover the costs. cern for maintaining regional chapters, conservation activities, and lodging (all Debt and Account Management focused in the Appalachian mountains). Not-for-profit organizations work to As another example, a local youth swim maintain sufficient funds for operations. club may provide a coach and the facili- Sources of income include programs, 18 Financial Resource Management: Sport, Tourism, and Leisure Services

special events, donors, bequests, govern- process, sometimes as a treasurer’s report, ment grants and contracts, private grants, and there should be an annual report, and the United Way. The United Way ideally certified by the not-for-profit provides support to a limited number organization’s account manager or an of not-for-profit organizations that meet independent auditing body. The vari- their minimum guidelines and are select- ety of not-for-profit organizations, their ed by a lay community-based board for size, scope of services, and management inclusion in their funding model. Some skills frequently determine the type and self-reliance is required, as the United effectiveness of reporting. Not-for-prof- Way almost never provides 100-percent it organizations with external funding support to a not-for-profit organization. sources require standardized reporting Not-for-profit organizations have consistent with the expectations of the a wide range of financial solvency. The funding organizations. The United Way, small, narrowly focused not-for-profit for example, usually requires monthly organization may struggle from month reports and an annual external audit. In to month to generate sufficient funds for addition, they may conduct their own au- operations. A larger not-for-profit organi- dit on a regular cycle, such as once every zation, such as the Appalachian Mountain three years. Financial reports should be Club, might have a budget in excess of consistent with the principles presented $15 million with multiple sources of rev- in Chapter 18. enue and a strong endowment. In 2005, the Appalachian Mountain Club’s oper- Performance Evaluation ating budget was $15.6 million and they For not-for-profit organizations, the maintained an endowment of $36 million level of performance evaluation is depen- (Appalachian Mountain Club, 2005 An- dent upon the expectations of the board nual Report, http://www.outdoors.org). of directors, leadership, and outside fund- The solvency contrast among not-for- ing entities. Annual reports are common- profit organizations is dramatic. Financial ly required and are primarily concerned operations and debt management prin- with reporting on progress made toward ciples are consistent, but management of achievement of goals and objectives. A each will vary based on the size, solvency, United Way-supported entity frequent- and management competency of the not- ly is required to measure outcome for for-profit organization. In the absence funded programs, and continued United of an ongoing income revenue stream, Way funding may be based on progress many not-for-profit organizations adjust achieved toward intended outcomes. their operating budget on a monthly or Foundations may also require specific seasonal basis to deal with operating rev- evaluation products or performance in- enue availability. dicators from an organization, such as completion of a project, publishing of a Reporting report or monograph, completion of a Not-for-profit organizations report capital improvement project, or a formal on a monthly, quarterly, and annual basis. assessment report. They often utilize more than one of the Larger not-for-profit organizations standard financial reporting formats that issue annual reports reflecting progress are discussed later in this book. Regard- toward their vision, mission, goals, and less, there should be a monthly reporting objectives. The Appalachian Mountain Chapter 2 19

Club’s annual report identifies goals and ties, and areas for the public good, to annual progress toward those goals. Their improve the quality of life of commu- goals pertain to the number of acres pro- nity members or people in general, and tected, the management of miles of trails, to meet the goals of the organization in the number of outdoor experiences pro- an effective and efficient manner. Pub- vided, the provision of outdoor education lic entities, while conforming to some experiences, and the amount of litera- commercial business practices, are not- ture about the environment distributed. for-profit enterprises and generally are The annual report also identifies income not expected to generate excess revenue. sources, expenditure categories, levels of There are a few exceptions to this rule. income and expenditures, and the impact The organizations operate within legislatively mandated guidelines, reporting to of the expenditures upon individuals, re- elected or appointed lay and professional gions, and the goals of the organization. individuals. Not-for-profit organizations From a financial standpoint, a com- have an internal structure for reporting mon measure of efficiency is the percent with the Internal Revenue Service which, of the operating budget spent for admin- in turn, provides some external review istration. Not-for-profit organizations for financial accountability. Financial desire to maintain a low administrative success is defined in terms of solvency cost, striving to spend the bulk of their while impacting positive perceptions of operating budget on programs and ser- the community, meeting social needs, vices. The Appalachian Mountain Club, providing opportunities for recreation infor example, spent 9.6 percent of its oper- volvement, and perception of value in the ating budget on administration in 2005. public or not-for-profit leisure service. Summary

The purpose of ﬁnancial management in public and not-for-proﬁt entities is to enhance programs, service, facili-

NOTES 20 Financial Resource Management: Sport, Tourism, and Leisure Services C H A P T E R 3

Financial Management in Sport Organizations

Introduction Internet, and the radio (e.g. pay-per-view events, sport-specific channels like the The business of sport has a tremen- Golf Channel, NBA channel, etc.), (e) the dous financial and cultural impact on influence of technology on sport-related contemporary society, and that impact goods, services, and training, and (f) in- appears to be expanding. Today, jobs in creased numbers and variety of maga- sports are not limited to intercollegiate zines, newspapers, journals, and blogs athletics and the four major profession- related to sports (Pitts & Stotlar, 2002). al leagues. Opportunities for a career in Scholars agree that this growth has defi- sports cross over into other entertain- nitely influenced local job creation and ment-related industries, from video gam- entrepreneurial activity, but there is no ing and fantasy leagues, to sport tourism consensus on the broader economic im- and event hospitality (Gangemi, 2006). pact of the sport industry as a whole. The The growth of the sport industry in recent lack of consensus results, in part, from years can be attributed to: (a) increased the fact that “sport” is not classified as an interest in sport from diverse market seg- industry in the North American Classifi- ments such as women, minorities, and cation System (NAICS – a system devised aging individuals, (b) increased offerings by the U.S. Census Bureau to identify in- of new and different forms of sports (e.g., dustries based on the similarities of firms ESPN’s X-games, (c) growth in corporate in economic activities). Without that clas- sponsorship, (d) increased coverage of sification, statistics are not collected nor sporting events and matters on television, analyzed in a way that readily permits in- 22 Financial Resource Management: Sport, Tourism, and Leisure Services

dependent examination of the economic teams or clubs primarily participat- contribution of sports and sport-related ing in live sporting events before a activities. paying audience; (2) establishments primarily engaged in operating racetracks; (3) independent athletes en- Sport as an Industry gaged in participating in live sporting or racing events before a paying au- An industry is a collection of busi- dience; (4) owners of racing partici- nesses and consumers that have similar pants, such as cars, dogs, and horses, products and markets, and that engage in primarily engaged in entering them similar economic activities. NAICS uses in racing events or other spectator the similarity of economic activity to sports events; and (5) establishments, classify businesses in North America into such as sports trainers, primar- 20 distinct sectors, including Arts, Enter- ily engaged in providing specialized tainment, and Recreation. services to support participants in NAICS industries are identified by a sports events or competitions. The six-digit code in order to be placed in the sports teams and clubs included in hierarchical structure of the classification this industry may or may not operate system. The first two digits refer to the in- their own arena, stadium, or other dustry sector, the third digit identifies the facility for presenting their games or industry sub-sector, the fourth designates other spectator sports events. the industry group, the fifth refers to the NAICS industry, and the sixth digit des- 711211 Sports Teams and Clubs ignates the national industry (U.S., Cana- dian, or Mexican). Take, for example, the This U.S. industry comprises pro- six-digit code for U.S. sports teams and fessional or semiprofessional sports clubs (711211): teams or clubs primarily engaged in participating in live sporting events, 71 Industry Sector (Arts, Entertain- such as baseball, basketball, football, ment, & Recreation ) hockey, or soccer, before a paying 711 Industry Sub-sector audience. These establishments may 7112 Industry Group (Spectator or may not operate their own arena, Sports) stadium, or other facility for present- 71121 Industry (Spectator Sports) ing these events. 711211 U.S. specific (Sports Teams and Clubs) NAICS does not consider Sport as a major economic activity, “and, there- The definitions that NAICS provides fore, does not treat the sport industry as for the North American Industry of Spec- a stand-alone industrial sector or indus- tator Sports (71121), and the U.S. -spe- try” (Li, Hofacre, & Mahony, 2001). The cific Industry of Sport Teams and Clubs wide range of sport-related activities is (711211) are: scattered across several of the 20 industry sectors, such as construction, manu- 71121 Spectator Sports facturing, wholesale and retail trade, real estate, rental and leasing, education ser- This industry comprises (1) sports vices, arts, entertainment and recreation, Chapter 3 23 and other services. This dispersion makes attract professional teams, or to prevent it difficult to reconcile sales or financial their existing professional sports teams data (attributed to sport activities) from from going elsewhere. In the 20 years each of these sectors and, therefore, next since 1995, local, state, and federal gov- to impossible to accurately estimate the ernments have allocated more than $10 economic magnitude of the sport indus- billion of taxpayers’ money to subsidize try. Since the government has no system more than 50 new major league stadi- in place to estimate the annual impact of ums and arenas, and a larger number of sport on the U.S. economy, several ana- minor league sport facilities. The prac- lysts and scholars have tried to develop a tice of using public resources to support reliable measurement for the sport indus- private and commercial sport enterprises try. There is still no consensus, but most is growing, and governments continue experts believe that the industry has an to spend more that $2 billion a year to annual economic impact of anywhere subsidize major sport facilities. For ex- from $213 to $560 billion (Howard & ample, construction of the Washington, Crompton, 2005). D.C. ballpark that is home to the Major The importance of the sport indus- League Baseball (MLB) team Nationals try and the unique aspects of financial cost taxpayers more that $600 million management in sport organizations are (Demause, 2007). highlighted in the following discussions Critics have voiced concern about of (a) public subsidy of sport facilities, (b) the spiraling costs that seem to be mak- television ratings and broadcasting fees, ing the entire big league sports structure (c) players’ salaries, (d) sport franchise unworkable, and have challenged the as- values, and (e) costs associated with at- sumption that publicly supported sports tending a sporting event. stadiums justify themselves financially. Advocates of sport facility subsidies argue that the use of public money to fund their Public Subsidization of Sport development and operation provides the Facilities following benefits:

The significance of modern specta- (a) Injection of substantial amounts of tor sports is evident in the number of cit- money into local economies ies entering the race to build expensive (b) Creation of new jobs new sport facilities (using, to a great ex- (c) Revitalization of urban neighbor- tent, public monetary resources) for the hoods. purpose of attracting professional sport franchises. Proponents of such endeav- The opposing claims have been thor- ors argue that professional sports provide oughly investigated. Economist Robert increased community visibility, enhance Baale conducted a study that investigated community image, stimulate develop- 30 U.S. cities that had built new sport fa- ment, and generate high levels of psychic cilities during the last 30 years. The find- income (emotional and psychological ings were disappointing for proponents of benefits of sports) for the residents of subsidized sport developments. His study that community (Howard & Crompton, demonstrated that the development of 2005). As a result, local and state gov- new sport facility projects does not have ernments work closely together to either a positive effect on local economies. In 27 24 Financial Resource Management: Sport, Tourism, and Leisure Services

of the cities examined, the effect of ma- Television Ratings and jor sport developments on the per-capita Broadcasting Fees income was not significant, and in the remaining three cases, the sport facility The entertainment value of sport- had a significantly negative impact on ing events is evident in the large fees that the local economy. Two explanations for television networks are paying to right- these findings are offered: the substitu- holders in order to broadcast profession- tion effect and revenue leakages. al or intercollegiate sporting events. The The substitution effect measures amount of money that is paid is greatly how much money is simply transferred influenced by the television ratings that from other entertainment, food, and re- each professional league, game, individu- tail venues in town, as fans may decide al athlete, and conference captures when to spend their disposable income on sta- the sporting event is aired for public con- dium food and merchandise instead of at sumption. Each rating point accounts the local restaurants and retail stores. for 1,102,000 households in the U.S; that Revenue leakage is a measure of the is, one percent of the nation’s 110.2 mil- degree to which stadium spending is tak- lion houses with a television set in place. en out of the local economy before it can High television ratings are desirable be- be recirculated. Leakage is taking place cause they mean that bigger audiences because team owners and players usually are watching the event. Advertisers and live, invest, and spend money outside of sponsoring companies are attracted to the local economy. sporting events that capture high broad- The myth of new job creation at- cast ratings, and they are willing to spend tributed to sport facilities also collapsed large amounts of money to secure adver- under the weight of evidence found in tising space and time when these events this study. Testifying to a congressional are broadcast. oversight committee, Demause (2007) In 2006, NBC’s regular season pointed out that “where good job-de- broadcast of National Football League velopment programs can cost about (NFL) games—the first after eight years $10,000 for each new job created, sport of absence—captured a remarkable 12.6 facilities typically come in at as much as household rating and a 21 percent broad- $250,000 in public cost for each new job, casting share (percentage of in-use televi- a worse ratio than some of the most in- sions tuned to a given show). That same famous corporate giveaways in history.” year, the Super Bowl game had attracted Also, the belief that sport facilities can be 90 million viewers. Similar success in se- used to revitalize urban neighborhoods curing high T.V. ratings was experienced was not justified, especially for seasonal by the other two major leagues in the operations like baseball and football. U.S., the National Basketball Association There is no evidence that a new sport (NBA) and MLB. However, Major League facility is going to attract further devel- Baseball’s World Series ratings, although opment such as restaurants, sport bars, high compared to other sporting events, retail space, and entertainment venues, experienced a nine percent drop from the especially when the facility is closed for previous year’s series, and captured a 10.1 most of the year. rating in 2006 (Nye, 2006). This was the lowest rating ever recorded in the history of televised World Series baseball. This Chapter 3 25 ratings decline was attributed directly to extension agreement with its existing the starting time of the games, the small broadcast partners, ESPN ($2.5 billion) market size of the rival clubs, and the and FOX Sports ($3 billion) (Tribune Re- fierce competition from other profes- view, 2006). The League also added TBS sional sports (Hart, 2006). to its television partners after the net- Television ratings are also used as a work agreed to pay more than $3 billion negotiation tool between network execu- in broadcasting fees (Jackson, 2006). tives and leagues officials when contracts There are also noteworthy develop- are just about to expire, or new media ments in intercollegiate sports. In 2006, products, like Internet broadcasting, pay- the NCAA Big Ten Conference an- per-view sporting events, satellite sport nounced the creation of a new channel packages, etc., are available for bid. NFL dedicated to showcasing sporting events entertainment packages have been the and other accomplishments of its mem- most successful and popular in the coun- ber institutions. The channel, which has try. In 2006, after breaking attendance its headquarters in Chicago, is a joint records for a third consecutive year and venture between the Big Ten Conference achieving exceptional television ratings and the FOX Network and has signed for its broadcast games, the NFL was able multi-year agreements with ABC and to negotiate television contracts that had ESPN for programming production and an overall value close to $25 billion over sharing. The goal of this venture was to the succeeding six years (Covitz, 2006). dramatically increase the visibility of the For the 2007 season alone, the NFL raised Conference on television and through more than $3.5 billion from its T.V. con- other electronic media (Paul, 2006). tracts (Molinaro, 2006). The NFL also reserved its right to broadcast selected football events through its own television Franchise Values and Player channel. The scale of exchange based on Salaries television and broadcast rights and activity is indicated by the following presenta- Additional evidence of the impor- tion of selected contract details: tance and magnitude of professional sports business can be found in skyrock- (1) NBC – Football Night in America: eting values of franchises and player con- $3.6 billion/six-year agreement tracts (Naylor, 2005). Franchises in al- (2) ESPN – Monday Night Football: $8.8 most all major leagues have experienced billion/eight-year agreement significant increases in their value and, (3) CBS – Sunday Afternoon AFC Foot- by 2007, some were worth more than ball: $3.74 billion/six-year agree- $1.5 billion, with an annual appreciation ment rate of almost 19 percent. One NFL team, (4) FOX – Sunday Afternoon NFC Foot- the New England Patriots, exemplifies ball: $ 4.28 billion/six-year agree- this trend: the franchise was purchased ment in 1994 for $172 million. It was a record high price to pay for a team but, by Major League Baseball also expe- 2006, its value had risen to over $1 billion rienced success in negotiating its own (Weinbach, 2006). television and broadcast contracts. In Forbes magazine conducts an annual 2006, MLB signed a seven-year television survey and publishes the actual market 26 Financial Resource Management: Sport, Tourism, and Leisure Services

value of all professional sport franchises David Beckham, a star soccer player in the country. The survey takes into con- in Europe, left the famous Spanish soc- sideration a number of valuating factors, cer club Real Madrid to play for the U.S. such as the franchise’s annual operating Major League Soccer. Beckham signed a income, the stadium/arena value, the size five-year contract with the Los Angeles of the market in which the club oper- Galaxy that guaranteed him $250 million ates, the aggregate value of the roster, in salaries, and additional compensation etc. The highest valued teams in 2006 for a variety of considerations (Dell’Apa, are shown in Table 3.1 (Forbes, 2006; 2007). Other star players like Lebron Wharnsby, 2006). James and Kobe Bryant, both playing Players’ contracts have also been infor NBA franchises, make $80 million creased in value. In 2006, a star player and $136.4 million respectively over the for the New York Yankees baseball club length of their contracts. Even rookies in signed a lucrative contract that guaran- professional sports are signing multimil- teed a $252 million salary over a ten-year lion-dollar contracts, disproportionate contract, and made him the most expen- to their field performance and overall sive MLB contract in baseball history. achievements. Mario Williams, the first

Table 3.1 Highest valued professional sport franchises in 2006

Rank Team / Value Rank Team / Value

National Football League National Basketball Association 1 Washington Redskins 1 New York Knicks $1.423 billion $592 million 2 New England Patriots 2 Los Angeles Lakers $1.176 billion $568 million 3 Dallas Cowboys 3 Dallas Mavericks $1.173 billion $463 million 4 Houston Texans 4 Chicago Bulls $1.043 billion $461 million 5 Philadelphia Eagles 5 Houston Rockets $1.024 billion $439 million

Major League Baseball National Hockey League 1 New York Yankees 1 Toronto Maple Leafs $1.026 billion $332 million 2 Boston Red Sox 2 New York Rangers $617 million $306 million 3 New York Mets 3 Detroit Red Wings $604 million $258 million 4 Los Angeles Dodgers 4 Dallas Stars $482 million $248 million 5 Chicago Cubs 5 Philadelphia Flyers $448 million $246 million Chapter 3 27 overall pick in the 2006 NFL draft, signed ketball Association reported (for the sec- a $54 million, six-year agreement with ond year in a row) the highest average at- the Houston Texans. In Williams’ con- tendance in its history (17,558 spectators tract, $26.5 million is guaranteed. The per game), and the highest total atten- second pick, Reggie Bush, signed a six- dance, with a new record of 21.6 million year, $62 million contract with the New spectators (Business Wire, 2006). Major Orleans Saints, and the third overall pick, League Baseball experienced similar suc- Vince Young, signed a six-year, $58 mil- cess. The league recorded the second-best lion contract with the Tennessee Titans. record for average game attendance in the sport’s history (31,381 spectators), also breaking its season attendance record Attendance Costs of (for a second consecutive year) with 75.5 Sporting Events million tickets sold (Blum, 2006). With attendance in professional Gate receipts for amateur, college, sports hitting an all-time high, there are and professional sports signiﬁcantly con- some concerns about the escalating costs tribute to the $213 billion impact the of attending a sporting event, especially sport industry has on the U.S. economy. for low-income individuals and families. In 2006, the National Football League The Fan Cost Index (FCI), a survey con- broke its attendance record for the third ducted annually by Team Marketing Re- consecutive year, averaging 66,453 spec- port, a sport marketing company based tators per game in its regular season, in Chicago, provides a measure of how and a record-high total attendance with much a family of four will likely spend 17,012,000 tickets sold (Associated Press, during a night out at a professional sport- 2006). In the same year, the National Bas- ing event. “The FCI includes: four aver-

A day at the ballpark can be an expensive proposition. 28 Financial Resource Management: Sport, Tourism, and Leisure Services age-price tickets; four small soft drinks; FCI was $329.82. In 2006, the NBA av- two small beers; four hot dogs; two game erage FCI was $267.37, and, in the same programs; parking; and two adult-size year, the National Hockey League (NHL) caps” (TMR, 2005). recorded an average FCI of $247.32. According to the 2005 Fan Cost In- The 2006 FCI for Major League Base- dex (FCI), the most expensive sport fa- ball (MLB) was $171.19 (Barron, 2005; cility hosting an NFL game was the New Perry, 2006). Sample FCIs for teams from England Patriots’ Gillette Stadium. The three of the major professional leagues in average ticket price was $90.89. The Pa- the U.S. are presented in Tables 3.2—3.4. triots’ 2005 FCI was $ 477.47, which was Item costs that contribute to the calcula- 15 percent higher than in the previous tion of the FCI are also shown. year. The average NFL game ticket was priced at $58.95, while the league average

Table 3.2 Item costs ($) and Fan Cost Indexes (FCI) for selected Major League Baseball Teams (2006)

TEAM Avg. Beer Soda Hot Parking Program Cap FCI Ticket Dog Boston 46.46 6.00 2.75 4.00 23.00 5.00 15.00 287.84 Chicago 34.30 5.00 2.50 2.75 17.00 5.00 12.00 219.21 Cubs NY Yankees 28.27 6.00 3.50 3.00 12.00 7.75 15.00 208.57 Tampa Bay 17.09 5.00 3.75 3.25 Free Free 15.00 129.87 Kansas City 13.71 3.75 2.00 2.50 6.00 5.00 12.00 120.35 MLB 22.21 5.42 3.07 3.31 11.41 3.89 13.62 171.19 Average

Table 3.3 Item costs ($) and Fan Cost Indexes (FCI) for selected National Basketball Association Teams (2006)

TEAM Avg. Beer Soda Hot Parking Program Cap FCI Ticket Dog L.A. Lakers 79.00 7.50 3.00 4.00 13.00 5.00 10.00 402.84 New York 71.00 6.00 3.25 4.30 20.00 10.00 12.00 388.04 Houston 56.00 5.50 3.75 4.00 20.00 Free 18.00 321.34 New Orleans 29.00 5.00 4.00 4.00 10.00 Free 20.00 206.44 Golden State 24.00 4.50 2.00 3.00 12.00 3.00 16.00 174.27 NBA 46.00 5.44 2.95 3.40 11.67 3.68 14.00 267.37 Average Chapter 3 29

Table 3.4 Item costs ($) and Fan Cost Indexes (FCI) for selected National Football League Teams (2006)

TEAM Avg. Beer Soda Hot Parking Program Cap FCI Ticket Dog

New England 90.89 5.50 3.50 3.50 35.00 5.00 14.95 477.47 Washington 67.53 7.00 5.00 5.00 25.00 5.00 14.95 389.01 NY Giants 71.59 6.25 3.50 3.75 15.00 5.00 17.99 388.85 Jacksonville 40.16 5.00 3.00 3.00 10.00 5.00 9.95 234.55 Buffalo 39.37 5.50 3.00 3.00 15.00 n/a 11.00 229.49 NFL Average 58.95 5.52 3.22 3.53 16.31 4.53 15.30 329.82

Average ticket price represents a weighted average of season ticket prices for general seating categories, determined by factoring the tickets in each price range as a percentage of the total number of seats in each ballpark. Luxury suites are also excluded from the survey. Season-ticket pricing is used for any team that offers some or all tickets at lower prices for customers who buy season tickets.

The Fan Cost Index™ comprises the prices of two (2) adult average-price tickets, two (2) child average- price tickets, two (2) small draft beers, four (4) small soft drinks, four (4) regular-size hot dogs, parking for one (1) car, two (2) game programs, and two (2) least expensive, adult-size adjustable caps.

Source: Team Marketing Report (2006)

Summary revenues from food and beverage sales, merchandise licensing and production, The scale and common nature of and parking fees. business activity in sports is sufficiently large that it should be viewed as an in- References dustry. It is an industry that has a significant economic impact and is certainly an Associated Press. (5 January 2006). “NFL sets attendance record again. The Associated activity of social and cultural importance. Press. Many large professional sport operations Associated Press. (1 September 2006). Five teams are subsidized, in part, by governments worth over $1 billion, according to Forbes. and public agencies. The appropriate- Associated Press. Barron, D. (2005). Texans still a good value for NFL ness of public subsidization has been fans. The Houston Chronicle (17 September questioned, but such dissent has yet to 2005): SPORTS play an effective role in changing current Blum, R. (1 October 2006). MLB Breaks Season practices with respect to the private-pub- Attendance Record. Associated Press. Business Wire. (20 April 2006) NBA sets all-time lic partnership in sport enterprises. The attendance records; Regular season draws high cost of professional sport operations highest average attendance and highest total is influenced by high player salaries and attendance. Business Wire. other investments that increase the value Covitz, R. (2 October 2006). NFL, media battle in of the sport franchise. Costs are recov- the trenches over access issues. The Kansas City Star. ered and profits are made through the Dell’Apa, F. (12 January 2007). It’s a bonanza for sale of television and broadcast rights, as Beckham; MLS Galaxy lure star for $250m,” well as through gate receipts and other The Boston Globe. 30 Financial Resource Management: Sport, Tourism, and Leisure Services

Demause, N. (2007). Taxpayer-financed facilities. Molinaro, B. (11 August 2006). Even in the FDCH Congressional Testimony (03/29/2007). preseason, the NFL rules the waves. The HOUSE Oversight and Government Reform. Virginian-Pilot. Gangemi. J. (2006, February). A hot ticket for Naylor, D. (11 June 2005). Investing in a team a sports-biz rookies; B-schools are increasingly losing proposition; Franchise values have not offering specialized MBAs to give sports gone up like they have in other sports. The management hopefuls a chance of making the Globe & Mail (Canada): S1. team. Business Week Online. Nye, D. (3 November, 2006). Poor TV ratings Hart, J. (31 October 2006). Series ratings weren’t a reflect MLB’s popularity slide. The State. primetime success. Morning Call: C2. Paul, J. (22 June, 2006). “Big Ten announces new Howard, D., & Crompton, J. (2005). Financing TV contract with ABC/ESPN and creation of sport. Morgantown, WV: Fitness Information new cable channel. Associated Press. Technology, Inc. Perry, D. (2006). Red Sox, Patriots in a league of their Jackson, B. (12 July 2006). TBS joins MLB TV deal. own when it comes to high price of attending The Miami Herald. a game. Lowell Sun (Massachusetts). Li, M., Hofacre, S., & Mahony, D. (2001). Pitts, B., & Stotlar, D. (2002). Fundamentals of sport Economics of sport. Morgantown, WV: Fitness management (2nd Information Technology, Inc.

NOTES C H A P T E R 4

Financial Management in Tourism and Commercial Recreation Organizations

Introduction significant, and they are likely to have positive social impacts. Managing financial resources in Unlike commercial recreation busi- tourism and commercial recreation en- nesses, tourism organizations operate terprises requires most of the same skills in the public, private not-for-profit, and that should be applied in sport organi- commercial sectors. In some situations, zations or public and private not-for- local, state, and national governments profit leisure service agencies. The skills fund tourism agencies and attractions, may be the same, but the purpose of the and in other situations there are private tourism and commercial recreation or- not-for-profit organizations that exist to ganization will likely differ significantly. support industry and community efforts Tourism and commercial recreation are to attract visitors and guests. Of course, industries. Each industry is comprised commercial tourism enterprises are also of corporations, businesses, and organi- plentiful. The sources of funding and fi- zations that have a common goal of gen- nancial measures of success for tourism erating financial and economic benefits organizations in each sector are outlined for the owners. Commercial recreation in Table 4.1. businesses are an important part of the This chapter briefly explores some of community leisure service inventory, as the aspects of financial management that well as to the local economy. Similarly, have particular relevance to managers of tourism enterprises are not public social tourism and commercial recreation or- services, but their contributions to the ganizations. economic well being of a community are 32 Financial Resource Management: Sport, Tourism, and Leisure Services

Table 4.1 Funding sources and measures of success for tourism organizations in the public, private not-for-proﬁt, and commercial sectors

Sector Public Private Not-For-Proﬁt Commercial

Examples State or city tourism Destination marketing Attractions, hotels, of tourism department organization transportation, and organizations other proﬁt oriented businesses

Source of Primarily taxes Grants, earned income, Earned income revenues (general or lodging/ donations, tax transfers (investment, sales, fees, meal taxes) and charges) Financial Tax revenue General “health of the Liquidity, solvency, measures of generated industry,” sales statistics proﬁtability, success return on investment

Financial Objectives simply putting the required capital development funds in the bank in a nominal Financial decisions and operations interest-bearing account. As exciting as in the tourism commercial recreation in- the waterpark may be, it will not be built dustries must address the goal of creating if the financial return is greater for some added value (improving the bottom line), other profit-generating amenity on the and all appropriate accounting methods same site. Furthermore, investments are and investment activities should be ap- made not just to satisfy markets but to plied to that end. In spite of a financial attract and serve those markets with the manager’s passion for the destination, at- greatest spending potential. Chapter 15 traction, activity, or amenity, and regard- discusses investment decisions and pro- less of any genuine interest in providing vides the tools for evaluating proposed good service just because good service is initiatives. the ‘right’ thing to do, managers in tourism and commercial recreation must re- Debt and Inventory main focused on the ultimate goal of gen- Management erating a measurable profit. In these industries, decisions about In tourism and commercial recre- facilities to build or services to offer are ation businesses, financial managers viewed as investment decisions. Whether have two major interests: liquidity and or not a tourism or commercial recre- solvency. Liquidity refers to the corpo- ation project is developed or a program is ration’s ability to meet its short-term implemented depends on how well it will financial obligations. In other words, it generate expected returns under expected must be able to pay its bills. Assuring the risk conditions. For example, a waterpark availability of sufficient cash (liquid as- feature at a resort is only worth building sets) for the payment of bills is an ongo- if it generates more short-term and long- ing management task. Solvency refers to term returns than would be realized by the corporation’s ability to meet its long- Chapter 4 33 term financial obligations. Long-term ity to submit deposits or guarantees in obligations include debt to creditors and local currency. Furthermore, the enter- the owner’s claim to the corporation’s as- prise itself may have overseas operations sets. The entire management team of the that use a different currency. Not only is tourism or commercial recreation orga- there the need to convert currencies, but nization must be concerned with main- the fluctuating exchange rate and gov- taining an appropriate level of debt and ernment regulations on the cross-border ensuring a suitable return on the owner’s flow of funds will also impact financial investment. management in the tourism enterprise. Financial managers in tourism and Finally, tourism services are notoriously commercial recreation enterprises must susceptible to differential pricing strate- also be concerned about inventory turn- gies. That is, many different prices may over. An inventory turnover ratio tells be applied to a service that differs in no the manager how effectively the costs of substantial way between consumers or delivery goods to customers are being production/delivery costs. Airline ticket contained. For example, a low inventory pricing is a well-known and somewhat ratio indicates that there may be an over- mystifying example. The tourism finan- investment in inventory and, therefore, cial manager must be able to work with unnecessarily high storage or distribu- highly variable revenue models based on tion costs. differential pricing.

Account Management Reporting

In the tourism industry especially, In many organizations, sales and there are also some unique situations expenditures are predictable and some- that affect the way accounts are managed. times steady. This is so for tourism and In a hotel or resort, for example, each commercial recreation organizations that guest has an account to which charges know their markets, can control demand, and payments may be made at any time and successfully attract a loyal clientele. of the day or night, any day of the week. In such cases, financial activity reports Thousands of those accounts may be and statements of financial outcomes can opened and closed each day at one prop- be prepared relatively infrequently and erty. Additionally, payments for tourism for comparable periods of time. For ex- services such as cruise ship passage or air ample, monthly reports and statements transportation may be made in advance may be sufficient for monitoring financial of the service being provided, or may progress at a year-round reception center, include some sort of deposit. Payments even though there may be some peak pe- received and expenditure commitments riods around wedding seasons and tradi- made before and after a service is deliv- tional holidays. ered affect cash flow and must be man- Special events and tourism desti- aged carefully. A third unique aspect of nations, attractions, or amenities that managing financial resources in tourism serve many people for short periods of organizations is the use of foreign cur- time usually need more frequent reports rencies. Guests come from many parts of financial activity. Reports may be re- of the world and may have limited abil- quired as often as hourly in some cases. 34 Financial Resource Management: Sport, Tourism, and Leisure Services

At resorts and hotels, for example, it is a the Revenue Per Available Room, and common practice to prepare a daily op- differs from other measures that consider erations report, an event report, and a revenue per occupied room. Discussed night audit. further in Chapter 17, RevPAR is a valuable indicator of management effectiveness and is used by franchise companies, Performance Evaluation hotel owners, lenders, and management companies. Profit is the goal in tourism and commercial recreation enterprises, and the ultimate evaluation criterion will always Summary be the amount of profit generated with respect to the amount of the investment The purpose of financial investment made, or in other words, the return on the in tourism and commercial recreation investment. It would, of course, be foolish enterprises is to generate added value for any manager of a tourism or commer- for the business or industry. Financial cial recreation enterprise to simply wait decisions, management procedures, and until the end of a fiscal period and then reporting mechanisms must address the look at the investment return for that pe- achievement of this purpose. Tourism riod before deciding how well the busi- and commercial recreation businesses ness is doing. Along the way, there are have some unique circumstances that many other ways to assess the financial make managing financial resources a health and vitality of the organization. challenging task. Accounts may be nu- One important evaluation criteri- merous and may be opened and closed on that is widely used and is unique to in short periods of time. Short-term and the lodging side of the tourism indus- long-term financial decisions require up- try is known by the acronym RevPAR. to-date data, thus requiring accurate and It focuses on revenue and lodging room frequent reports. Corporate success in availability, and measures how effectively the tourism and commercial recreation the resort or hotel fills rooms during the industries is measured primarily in terms low-rate off-season, as well as during the of efficiency and effectiveness in generat- high-rate peak season. RevPAR, identifies ing profits and enhancing investments.

NOTES S E C T I O N B

Organization

The next two chapters of this book examine the major functions of financial management in sport, tourism, and leisure service organizations. Organizational structures are discussed and the financial management responsibilities of a variety of positions within organizations are detailed. Organizational structures in sport, tourism, and leisure service entities are compared in the context of their public, private not-for-profit, and commercial settings.

C H A P T E R 5

Functions

Introduction procedures. They have specific duties and authority and are responsible not for the Effective management of financial financial well-being of the organization, resources in the sport, tourism, and lei- but rather for how they perform their du- sure service organization requires the ties and exercise their authority. assumption and recognition of responsi- This brief chapter examines the ele- bility, as well as the deliberate assignment ments of organizational structures that of authority and duties to the appropri- are designed to facilitate the integrated ate departments, offices, and individuals. efforts of financial decision makers, Those who are responsible for the finan- financial administrators, and program/ cial well-being of the organization are the facility managers in sport and leisure ser- financial decision makers. They are the vice agencies. It also describes the roles ones who are the sources of authority, and of the different types of financial man- they are the ones who are ultimately held agers in a variety of settings, including accountable for the consequences of their public agencies operating at all three lev- decisions. Those to whom they delegate els of government; private not-for-profit authority may make financial decisions agencies with local, regional, and na- within the parameters of their steward- tional programs; and commercial sport, ships, but they typically function with tourism, and recreation enterprises of limited responsibility as financial admin- different sizes. istrators. Financial administrators are Functional distinctions between the those in the organization who are autho- individuals or units within an organi- rized to implement financial policies and zation are most evident on the vertical follow established financial management dimension of the organizational chart. 38 Financial Resource Management: Sport, Tourism, and Leisure Services

Specifi cally, those who occupy positions hand, if she has instituted sound policies at the top of the organizational chart are on cost recovery, complementary servic- the fi nancial decision makers, while those es, and employee compensation, then she at the bottom of the chart are, in varying is likely to enjoy a suitable return on her degrees, the fi nancial administrators. For investment. Th e owner is responsible for example, the owner of an indoor sports either outcome. complex in a responsive market will, as In order to realize her fi nancial goals, the fi nancial decision maker, establish the sports complex owner will delegate policies about such things as cost re- authority and assign duties to her staff . covery targets, free services, employee Th e likelihood of her realizing a profi t is compensation, etc. However, the imple- dependent on her staff exercising that au- mentation of those policies is left to the thority and performing their duties in the fi nancial administrators: program man- way she expects. If they exceed the limits agers (who set prices and incur program of their authority or fail to do their duty, costs), cashiers (who collect admission the staff members are responsible for fees or check passes), and clerical staff those off enses only; however, the owner is (who handle the payroll). still responsible for the resulting profi t or loss. In fi nancial management, as in any other area of management, authority can Financial Responsibility be delegated, but responsibility cannot.

In the preceding example, the owner is responsible for her decisions, regardless Financial Functions of the of the outcomes. If she sets the cost recov- Organization ery target too low, authorizes too many free passes, or pays her staff too well, then Sport, tourism, and leisure service she may not make a profi t. On the other organizations facilitate two primary fi nan-

Owner Final Maker Decision Clerk

Program Managers Financial

Administrators Cashier

Figure 5.1 Financial management functions and roles within the organizational structure Chapter 5 39 cial functions: controlling and acquiring. nancial events that have occurred within Controlling is an internally oriented func- a certain period of time. The controller tion that involves recording, monitoring, develops and maintains a management and managing the financial consequences information system and prepares finan- of past and current activities. Acquiring is cial forecasts for use by financial decision an externally oriented function that deals makers. Additional duties include pre-au- with securing financial resources required diting purchase orders, handling receipts to meet current and future needs. The and disbursements, and issuing all pay- organizational chart of a sport, tourism, ments and invoices. The controller may and leisure service agency will usually also be charged with maintaining inven- reflect these two functions by designat- tory records. ing a controller and a treasurer. In large organizations, there may be many people Treasurer working in both a controller’s office and The duties of the treasurer focus on a treasurer’s office; in smaller organiza- the acquisition of funds needed for the tions, the two functions might be handled operation of the sport and leisure service by the same person. Furthermore, that organization. Private funds may come single controller/treasurer may also have from a variety of sources, thus requiring other non-financial duties. Although the treasurer in the private or commercial desirable in certain situations, there is setting to maintain and nurture relation- usually no requirement that a crowd of ships with lenders, stockholders, security financial managers be included in the or- markets, and regulatory agencies. In con- ganizational structure. These two primary trast, the treasurer in a public agency functions should, however, be adequately works primarily with tax collection and addressed in the structure. fund generation through special as- The major financial management sessments. In addition to collecting all functions in the sport, tourism, and lei- revenues, the treasurer plans cash flow, sure service organization are handled by invests available funds, and recommends skilled individuals who have specific ar- pricing policies/strategies that will help eas of responsibility. Several key positions to achieve funding objectives. and their functions are described below. Assessor Director of Finance Public sport and leisure service orga- The duties of the director of finance nizations receive much of their funding include supervising and coordinating the from tax revenues. Property taxes are activities of the Department of Finance. collected according to assessed property The director of finance serves as a finan- values, and the establishment of those cial adviser to decision-making bodies values is the duty of the assessor. Working within the organization and often serves closely with the treasurer, the assessor ap- as the chief budget officer. plies relevant state laws, studies property values, and assesses property for taxation Controller (also called purposes. “Comptroller”) The controller’s duties include de- Purchasing Agent scribing (by using generally accepted The duties of the purchasing agent accounting principles [GAAP]) the fi- go well beyond processing paperwork 40 Financial Resource Management: Sport, Tourism, and Leisure Services

for ordering materials, supplies, and state/provincial, and federal laws and equipment. An effective purchasing regulations; agent establishes standards for regularly • the organization has established an purchased items and prepares specifica- adequate system of internal account- tions for each item to be purchased. By ing and control; maintaining relationships with vendors • there are questionable expenditures; and suppliers, the purchasing agent can • there is evidence of waste, abuse, or economize on certain bulk or special-or- fraud. der purchases, as well as advise program managers on new services or materials Since the finance department is the that are available. The purchasing agent primary administrative body (and subject purchases all materials, supplies, and to input by executive officials), it would be equipment for the organization and then unwise for the auditor’s position to be too receives and inspects them to ensure that closely associated with that department. specifications have been met. Significant To avoid the appearance of the finance monetary savings can also be realized department checking up on itself, audi- through the purchasing agent’s maintain- tors are usually directly accountable to ing of warehouse storage and commodity the chief executive officer or directing au- distribution systems. thority (board of directors, city council, etc.) and may not even be an employee Auditor of the agency. Many large and small sport Though not incorporated in the fi- and leisure service organizations contract nance department, the auditor has a with or retain an independent account- position of great importance to the fi- ing firm to serve as their auditor. In a few nancial well-being of the organization. local governments, the audit function is The task of the auditor is to periodically carried out by an independently elected provide an independent, objective evalu- auditor or controller. ation of financial management systems and practices. The independent auditor serves as a check on executive officials by Summary determining whether any errors (uninten- tional misstatements) have been made or The many aspects of financial man- whether there are irregularities (deliber- agement in the sport, tourism, and leisure ate misstatements or unauthorized/illegal service organization can most effectively depletion of financial resources). and efficiently be addressed through The auditor thoroughly reviews pro- an organizational structure that clearly cedures and statements to determine and defines the lines of authority and differen- report whether: tiates between financial decision-making bodies and financial administrators. Fi- • the financial statements present fairly nancial officers develop systems and the organization’s financial position; apply standard procedures to moni- • the financial statements accurately tor, control, and report on the financial present (in accordance with GAAP) position, activities, and future of the or- the results of agency operations; ganization. They also implement policies • the financial activities of the organi- that generate required financial resourc- zation are in compliance with local, es, as well as relate to program-based Chapter 5 41 departments. The general organization commercial agencies and maintains the for financial management varies little be- same basic elements in both small and tween public, private not-for-profit, and large enterprises.

NOTES 42 Financial Resource Management: Sport, Tourism, and Leisure Services C H A P T E R 6

Departmentalization

Introduction private not-for-profit organizations, and tourism enterprises. Financial management functions are the responsibility of specific financial officers (at least a controller and treasurer) Organization for Financial and individuals within program units that Management in the receive revenues or make and approve Public Sector expenditure commitments. Financial officers in large organizations might be Figure 6.1 presents a basic organiza- housed (with respect to organizational tional chart for a local government (e.g., structure) in a Department of Finance or a city, county, or town). Detailed in the similarly named unit. This chapter dis- chart are the relationships of the inde- cusses the relationship of the Department pendent auditor to the elected governing of Finance to other organizational units, body, and the Department of Finance including those that also have some fi- to the institutional hierarchy and oth- nancial management roles. Additional er civic departments. This model also discussion is devoted to developing an represents the general structure of state/ understanding of the extent to which fi- provincial and federal governments in nancial management duties are shared the United States and Canada. Note that by different people within typical orga- the responsibility and full authority to nizations in public parks and recreation manage public finances is vested in the agencies, school athletic departments, elected governing body. In a represen- 44 Financial Resource Management: Sport, Tourism, and Leisure Services

tative democracy, this authority comes tem. Th at importance is underscored by from the people, and it is to them that the the dual role that the general manager, at elected body is accountable. times, appears to play. Th is top offi cial is Figure 6.1 shows an independent eff ectively both a fi nancial decision mak- auditor who reports to the fi nancial de- er and a fi nancial administrator. cision-making body. It is a standard Technically, fi nancial decision mak- practice and oft en a legal requirement for ing or policy setting does not exist at the local, state/provincial, and federal gov- level of the general manager; however, ernments to have auditors who submit it must be recognized that this person public reports of their reviews to their re- is in a position to provide selective in- spective legislatures. As much as possible, formation that leads the elected body these auditors operate independently and to make certain decisions. Th us he or without regard to personal or partisan she has eff ective decision-making power politics. without having formal decision-making Also shown in this basic organiza- authority. Th e general manager is also tional chart is the position of general the top fi nancial administrator in the manager. Th e general manager is the se- government and oversees the work of the nior civil servant to whom all department director of fi nance. In this oversight role, heads report and through whom govern- the general manager interprets the policy ment policies are articulated. Th e director decisions of the elected governing body of fi nance reports to the general manag- and, thereby, has further opportunity to er; thus making the latter an important broadly infl uence fi nancial management fi gure in the fi nancial management sys- in the organization.

Elected Governing Body

Independent Auditor

General Manager

Department of Finance Other Departments - Controller - Treasurer - Assessor - Purchasing Agent - Budget Ofﬁ cer

Figure 6.1 Basic organizational chart emphasizing ﬁ nancial management unit Chapter 6 45

Figure 6.1 uses a dotted line to rep- independent auditor position is frequent- resent the relationship between the ly mandated by the organization’s charter Department of Finance and the other or by-laws. Some small private not-for- governmental departments. The dotted profit sport, tourism, and leisure service line indicates that one department does agencies rely on local volunteers to con- not take direction from the other(s), but duct their financial audits, while major rather, departments must communicate commercial enterprises may have large and work together to ensure proper man- in-house auditing departments. agement of financial resources. In reality, As in the public agency, the day-to-day the Department of Finance is a support management of the private not-for-profit unit to the other program-based depart- or commercial organization is entrusted ments, yet it does maintain control over to the general manager. The title used for most procedures pertaining to budget this top management position varies, but implementation. In some organizations, the most common alternatives are “chief financial administrators working within executive officer” or “president.” program-based departments actually re- Finally, the finance division is also an port both to the program department head important part of private not-for-profit and to the Department of Finance. This and commercial sport, tourism, and matrix structure can be an efficient way to leisure service organizations. In these manage financial functions with a degree nonpublic settings, the finance division of consistency, as well as avoid duplica- continues to fulfill the basic functions of tion that occurs when other departments acquiring funds and controlling inter- feel the need to keep their own financial nal financial activities while relating in a records and develop their own financial supportive way to the organization’s pro- management information systems. gram-based departments.

Organization for Financial Program Unit Involvement in Management in the Private Financial Management Not-for-Profit and Commercial Though not designated as finan- Sectors cial managers, some individuals in the sport, tourism, and leisure service orga- Whether large, small, private not-for- nization do manage financial resources. profit, or commercial, most nonpublic They are most likely program personnel organizations will have a similar basic who recommend and implement pricing structure to the government organization strategies, collect fees, make expenditure typified in Figure 6.1. Instead of from an commitments, and ensure that program elected governing body, the private not- activities are consistent with established for-profit agency will receive policies and fiscal parameters. In a public leisure directives from an appointed board of service organization, for example, the directors. In the commercial sector, the Parks and Recreation Director is respon- decision-making body will be the owner(s) sible for developing and implementing or board that represents the shareholders. an operating budget. The Recreation The value of an independent auditor Manager makes purchases and wages is just as great for not-for-profit orga- commitments, as does the Parks Man- nizations as it is for public entities. The ager. The Administrator and positions 46 Financial Resource Management: Sport, Tourism, and Leisure Services

within the administrative support unit and investment). Th e Associate Ath- manage fi nancial resources by control- letic Director for Administration and ling petty cash, purchasing, accounting, Finance makes certain that all bills are and reporting. paid and that earned income is properly In a school or college setting, an managed. Th is individual and others in athletic department has a director who subordinate units handle a wide variety oversees all operations, including the use of expenditure accounts, such as travel, and acquisition of fi nancial resources. lodging, licensing, staff compensation, Th e Athletic Director develops and im- marketing, administrative operations, plements a budget for athletic operations accreditation/affi liation, etc. Income ac- and oversees other areas that also manage counts that they manage include ticket fi nances. One important area for school sales, sponsorships, concessions, licens- athletic departments is fundraising and ing, merchandising, etc. development. Th e Associate Athletic Di- In a private not-for-profi t sport, tour- rector for External Aff airs spends a great ism, or leisure service organization, the deal of time and eff ort identifying and Executive Director prepares and imple- recruiting donors and sponsors, thus as- ments the budget. Th is individual also suring an important source of income has a somewhat unique responsibility for for the school. Managers of the Athletic encouraging fund-raising success and Fund record and account for revenues philanthropic support. In representing into and expenditures from that account, the not-for-profi t organization, the Ex- but are also involved in helping the fund ecutive Director works closely with the grow (through additional donations Development Manager to nurture giving

Parks and Recreation Director

Recreation Administrator Parks Manager Manager

Figure 6.2 Units within a public leisure service agency that are involved in managing ﬁ nancial resources (shown as unshaded blocks) Chapter 6 47

Athletic Director (A.D.)

Assoc. A.D. Assoc. A.D. Assoc. A.D. Assoc. A.D. Public/Media External Admin./ Programs Relations Affairs Finance

Athletic Fund Tickets and Licensing

Figure 6.3 Units within a school athletic department that are involved in managing ﬁ nancial resources (shown as unshaded blocks)

relationships with individuals, founda- not-for-profi t sport, tourism, and leisure tions, and corporations. Th e Facility service organizations. Th e General Man- Manager manages fi nancial resources as ager (GM) of a resort hotel, for example, an expenditure offi cer and is expected to must make the property earn a profi t. Th e keep costs down and enhance the reve- GM’s job depends on it. Financial man- nue potential of the facilities. Th e Offi ce agement becomes the primary concern Manager records fi nancial transactions, of the GM, and he or she ensures that all makes payments, issues invoices, re- subordinate managers and staff share that ceives revenue, handles payroll issues, interest. Th e use of profi t centers in resort and generates fi nancial status reports hotels and other commercial enterprises and projections. Th e Program Coordi- pushes the concern for and involvement nator provides programs while making with fi nancial procedures and results to expenditure commitments within the all levels of management. Th e role of the limits of the approved budget. Th e Pro- Human Resources department is limited gram Coordinator is also involved in to salary and benefi t issues, and meeting fi nancial management when setting the costs of training requirements. Th e prices and determining the number and Accounting Offi ce is involved in fi nancial nature of revenue-generating programs management in an obvious way, and the and services. Marketing and Sales Department spends It is reasonable to expect that, in a money for marketing and generates reve- commercial setting, fi nancial resource nues through group and individual sales. management is shared by a wider range Marketing and sales goals are expressed of positions within the organization than almost entirely in monetary terms. Th e would be the case in public or private- Food and Beverage Division plans and 48 Financial Resource Management: Sport, Tourism, and Leisure Services

Executive Director

Volunteer Facility Ofﬁ ce Development Program Coordinator Manager Manager Manager Coordinator

Figure 6.4 Units within a private not-for-proﬁ t organization that are involved in managing ﬁ nancial resources (shown as unshaded blocks)

General Manager (G.M.)

Rooms and Food and Human Marketing Accounting Guest Services Beverage Resources and Sales

Figure 6.5 Units within a hotel/resort organization that are involved in managing ﬁ nancial resources (shown as unshaded blocks)

follows a budget for every catered event Services unit generates revenue through and for the operation of the restaurant, the services they provide. This area in- lounge, snack bar, café, food vending cludes resort recreation services, to machines, and room service. Food and which appropriate pricing structures beverage managers must be smart pur- should be applied and for which ex- chasers and experts in limiting expenses penses should be kept to an appropriate by accurately estimating demand and minimum. The staff in each of these ar- consumption. Th e Rooms and Guest eas is usually keenly aware of the impact Chapter 6 49 of their activities on the management of Financial decision makers are usu- financial resources. Many of their op- ally in such a position because their erational decisions are, in fact, financial political viewpoint is consistent with decisions. that of the power base (i.e., the voters or Figures 6.2—6.5 illustrated the slight the shareholders). It is believed that the differences in organizational structures management philosophy of the financial in sport, tourism, and leisure. There are decision maker will lead to desired results, very few organizations, if any, that do not and the decision maker is, therefore, em- decentralize the management of finan- powered to establish fiscal policies for the cial resources, at least to some degree. organization. Financial administrators Likewise, there are very few, if any, sport, are expected to reflect that management tourism, and leisure service organiza- philosophy in their implementation of tions that leave all financial management the fiscal policies. In reality, it is just as activities up to just one office or person. important for the financial administrator to be responsive to the political context as it is to be efficient and effective in per- Politics and the Financial forming the technical finance functions Management Organization of the organization. To underscore the importance of this responsiveness, most Managers of public sport, tourism, financial administrators serve “at the and leisure service organizations are pleasure of the board,” and their job se- generally quick to point out that there is curity depends on how well they reflect no work environment where politics so political ideologies and achieve desired much influences day-to-day management results. as it does in government agencies. Private In some public organizations, how- not-for-profit managers would likely dis- ever, there is a stated need for and an agree and describe the many frustrations interest in achieving nonpartisan, techni- that they experience in their own political competence in financial management. cally sensitive positions. Further claims In other words, the voters want to be sure to the title of “Most Political Organiza- that their tax dollars are managed by the tion” could also be made by managers of most competent financial administrator, commercial sport, tourism, and leisure regardless of political party affiliation. In service organizations who feel that too such cases, the organizational structure much of their time and energy is spent may include a variety of autonomous on keeping the owners happy rather than or semiautonomous elected fiscal agen- doing the job properly. cies (ranging from boards of tax appeal A reality of management life is the to boards of assessors) and elected offi- constant exposure to and influence of cers such as controllers, treasurers, and corporate politics: It is a part of public assessors. However, the more integrat- service management. It is a part of man- ed financial system and organizational agement in the private not-for-profit structure (with the general manager as sector. It is a part of how the commercial the chief steward and distributor of au- sport, tourism, and leisure service orga- thority) is most common in the public nization operates. It is natural, and it is sector and almost universal in the private not necessarily bad. not-for-profit and commercial sectors. 50 Financial Resource Management: Sport, Tourism, and Leisure Services

It should be noted that, while fi- tional unit and be directed to assist and nancial managers might not serve a support program units in such matters political (policy-making) function in the as payroll, invoicing, payments, and organization, they are working in an en- purchasing. Program specialists in other vironment that is influenced by political organizational units usually do have fi- philosophies, structures, and behaviors. nancial management responsibilities, Financial management requires a set of but financial management is not the skills that goes beyond accounting and major skill that they possess, nor is it forecasting, and includes interpersonal considered to be a defining element of skills that allow the financial manager their assignment. in sport, tourism, and leisure service or- A variety of organizational structures ganizations to respond to directives that can support financial management rela- don’t always make the most financial tionships in sport, tourism, and leisure sense. An important function of the fi- services. Typical structures vary and re- nancial manager is to advise about the ‘right’ course, and about potential prob- flect the public, private not-for-profit, or lems with politically motivated decisions. commercial nature of the enterprise. They This responsibility is one that cannot be also reflect the political realities of the shirked, but it must be understood that corporate environment and emphasize the final decision is often made by some- the importance of hierarchy in financial body else in the organization. resource management.

Summary

Financial management specialists may be assigned to a distinct organiza-

NOTES S E C T I O N C

Economics

The first six chapters of this book lay the foundation for detailed discussions of the most important aspects of managing financial resources in sport and leisure service organizations. Although we could have provided the reader with a thorough introduction to and exploration of the principles of economics as a preface to an examination of the structural or technical aspects of financial management, we have waited and chosen to highlight and discuss in Chapter 7 those basic economic principles of most immediate concern to managers in the field.

C H A P T E R 7

Economic Principles

Introduction locate available resources for the purpose of realizing their wants and needs. Eco- An effective sports, tourism, and lei- nomics involves the measurement and sure service manager is not only capable quantification of observed or expected of establishing, directing, and imple- relationships and transactions between menting procedures of sound financial economic agents. Individuals, families, management, but is also aware of the basic teams, government departments, and economic and accounting principles that not-for-profit and business organizations relate to those procedures. This chapter are all examples of economic agents. introduces some elementary economic When, for example, an event manager concepts that are particularly relevant to predicts the attendance at a championship financial management in sports, tourism, baseball game for which the admission and leisure service organizations. It should price is $8.00, he applies his understand- be noted that this is a very basic discus- ing of the economic principles of supply sion of a few key principles and in no way and demand. If a public recreation ad- is meant to supplant the valuable learn- ministrator is trying to decide whether ing that can be gained from a full course investing today in a particular recreation of studies in economics. While financial facility or piece of equipment will pro- management and accounting require vide the future returns that she feels are development of technical proficiency, appropriate, she will need to apply her we gain from their parent discipline an understanding of the economic concepts understanding of the human element of of inflation, interest, and future values. resource allocation. Economics is a social Furthermore, accounting for the chang- science that contains specific assumptions ing value of facilities or equipment over about the way people behave as they al- time requires a manager to understand 54 Financial Resource Management: Sport, Tourism, and Leisure Services

the notion of depreciation, and articulat- petroleum reserves have extensive stock, ing the benefits of a sports, tourism, or but may have a very small supply when leisure program or enterprise will require the price being offered is only $10 per an understanding of multipliers, leakage, barrel. Without any change in the stock and inter-industry purchasing as they re- of oil, the supply would increase signifi- late to economic impact assessment. cantly if the price rose to $50 per barrel. These key economic principles are Similarly, there is a very small supply of important to the effective management excellent basketball players who will play of programs, events, attractions, destina- for a professional team when offered a tions, and facilities. Among other benefits salary of $5,000 per year. The supply will, to be gained from studying economics however, increase considerably when the and understanding these few principles annual salary offer goes to $50 million. is an increased ability to recognize and In this illustration, the number of excel- measure the probable financial out- lent basketball players did not increase, comes of decisions that might be made but the supply for the professional league with respect to product development, did. The relationship between quantity pricing, and promotion. Exploring and made available and the price offered is understanding these principles can help graphically represented in Figure 7.1 and managers of sport, tourism, and leisure is referred to as the supply curve. services to see the full effect and impact From the data presented in Figure of specific financial decisions, thereby en- 7.1, it appears that there are only about hancing their ability to successfully meet 25 excellent basketball players who are their respective financial objectives. willing to play for a professional team for $20,000 per year. There are, of course, many more equally talented players, but Supply and Demand they probably will choose to pursue more lucrative careers for which their college The terms supply and demand have education has prepared them. When the more precise meanings than are sug- invitation to join the team comes with a gested by their everyday use. In casual $40,000 salary offer, there are many more conversation, for example, reference is players (about 40) willing to consider the made to the supply of gasoline, and an opportunity. Teams that offer $90,000 per opinion might be expressed that, after year find an even greater number of ex- learning about the huge oil reserves in cellent players (approximately 70) from the Persian Gulf, there is a large supply whom to recruit. The supply curve illus- of gasoline—certainly enough to meet trates the human behavior expected in the public demand. More correctly, the situations of exchange. The supply curve assertion is that there is a large stock of shows how the quantities that are avail- gasoline—enough to meet current needs. able increase and decrease in relation to The difference between stock and supply the prices offered for the product or re- is subtle, but important. Stock refers to source. the quantity of a product or resource that In discussing demand, it is com- exists. Supply refers to the quantity of a mon to refer to the amount wanted or product or resource that the owner is will- needed. The more traveling a team wants ing to offer or make available at a given to do, the more it wants gasoline for its price. Oil-producing nations with large bus. However, the precise meaning of Chapter 7 55

100 Supply 90 80 70 60 50 40 PRICE ($000s) 30 20 10 0

10 20 30 40 50 60 70 80 90 100 110 120 QUANTITY (players)

Figure 7.1 The supply curve for athletes in a professional sport demand is the amount of a product or re- As the price goes down, the demand source wanted at a given price. When the goes up. The supply and demand curves consumer price of gasoline is $1.90 per shown in Figures 7.1 and 7.2, respec- gallon, the team is more inclined to trav- tively, appear to be straight lines rather el, and the quantity of gasoline wanted is than arc-like curves. The extent of cur- greater than when the price is $3.40 per vature will vary according to the nature gallon. Similarly, if would-be professional of the resource and the behavior of the athletes are demanding annual salaries of market. A straight line may, in fact, be $20 million to play, the number of teams the best representation of the price/quan- and the number of player positions will tity relationship and is, for convenience be less than if players could be contracted and simplicity, used in our discussion of for $50,000 per year. The relationship be- supply and demand. All curves shown tween quantity wanted and the price of in Figure 7.3 can be accurate reflections the resource is graphically represented of either supply or demand. in Figure 7.2 and is referred to as the de- It might also be observed, when mand curve. comparing the above supply and demand Using the demand curve repre- curves, that the supply and demand sented in Figure 7.2, it is observed that curves slope in opposing directions. Sup- when players demand $80,000 salaries, ply curves have a positive slope; that is, the league is only interested in or able to they show that the quantity made avail- acquire approximately 25 players. If the able increases when the price offered salaries are only $20,000, perhaps smaller increases. Conversely, demand curves markets can afford to have teams, team have a negative slope. This means that rosters can be expanded, and more play- increases in price are associated with ers (approximately 100) will be needed. decreases in the quantity wanted. If the 56 Financial Resource Management: Sport, Tourism, and Leisure Services

100 90 80 70 60 50 40 PRICE ($000s) 30 20 Demand 10 0

10 20 30 40 50 60 70 80 90 100 110 120 QUANTITY (players)

Figure 7.2 The demand curve for athletes in a professional sport

Supply Supply Supply Price Price Price

Quantity Quantity Quantity

Demand Demand Demand Price Price Price

Quantity Quantity Quantity

Figure 7.3 Examples of supply and demand curves

supply curve and the demand curve for quantity of a resource that is wanted by a particular product or service are both the consumers at that price. At any price drawn on the same ﬁeld, they will inter- above the equilibrium point, there is in- sect at some point. This point is called suﬃcient demand (i.e., too much supply). the equilibrium point. At the equilibrium At any price below the equilibrium point, point, the corresponding price motivates there is inadequate supply (i.e., too much the supplier to make available the same demand). Chapter 7 57

Supply and demand curves are con- 25 boat owners. These data are summa- structed using data that describe the rized in Table 7.1. availability of and the want for resources at different prices. They are the result of Problems: experimentation, simulation, and obser- • How many boat slips should he build vation of behaviors in similar exchange if he decides to charge $40 per slip? situations. In the following example, • How many customers would want some very simple data will be used to il- his $40 boat slips? lustrate three different approaches to the • At what price will the supply of boat estimation of supply and/or demand. slips equal the demand? • How many boat slips should he build in order to take full advantage of the Estimating Supply and Demand demand without creating more capacity than is necessary? (Alabama Data: State Parks, Department of Con- A marina developer calculated that servation and Natural Resources, appropriate revenues could be generated 2000.) if he offered 20 boat slips for $10 each. If, somehow, his customers could be con- There are two approaches to solv- vinced to pay $90 for a slip, the devel- ing these problems: (1) approximation oper could build a larger facility and re- through graphing, and (2) algebraic cal- alize appropriate revenues by offering 73 culation. These approaches are explained boat slips. After studying marina opera- in the following examples. tions at another waterfront in the area, he found that one that charged only $20 1. Approximation through Graphing was able to attract 100 customers, and Using graph paper, plot the known another that charged $80 attracted only data points and draw the supply and

Price

Supply ﬁcient demand (too much supply) Insuf Right Price Equilibrium Point

Demand Inadequate supply (too much demand) Quantity

Supply equals demand

Figure 7.4 The supply/demand equilibrium point 58 Financial Resource Management: Sport, Tourism, and Leisure Services

Table 7.1 approximate values. In most cases, the Summary of supply and demand data for approximation is suﬃcient, especially in proposed marina consideration of the fact that the supply Price Supply Demand and demand curves themselves are some- $90 73 what imprecise. $80 25 $40 ? ? 2. Algebraic Calculation $20 100 The second method provides more $10 20 precise results, but these too are based on somewhat imprecise values for points along the supply and demand curves. demand curves (Figure 7.5). For a given This method involves the use of basic al- price, ﬁnd its intercept on the supply or gebra as follows: demand curve and identify the corre- Use the formula for calculating any sponding points on the horizontal axis point on a straight line. In this case, the representing units of supply/demand. For straight lines are slopes. example, at $40, it appears that the supply will be about 40 units and the demand y=ax+b will be for about 75 units. - where: y is a given price It also appears that the equilibrium - x is the quantity supplied or de- point (where the supply and demand manded at that price curves intersect) is somewhere around - a is the slope of the supply or de- the $60 mark, with supply and demand at mand curve that price being approximately 50 units. - b is a constant Obviously, this method has the advantage of simplicity, but it results in First calculate the slopes of the sup-

100 90 80 70 60 50

PRICE ($) 40 30 20 Demand 10 0

10 20 30 40 50 60 70 80 90 100 110 120 QUANTITY (units)

Figure 7.5 Supply/demand curve graph Chapter 7 59 ply and demand curves: ﬁnd a price where the supply meets the demand and to know what that supply/ Slope (supply) = Change in price demand quantity will be. /Change in quantity With slopes and constants already established, x (the quantity at equilibrium) =(90-10) / (73-20) can be calculated by equating y (price), =1.5 even though its value is not yet known.

Slope (demand) = Change in price / If y(supply) = y(demand), then Change in quantity 1.5x - 20 = -0.8x + 100 =(80-20) / (25-100) - x = 52 (the quantity supplied/de- = -0.8 manded at the equilibrium point)

Next, calculate the constants for both To calculate the price at equilibrium, the supply and demand curves. substitute the calculated value for x in For the supply curve, use the known either of the equations for supply or de- coordinates of any point on the line. For mand. example, use $10 and 20 units and a slope of 1.5. Thus: Supply: y = 1.5 (52) - 20 Demand: y = -0.8 (52) + 100 10 = 1.5 (20) + b b = -20 y = $58

Likewise, for the demand curve, use It has now been determined that, at a the known coordinates of any point on price of $58, the supply and demand will the line. For example, use $20 and 100 both be 52 units. units and a slope of -0.9. Thus: (Note that this result is very close to the result from approximation through 20 = -0.8 (100) + b graphing [$60 and 50 units] and, in most b = 100 circumstances, is close enough.) It is important to note that supply To estimate the supply and demand and demand curves are not fixed for eter- when the price is $40, simply use 40 as nity. Rather, they reflect the behavior of a the value for y, use the same values for the certain market or industry at a particular slope and the constant, and solve for x. time. Either curve or both curves may change in response to common circum- (ignore the minus sign) stances or conditions. For example, the pattern of demand for spectator seating Supply Demand at a high school football game may move y = 1.5x - 20 y = -0.8x + 100 to the right (i.e., more will be demanded 40 = 1.5x - 20 (40) = -0.8x + 100 at a given price) if it bcomes to be ap- x = 40 units x = -75 units parent that the team has a good chance Therefore, if the price is set at $40, the of qualifying for the state championship supply will be 40 units, but the demand for the first time in 25 years. Likewise, the will be for 75 units. It would be useful to curve can move to the left (i.e., less will 60 Financial Resource Management: Sport, Tourism, and Leisure Services

be demanded at a given price) if the foot- influence shifts in supply and demand ball team consistently loses by 30 or more curves. Generally, they relate to capacity points to competitors who play their sec- and production opportunity, or to con- ond string for three quarters of the game. sumer need and sentiment. Some of the Such movements in patterns of demand most common influences of supply and do not necessarily change the supply demand for leisure and sport services are curve, but they will likely affect stock. Re- identified in Table 7.2. fer to the new equilibrium point shown Managers of tourism, leisure, and in Figure 7.6 and notice how the number sport organizations who understand the of seats that can be sold and the price at economic principles of supply and de- which they can be sold increase solely as mand are well equipped to deal with the a result of change in demand. relative uncertainties of forecasting reve- Not only can shifts in demand occur, nues and anticipating expenses. They are but also attitudes about and opportuni- better able to apply the art of anticipating ties for supply can change. For example, a human behavior in exchange situations Boy Scout camp may, because of surplus to the technical process of budgeting and capacity and a generous operating grant, other aspects of financial management. be able to substantially reduce individual participation fees for the usual number of campers. This price reduction also means Inflation that the camp administrators will be under pressure to serve more campers be- In discussing the principles of supply cause of the increased demand at those and demand, it is evident that decisions lower prices. Figure 7.7 illustrates the im- with regard to the offering of or desire for pacts of changes in supply conditions. stock reflect the natural desire of both pro- There are many conditions that can ducers and consumers to maximize their

10 9 8

7 Supply 6 5 4 PRICE 3 Demand (winning) 2 1 0 Demand (losing) Demand (usual)

100 200 300 400 500 600 700 800 900 1000 QUANTITY (players)

Figure 7.6 Illustration of shifts in the demand curve Chapter 7 61

100 90 Supply A 80 Supply B 70 60 50 40 PRICE 30 20 10 Demand 0

50 100 150 200 250 300 350 400 450 500 QUANTITY (campers)

Figure 7.7 Illustration of shifts in the supply curve

Table 7.2 Common inﬂuences on supply and demand for leisure and sport services

Condition Inﬂuence

Increased ability to offer services due to: Move supply curve to the right. —new or expanded facilities —new or expanded staff —new equipment —staff with new skills/certiﬁcation

Reduced capacity of physical plant Move supply curve to the left.

Realization of greater efﬁciency due to Move supply curve to the right. economies of scale

Revised operational mandate or mission. Move supply curve in either direction.

Change in market need/problem resolution Move demand curve to left if problem resolved or need reduced. New problems or needs move demand curve to the right.

Change in market resources Move demand curve to the right if time, money, transportation, etc., more available. Move demand curve to left if constraints increased.

Panic/Perception of scarcity Move demand curve to right.

Competition Move demand curve to the left. 62 Financial Resource Management: Sport, Tourism, and Leisure Services returns. Consumers want as much as they and sport service manager is to protect can get for the least amount of money, vital resources from the eroding effects while suppliers want as much money as of inflation. they can get for the least amount of stock depletion. Human nature is such that, in Interest a free market economy, this valued drive for maximization results in a gradual in- Regardless of the source of money that crease in the price of goods and services. a sport, tourism, or leisure organization This phenomenon is called inflation. The acquires and uses in its operation, inter- impact of inflation is the erosion of the est will play a significant role in financial purchasing power of financial resources decisions. If the financial resources used that do not grow at least at the rate of by the organization come from lenders inflation. The challenge to the leisure or investors, then interest will be paid to

CASE STUDY The Alabama Experience

In the mid-1980s, the Alabama State Park system stopped receiving tax revenues from the state general fund. This included money for their operational budget and capital improvement budget. By 2000, the state park system was in desperate trouble. The parks were in poor shape, almost no money had been spent on improvements, personnel were poorly paid, morale was low, and their lodge system was in such poor shape that few people stayed in their facilities. By 1990, the state park system received $4 million in cigarette tax funds and generated $24.3 million in revenues from entrance fees, lodge room rentals, campground reservations, restaurants, and similar outdoor recreation services. By 1999, the total operating budget had State parks are dependent upon multiple risen to $28.8 million (or about $500,000 sources of income for successful operations. over a 10-year period). It seemed a reasonable amount of money to operate the state budget until inflation’s impact is measured. During the same 10-year period the rate of inflation averaged 2.8 percent per year. Inflation’s impact on purchasing power can be measured through the use of an inflation calculator. The impact of inflation on the operating budget was measured by converting each year’s budget (from 1991 to 1999) to 1990 dollars. The calculator applied the impact of inflation on each year’s operating budget and converted the value of each year’s budget to 1990 dollars. When this was applied, it was discovered that the $28.8 million 1999 operating budget only had a purchasing power of $23.8 million, or $5 million less purchasing power in 1999 then in 1990. Alabama’s operating budget, while appearing to hold steady, had actually decreased in purchasing power a total of 8% over the 10-year period. The actual loss in purchasing power over the 10-year period exceeded $25 million. Chapter 7 63 them in addition to the original amount will be invested and thereby has the po- borrowed or invested. If the funds used tential to grow or increase in value over come from internal reserves, then their time. Such is the effect of interest. How- use will reduce the interest that could ever, the effect of inflation is the erosion have been earned by those reserves. The of the purchasing power of money over impact of interest should not be ignored. time. Obviously, it is hoped that the rate In fact, this point is emphasized in the of growth will be greater than the rate of unofficial definition: “Interest—those who inflation. The financial manager works understand it, get it; those who don’t, pay it.” to protect the purchasing power of the Interest is the time value of money. sport, tourism, or leisure organization’s It represents what it costs an economic money. In other words, the financial agent to consume immediately by using manager’s first goal is to ensure that funds that it does not have. It represents the future value of a sum is sufficient to what an economic agent receives for overcome the impact of inflation. Earlier postponing consumption by lending or in this chapter, it was shown how a sum investing funds that it does have. Inter- of money increases in value over time, est is typically expressed as a percentage thanks to interest. The future value of an of an original amount (called principal) investment can be calculated as follows: that is paid by a borrower or earned by If interest is paid each year for a a lender on a per-annum basis. For ex- given number of years, the future value ample, 7% interest on a principal of (F) of an original sum is P+n (Pi), where $2,000 would oblige a borrower to pay P = the principal (the original amount the lender the original $2,000 plus $140 invested), n = the term (number of years interest after one year. The lender may until repayment of the principal), and i extend the loan period for one more year, = the interest rate. After two years, the after which the borrower would repay the value of $2,000 earning 7% paid annu- $2,000, plus another $140 (if interest was ally is: also paid after the first year). In this case, the time value of the money was $280. F = P+n (Pi) If the borrower did not make the $140 interest payment after the first year, that $2,000 + 2($2,000 x .07) = amount would be considered as an addi- $2,280 tional loan and be added to the principal to be repaid after the second year. After If the interest is compounded, the the second year, the borrower would, in future value of the original sum is cal- addition to the $2,140 principal, pay an culated using a more complicated for- interest charge of $149.80 (7% of $2,140). mula: The total time value of the money when the interest is compounded (i.e., carried F = P(1+ i)n over and included in the principal) was $140.00 + $149.80 = $289.80. Fortunately, table values can be used to avoid calculation of (1+i)n. Interest Ta- Future Value ble A (which can be found at the end of the book and is excerpted here in Table

Unless the owner of money hides it in 7.3) provides interest factors (TA) to be a sock or under the mattress, that money substituted in a restated formula for the 64 Financial Resource Management: Sport, Tourism, and Leisure Services

future value of a sum with interest com- F1 = P (TA) = $10,000 (1.469) = pounded. The restated formula is: $14,690

F = PTA. To this amount, add the future value of the next $10,000 installment (F2) in- Note that the product of P (the origi- vested at 8% for four years:

nal $2,000 investment) and TA (the table value for n = 2 years and i = 7%) is $2,000 F2 = P(TA) = $10,000 (1.360) = x 1.145 = $2,290. This outcome is essen- $13,600 tially the same as was earlier determined to be the future value of the sum after two Continue calculating the future val- years earning 7% interest. ues for the remaining installments (while The foregoing discussion of future paying attention to the fact that the TA values helps the sport, tourism, and lei- value should reflect the declining n [years sure organization determine the future of investment]). Sum the future values to value of resources that it currently has determine the money that will be avail- and is willing to invest. For example, an able for the project after five years. agency that plans to fund a future building project by setting aside (investing) F1 = P (TA) = $10,000 (1.469) = $10,000 at the beginning of each year for $14,690 the next five years is able to calculate the F2 = P (TA) = $10,000 (1.360) = expected balance of that earmarked ac- $13,600 count at the end of the five-year period. F3 = P (TA) = $10,000 (1.260) = Assuming a stable interest rate of 8% $12,600 for five years, the future value of the first F4 = P (TA) = $10,000 (1.166) = amount invested (F1) will be: $11,660 F5 = P (TA) = $10,000 (1.080) = $10,080

Table 7.3 Excerpt from Interest Table A (1+ i)n

n\i 6% 7% 8% 9% 10% 12% 15% 1 1.060 1.070 1.080 1.090 1.100 1.120 1.150 2 1.124 1.145 1.166 1.188 1.210 1.254 1.323 3 1.191 1.225 1.260 1.295 1.331 1.405 1.521 4 1.262 1.311 1.360 1.412 1.464 1.574 1.749 5 1.338 1.403 1.469 1.539 1.611 1.762 2.011 6 1.419 1.501 1.587 1.677 1.772 1.974 2.313 7 1.504 1.606 1.714 1.828 1.949 2.211 2.660 8 1.594 1.718 1.851 1.993 2.144 2.476 3.059 9 1.689 1.838 1.999 2.172 2.358 2.773 3.518 10 1.791 1.967 2.159 2.367 2.594 3.106 4.046 15 2.397 2.759 3.172 3.642 4.177 5.474 8.137 20 3.207 3.870 4.661 5.604 6.727 9.646 16.367 25 4.292 5.427 6.848 8.623 10.835 17.000 32.919 Chapter 7 65

Total $62,630 P = F[1/(1+i)n ] = $20,000 [1/(1+.06)2] = $20,000 (0.890) = By setting aside $10,000 per year for $17,800 the next five years, the organization will have $62,630 for its building project. The team needs to deposit only $17,800 now and $20,000 later to have the full $40,000 at the time of the trip. Present Value Once again, a formula has been introduced that may look a bit intimidat- The calculation of future values re- ing. Fortunately, there is another table quires knowledge of a beginning amount that eliminates the need for cumbersome (principal), a term of investment, and the calculations. Interest Table B (which can applicable interest rate. There are, howev- be found at the end of the book and is ex- er, situations wherein the financial man- cerpted here in Table 7.4) provides values ager has a target future value but needs from the solution of [1/(1+i)n] when cal- to know how much to invest at a given culating present values. rate for a specified term to achieve that In the previous illustration, solution target. In a sense, the manager needs to of the formula [1/(1+i)n] generated an in- reverse the procedure for determining fu- terest factor of 0.890. The Table B value ture value in order to calculate a present corresponding to i =.06 and n = 2 also value. For illustrative purposes, assume generates the interest factor of 0.890. The that an athletic team has been invited to formula for calculating present value can, travel to and participate in a prestigious therefore, also be expressed as: tournament in just a little more than two years from now. The team’s manager has P = F(TB) worked with a transportation agency, hotels, and others to secure a firm price for services needed at the time of the event. Depreciation The estimated team expenses to be paid at the time of the trip total $40,000. Team Physical assets used by sport, tour- members are required to have 50 percent ism, and leisure organizations do have of the trip funds deposited in the team’s a finite life span. With the exception of interest-bearing account two years before land, assets such as buildings and equip- the event. The remainder is payable at the ment eventually wear out or become ob- end of the two years, just prior to depar- solete because of market or technologi- ture. How much money has to be deposit- cal developments. The loss of or reduced ed now? The amount of $20,000 comes to productivity of these resources is recog- mind quickly, but, after considering what nized and quantified as depreciation. In was just discussed about future values, it accounting, depreciation is considered as becomes evident that all that is needed an expense, but not in the same way as is is an amount that in two years will have the cash outlay for the purchase of pro- become $20,000. The question is actually, duction supplies or services. The precise “What is the present value of the future accounting procedure for dealing with sum of $20,000?” Using, for example, 6% depreciation is discussed in Chapter 17. as the interest rate, the present value can be calculated in the following manner: 66 Financial Resource Management: Sport, Tourism, and Leisure Services

Table 7.4 Excerpt from Interest Table B 1/(1+i)n

n\i 6% 7% 8% 9% 10% 12% 15% 1 0.943 0.935 0.926 0.917 0.909 0.893 0.870 2 0.890 0.873 0.857 0.842 0.826 0.797 0.756 3 0.840 0.816 0.794 0.772 0.751 0.712 0.658 4 0.792 0.763 0.735 0.708 0.683 0.636 0.572 5 0.747 0.713 0.681 0.650 0.621 0.567 0.497 6 0.705 0.666 0.630 0.596 0.564 0.507 0.432 7 0.665 0.623 0.583 0.547 0.513 0.452 0.376 8 0.627 0.582 0.540 0.502 0.467 0.404 0.327 9 0.592 0.544 0.500 0.460 0.424 0.361 0.284 10 0.558 0.508 0.463 0.422 0.386 0.322 0.247 15 0.417 0.362 0.315 0.275 0.239 0.183 0.123 20 0.312 0.258 0.215 0.178 0.149 0.104 0.061 25 0.233 0.184 0.146 0.116 0.092 0.059 0.030

At this point, the techniques for calculat- depreciation. Note that the bulletin board ing depreciation will be presented. has no book value or salvage value at the One way of calculating depreciation end of its life span. is to divide the original value (sometimes Not all assets depreciate to zero value referred to as the starting book value) of at the end of their projected life spans. an asset by its expected life span. For ex- Furthermore, only some will depreciate ample, a $6,000 electronic notice board at at a constant rate, as was expressed in a community center may have a ﬁve-year the preceding example of straight-line life span, after which any repairs needed depreciation. In reality, many assets will would be too expensive or may be impos- decrease in value more at the beginning sible because of changing technology. of their use than later on, and many will Table 7.5 illustrates the steady reduc- outlast projected life spans, as well as tion in value of the bulletin board during maintain some salvage value, even when the ﬁve years. This is called straight line obsolete or nonfunctional. Declining bal-

Table 7.5 Annual starting values, depreciation, and remaining book values after straight line depreciation

Period Starting Book Depreciation Remaining Book Value Amount Value

Year 1 $6,000 $1,200 $4,800 Year 2 $4,800 $1,200 $3,600 Year 3 $3,600 $1,200 $2,400 Year 4 $2,400 $1,200 $1,200 Year 5 $1,200 $1,200 $0 Chapter 7 67 ance depreciation reflects these realities. considered an expense, the taxable prof- With declining balance depreciation, a its are reduced, but not the cash that is depreciation rate is set for an asset based generated from operations. These cash on industry standards. This rate affects reserves are more critical in the early both the amount of annual depreciation stages of an enterprise than later, when and the salvage value. the depreciation amount is reduced. To calculate first-year depreciation Table 7.7 provides a comparison of and remaining book value (salvage val- the depreciation amounts and remain- ue), divide the starting book value of the ing book values of a $6,000 asset that asset by its life span, and then multiply is straight-line depreciated, and declin- that number by the appropriate deprecia- ing-balance depreciated at 150 percent tion rate. Expressed as a formula: and 200 percent. The choice of depreciation method and seemingly small differ- (Starting Book Value/Life Span) x ences in depreciation rates clearly have Depreciation Rate = Depreciation significant impacts on how the sports, tourism, or leisure service organization For example, a $6,000 pitching accounts for the mortality of its physical machine with a five-year life span and resources. 150% depreciation rate would depreciate ($6,000/5) x 1.5 = $1,800 in the first Sensitivity to Changes in Price year and have a remaining book value of $6,000 – $1,800 = $4,200. After the Consumers of sport, tourism, and lei- second year, it will have depreciated sure services respond to changes in prices ($4,200/5) x 1.5 = $1,260 and have a rein several different ways. In some cases, maining book value of $4,200 – $1,260 = an increase in price will result in an in- $2,940. As shown in Table 7.6, the final crease in consumption because the price year’s depreciation will be much lower increase is thought to be an indication (only $432), and there will be a salvage of improved service quality. Most often, value of $1,009. however, increases in price have the op- An important advantage of declin- posite effect on consumption. When the ing balance depreciation is the tax shel- price goes up, consumption goes down. ter it offers to profits generated early The degree to which consumption in an enterprise. Since depreciation is decreases with a given increase in price

Table 7.6 Annual starting values, depreciation, and remaining book values after declining balance depreciation (150%)

Period Starting Book Depreciation Remaining Book Value Amount Value

Year 1 $6,000 $1,800 $4,200 Year 2 $4,200 $1,260 $2,940 Year 3 $2,940 $882 $2,058 Year 4 $2,058 $617 $1,441 Year 5 $1,441 $432 $1,009 68 Financial Resource Management: Sport, Tourism, and Leisure Services

Table 7.7 Comparison of depreciation amounts and remaining book values for straight line declining balance (150%) and declining balance (200%) depreciation of a $6,000 asset

Period Straight Line 150% 200%

Year 1 $1,200 $1,800 $2,400 Year 2 $1,200 $1,260 $1,440 Year 3 $1,200 $882 $864 Year 4 $1,200 $617 $518 Year 5 $1,200 $432 $311 Total Depreciation $6,000 $4,991 $5,533 Remaining Book Value $0 $1,009 $467

will differ between consumer markets. values (and to avoid confusion when com- Some groups of consumers are more sen- paring those values) economists usually sitive to price changes than others, and ignore the negative sign. Thus, an elastic- it is important for the financial manager ity of –2.5 would be considered greater in sport, tourism, and leisure service or- than –2.4 (in spite of what is learned in ganizations to understand and be able elementary school mathematics). to make sound decisions based on an Consider the following illustra- understanding of price-induced fluctuation, which uses admission price and tions in demand. attendance data from A.J.’s Aussieland The measure of demand fluctuations Theme Park. is referred to as elasticity of demand. The To calculate the price elasticity of measure of price-induced demand fluctu- demand for any of the four market seg- ations is called price elasticity of demand. ments, use the appropriate data from Ta- More specifically, price elasticity of de- ble 7.8 and apply the following formula: mand is defined as the percentage change in a quantity consumed that is caused by a Price Elasticity= percentage change in price. For example, suppose that a 1.0 percent increase in the Change in attendance/(Sum of attendance/2) admission price results in an 0.5 percent Change price/(Sum of prices/2) decrease in sales to a particular market segment. The price elasticity of demand Example: For the child market seg- for this market segment and this product ment in 2004-2005, the price elasticity of would be –0.5. demand would be: Allowing that an increase in price practically always results in a decrease in Price Elasticity = demand, the calculated value of price demand elasticity would always be negative. (120,000 - 150,000) / ((120,000 + 150,000)/2) An important academic/practical contra- (3.50 - 3.00) / ((3.00 + 3.50)/2) diction deserves attention at this point. Because elasticities are always negative = -1.44 Chapter 7 69

Table 7.8 Sample price and attendance data for four market segments

Market Segment Season Price Attendance

Child 2004 $3.00 150,000 Child 2005 $3.50 120,000 Child 2006 $4.00 100,000

Youth 2004 $4.00 105,000 Youth 2005 $5.00 99,500 Youth 2006 $6.00 92,000

Adult 2004 $7.00 60,000 Adult 2005 $8.00 52,500 Adult 2006 $10.00 42,000

Senior 2004 $6.00 35,000 Senior 2005 $6.50 28,000 Senior 2006 $7.00 23,000

Other elasticities were calculated in prices produces increasing revenue). an identical manner and are presented in The calculated elasticities for the the Table 7.9. youth market segment are “less” than 1.0, Note that the calculated elasticities which indicates that the youth market is for the child and senior markets are both relatively insensitive to price changes at “greater” than 1.0 (remember to ignore A.J.’s Aussieland. Market segments with the minus sign). This means that a greater an elasticity of less than 1.0 are said to percentage of change was observed in at- be relatively inelastic. They are markets tendance than was aﬀected by price. As for which a change in price results in a demonstrated by their change in demand, parallel change in revenue (i.e., increas- the children and the seniors appear to be ing prices produces increasing revenue; relatively sensitive to price changes. In decreasing prices produces decreasing fact, they are so sensitive that the addi- revenue). tional revenue received from increased The adult market is called a unitary admission fees paid by the 120,000 re- elastic market segment because price maining customers in 2003 was $30,000 changes, although they cause a decrease less than the amount received in 2001 in attendance, do not result in either an from the 150,000 customers who paid the increase or a decrease in revenues. Uni- lower fee. Market segments with an elas- tary elastic markets have a price demand ticity of greater than 1.0 are said to be rel- elasticity of approximately 1.0. For the atively elastic. They are markets for which purpose of comparison, the linear de- a change in price results in an opposite mand curves for three markets that share change in revenue (i.e., increasing prices a common point on their demand curves produces decreasing revenue; decreasing are presented in Figure 7.8. 70 Financial Resource Management: Sport, Tourism, and Leisure Services

Table 7.9 Sample data and computed elasticities for four market segments

Market Segment Season Price Attendance Elasticity

Child 2004 $3.00 150,000 Child 2005 $3.50 120,000 -1.44 Child 2006 $4.00 100,000 -1.36

Youth 2004 $4.00 105,000 Youth 2005 $5.00 99,500 -0.24 Youth 2006 $6.00 92,000 -0.43

Adult 2004 $7.00 60,000 Adult 2005 $8.00 52,500 -1.00 Adult 2006 $10.00 42,000 -1.00

Senior 2004 $6.00 35,000 Senior 2005 $6.50 28,000 -2.78 Senior 2006 $7.00 23,000 -2.78

From Figure 7.8, it is evident that Economic Impacts markets that are less sensitive to price changes (inelastic) are represented by A common strategy for winning sup- steep demand curves. Conversely, the port for a major tourism, recreation, or demand curves for more price sensitive sports development project is the dec- (elastic) markets will be less sloped. laration of economic benefits that will be realized in the community by virtue of that particular project. A city council considering the construction of a major sports stadium might be influenced by the promise of hundreds of new jobs in Inelastic the community and millions of dollars of Unitary additional sales, household income, and tax revenues. Because of the influence

PRICE that such promises may have, it is impor- Elastic tant for the sport, tourism, and leisure service manager to understand the basics of economic impact analysis and be able to critically evaluate such considerations. QUANTITY A simple illustration will lay the foundation for this discussion. Assume that Maurice visits the small town of Figure 7.8 Comparison of demand curves for elastic, Striderville and spends $100 on crafts inelastic, and unitary elastic markets made and sold locally by Jean. Jean needs

Chapter 7 71 a new display case, so she hires Stefan ville economy by Maurice and was res- to build one for her. She pays Stefan $80 pent by several people. Some of the mon- and spends the remaining $20 at Vicki’s ey was spent on locally produced goods produce stand at the Farmer’s Market. and services and some was spent outside Stefan pays $35 for materials bought in the community. Eventually, all the money New York City, spends $30 on computer introduced by Maurice was sent to New soft ware from a mail order company in York City ($35), St. Louis ($30), Orlando St. Louis, and buys $15 worth of produce ($15), and Seattle ($20). Th e exogenous from Vicki. Vicki pays $35 to her lawyer, funds had circulated within the econo- Susan, who hires Rufus to tend her garden my and then leaked out through outside while she attends a professional meeting spending. However, Maurice’s $100 did in Orlando. Rufus is paid $20, while the result in $270 of spending (economic remaining $15 of Susan’s income goes activity) in the community. Its direct im- toward her trip. Rufus spends his $20 on pact was multiplied 2.7 times, and it con- garden tools manufactured in Seattle by tributed to the employment income of Ethel & Pen Tool Co. Figure 7.9 diagrams ﬁ ve people in Striderville. this series of transactions. Economic impact assessment mea- Note that, in the above scenario, sures the amount of local respending money was introduced into the Strider- of money that comes into the economy

Maurice

$100

Jean

New York City $35 $80 $15 $20

Stefan Vicki

St. Louis $30

$35

Orlando $15 Susan

Seattle $20 $20

Rufus LEAKAGE LOCAL INCOME/SPENDING

Figure 7.9 Transaction series showing local re-spending and leakage 72 Financial Resource Management: Sport, Tourism, and Leisure Services

because of a particular event or project. Th e direct eff ect of money spent on a It results in a description of the local in- major tourism, sports, or leisure project is come, local sales, and local tax revenues the local purchasing and employment re- generated by exogenous funds. It results quired for that project. Th e indirect eff ect in quantifi cation of the employment cre- is the local purchasing and employment ated by new income, sales, and tax rev- that results from direct sales and employ- enues. Figure 7.10 details the fl ow of dol- ment income. Induced eff ects result from lars from non-local sources as they move third and subsequent rounds of economic through the local economy and aff ect activity having their genesis in the project. government, industry, and household Economic impact studies are occasion- spending activity. ally conducted to provide justifi cation for

Non-Local Consumer Spending

Sport, Tourism, and Leisure Enterprises

Local Local Direct Revenue Import Government Interindustry Household to Leakages Revenue Purchases Income Non-residents

Local Import Household Savings Leakages Purchases

All Businesses

INDIRECT EFFECT

Local Local Secondary Revenue Import Government Interindustry Household to Leakages Revenue Purchases Income Non-residents

Local Import Household Savings Leakages Purchases INDUCED EFFECT

Figure 7.10 Flow of exogenous funds through the local economy (adapted from Liu and Var, 1983) Chapter 7 73 a “dream” project. Such studies must be ment decisions that would require an viewed with a critical eye, as the results economic impact analysis are much may reﬂect more of a political will than too important to make on the basis an economic reality. When evaluating the of unreliable or biased information. results of an economic impact study, the sports, tourism, and leisure service manager should consider the following: Summary

• Does the study focus on the impact As an introduction to the economic of money coming from outside the principles that underlie the successful community? This is an important management of financial resources in the distinction, because the impact of sport, tourism, and leisure service orga- spending local funds is, in most re- nization, this chapter has emphasized spects, independent of the project. the need to develop an understanding In fact, a project that only stimulates and working knowledge of the concepts spending of local money may cre- of supply and demand. Additionally, at- ate more import leakage than it does tention has been devoted to the impact new sales, income, and employment. of interest on decisions about present or future use of money. The concepts of de- • Are the multipliers that are used tru- preciation and economic impact assess- ly reflective of economic conditions ment were also introduced. The econom- within the community? Extreme ic principles presented help the financial caution should be exercised when manager to understand how individuals applying a sales, income, or employ- and society work; that is, they provide ment multiplier that was computed insights into basic human behavior. Fur- for another community that may thermore, the technical aspects of the dis- have a more diverse economic base cussion also serve as a review of the basic or may be less subject to seasonal mathematical skills that are needed for constraints and market fluctuations. procedures discussed later in this book. While it may be convenient or less An understanding of basic economics is expensive, a “borrowed” multiplier important to the development of skills just may not fit. and the strengthening of the decision- making ability of financial managers in • Are projections of direct spending sport, tourism, and leisure service orga- based on solid market research or on nizations. unsubstantiated optimism? Invest-

NOTES 74 Financial Resource Management: Sport, Tourism, and Leisure Services S E C T I O N D

Revenue Management

The next five chapters of this book examine the need and opportunities for revenues to be used in support of the sport, tourism, and leisure service enterprise. Revenue management is a crucial skill to develop because without the acquisition and management of revenues, there can be no expenditures and therefore no activity. Chapter 8 identifies major sources of income for organizations in the public, private not-for-profit, and commercial sectors. It provides a detailed discussion of compulsory income and introduces other sources, including earned income. Pricing is an important consideration in the generation of earned income and is the topic of Chapter 9. Pricing principles and strategies are presented, and the impacts of price and price adjustment on consumer behavior are described. Gratuitous income is discussed in Chapters 10 and 11, and the process of grantseeking is carefully detailed. Because grants are usually awarded by foundations or other philanthropic organizations, this section includes an exploration of philanthropy and fundraising. In the sport industry, sponsorship is a particularly important source of revenue and it is discussed in Chapter 12. Thanks to a firm foundation in the principles and practices of revenue management, the financial manager will then be prepared to focus on expenditure management through budget development and administration, and through accounting and reporting.

C H A P T E R 8

Revenue Sources

Introduction Types of Income Sources

Income is essential to all sport, tour- There are multiple sources of income ism, and leisure service organizations. available to any organization. In this Without income, they would not be able section, five of the most common types to function. Regardless of whether it is of income will be discussed. They are a private fitness center, a not-for-profit compulsory income, gratuitous income, sport stadium, or a state park system, earned income, investment income, and each uses similar, and yet different, sourc- contractual receipts. While these are the es of income. The different types of sport, most commonly accepted terms, not all tourism, and leisure service organizations organizations use the same terminology. rely on different types of income in differ- For example, the National Association of ent ways, and in some cases, their sources State Park Directors (a not-for-profit or- of income will be unique. Initially, this ganization) uses revenues appropriated, chapter will discuss the types of income revenues unappropriated, general funds, common to the three sectors: commer- dedicated funds, and federal funds to de- cial, private not-for-profit, and public. scribe sources of income for the various Governments have different ways to se- state park systems. The meanings are sim- cure income, and the methods of achiev- ilar, but this example of a different clas- ing it may vary on a state-by-state level. sification system emphasizes the point This uniqueness of government sources that while there is a general acceptance will receive particular attention. among terms, they are not universal. Ta- 78 Financial Resource Management: Sport, Tourism, and Leisure Services

ble 8.1 illustrates the five most common considered to be gratuitous income. sources of income for sport, tourism, and Earned income consists of cash re- leisure service organizations and identi- sources generated from fees and charges fies the level of importance each source instituted by the sport, tourism, or leisure has to the sectors. It also emphasizes the service organization. These can include uniqueness of compulsory income to the program fees, charges for use of areas and public sector and the relative importance facilities, income from sales of supplies, of earned income to all three sectors. equipment, gift shops, entrance fees, ad- Compulsory income consists of funds mission fees, rental fees, and user fees. secured by government organizations that Fiscal investments that earn interest are are generated through taxes, licensing, or also considered earned income. some other sort of government-instituted Investment income includes new income source that requires all or specific money generated from investment in the individuals or organizations within a leg- form of interest, dividends, and capital islative jurisdiction to contribute. appreciation. Investment income is the Gratuitous income is received with- result of investing a fixed amount of dol- out expectation of a return. Sources for lars (principal) in such a way as to gener- gratuitous income include grants, be- ate new money. The increase in wealth is quests, gifts, and blind and open spon- the investment income available to sport, sorships. In each case, the giver typically tourism, and leisure service organizations. does not receive a direct benefit or com- Contractual receipts are revenues pensation for the gift. Much of what is generated from legal agreements with discussed in Chapters 10 (Grantwriting) other organizations. Agreements can in- and 11 (Philanthropy and Fundraising) is clude the management of resources, rent-

Table 8.1 Income sources and their level of importance to the three sectors

Sector Compulsory Gratuitous Earned Investment Contractual Income Income Income Income Receipts

Commercial None Minimal Major source Key source Can be a major Sector of income for of income for source of income, operations some business dependent upon enterprises scope of enterprise

Nonproﬁt May have Essential and Becoming a Limited, based Growing Sector some impact major source major source on importance when tied to of income organization’s through public funding, for some types capability to partnerships but limited of nonproﬁts secure gratuitous income and invest the income

Public Essential source Growing Essential Limited source Growing source Sector of income importance source of income, but of income among as an income of income frequently some agencies source used Chapter 8 79 al of facilities, rental of equipment, man- taxes, including real property tax, per- agement of special operations such as sonal property tax, excise tax, use tax, golf courses or marinas, concession oper- income tax, local option tax, special as- ations, tennis centers, zoos, stadiums, gift sessment tax, and impact tax. Each has a shops, or other types of enterprises. They specific purpose and is discussed in the can also include arrangements generally next two sections. referred to as privatization, a practice of contracting out for the delivery of a spe- Types of State and cific service. Municipal Taxes Real Property Taxes Compulsory Income Sources Real property taxes are assessed in all 50 states and their subordinate juris- Compulsory income includes cash dictions (counties, cities, municipalities, and non-cash sources collected through etc.). Jurisdictions can set the tax at the the taxing and regulatory powers at dif- local level in compliance with state law. ferent government levels as prescribed Real property is defined as land and what- by state and federal law. Government ever is developed or erected or growing sources of income have changed dra- on the land. This includes subsurface fea- matically for sport, tourism, and leisure tures such as oil or mineral deposits. Tax service organizations since 1978, when assessors (see Chapter 5) are appointed at California voters passed Proposition 13 the local level and have primary respon- (a landmark initiative that cut property sibility for determining the value of the taxes by almost 50 percent). Prior to that, property. public agencies gained the vast majority In 1957, real property taxes repre- of their income from the general fund, sented 69 percent of the total local gov- which was primarily supported through ernment tax base. By 1995, property taxes property tax revenues. Since 1978, gov- had shrunk to 22 percent of the tax base ernments across the United States have and has remained constant. Other types responded to voter demands for lower of taxes increased over the same period taxes with sometimes massive tax cuts. In and became a larger part of the mix of some cases these have been prompted by revenues available to sport, tourism, and voter-initiated propositions, as in Cali- park and recreation organizations. In fornia, Oregon, and Massachusetts. In spite of the recent changes in compul- other states, the legislatures responded to sory income sources, property taxes re- what they saw as a growing trend. Even main the single largest source of revenue the federal government has not been im- for local governments. Table 8.3 depicts mune to the trend, as the President and the various sources of revenue utilized Congress have sometimes competed with by state and local governments in 1990, each other over who could appear to cut 1995, and 2003. taxes more. The declining availability of It can be seen that, while property general fund dollars has required public taxes as a source of revenue declined sport, tourism, and leisure service orga- minimally over the period, total taxes nizations at all levels to rethink how they paid has almost doubled. Because this secure and use income. table represents both state and local gov- Taxes continue to represent the larg- ernments, not all results can be univer- est single source of income to govern- sally applied. ment. There are several different types of 80 Financial Resource Management: Sport, Tourism, and Leisure Services

CASE STUDY Alabama State Parks Focus on Increasing Revenue

In 1999 Alabama State Parks determined they needed to enhance their revenue. In 1987 the state parks converted from an agency that received 60 percent of its operating budget from the general fund (compulsory income) to 14 percent from an excise tax on cigarettes. By 1999 the $28 million operating budget received only 14% of the budget from the excise tax on cigarettes, a declining source of revenue in most states. The director of the Department of Natural Resources, the administrative location of state parks, determined the future of tax support was, at best, tenuous. Consultants were brought in to assess the current revenue in the state park system and how it might be enhanced. It was determined the state park system generated most of its revenue from earned income. Two key sources of income were entrance fees ($1.3 million annually) and camping ($3.9 million annually), and were identified, along with concession operations ($117,000 annually), as targets for increased revenue. Alabama’s actual income for the targeted income areas was compared with national averages and suggestions were made for increasing income. The table below depicts the findings of the study. Alabama had assumed the income from entrance and camping fees provided considerable income to the state park system while concession operations provided minimal income. When compared to national averages the Alabama revenues were poor performers. From just the three sources studied it was suggested that over $9 million in potential revenues were not captured. Such a study of mean collections of all states versus a single state presents some problems, but for state park and department of natural resource executives it was immediately apparent that changes needed to be made. The data, when compared to state park political realities, suggested entrance fees could not be changed. They had been raised two times in recent years. Closing of the entrance fee gap, however, could be affected by implementing more fee stations at state parks. Many state parks were not collecting entrance fees for a variety of reasons. Camping was immediately embraced as a source of improved income. An initial $5 million in capital improvement funds was targeted and applied to key state parks where the potential for increased revenue could be achieved. Concession operations were a bigger challenge. There was no consistent state-wide policy for establishing concession contracts and operations. A multiyear strategy was adopted. The Alabama State Park case study reflects changes in public park and recreation

Table 8.2 Comparison of Alabama state parks’ sources of revenue compared to national trends

Operating Revenue Category Entrance Camping Facilities Concessions Beaches & Total Fees Pools Alabama $1,334,525 $3,897,545 $5,526 $117,107 $72,627 $26,159,506 % of income 5.10% 14.90% 0.10% 0.45% 0.28% 100.00% National Average 21.46% 27.00% 0.35% 8.13% 0.83% 100.00% Difference -16.36% -12.10% -0.25% -7.68% -0.55% Revenue $4,279,527 $3,166,221 $65,333 $2,009,074 $143,975 $9,664,130 Chapter 8 81

CASE STUDY Alabama State Parks Focus on Increasing Revenue (continued)

income sources over the last 30 years. These agencies have moved from a compulsory income model to a mixed model including compulsory income, gratuitous income, earned income, contractual receipts, and state and federal entitlement funding (another source of compulsory income). The model continues to change as compulsory income sources lessen and expectations for earned income increase.

Municipal governments are allowed, Tax abatements are generally granted as by law, to establish different tax rates for an incentive to firms considering moving different classifications of property. Deci- to a particular region. sions about the levels at which different Determining the value of real prop- properties are taxed are made by the local erty is based on an estimation of its tax- legislative body. Personal homes, unde- able worth or assessed value. Assessed veloped land, businesses, and farm prop- value is different from market value. In erty are typically taxed at different levels. many states, assessed value is much lower Permanent tax-exempt status may be than fair market value. Fair market value granted to certain types of land uses, such is that at which a home may be valued as governments, school districts, and reli- for sale, whereas its assessed value for gious and charitable organizations. A tax taxation purposes may be as much as abatement, which is an exemption from 30 percent to 50 percent lower. For ex- paying taxes, can be granted to an orga- ample, a home with a fair market value of nization for a specified period of time. $240,000, which is assessed at 50 percent

Table 8.3 Amount and percentage of state and local government revenue from selected sources, comparative years (in millions of dollars; 712,700 represents 712,700,000,000) (Source: 2007 Statistical Abstract of the United States, U.S. Census Bureau)

1990 1995 2003 Revenue Amount ($) Percent Amount ($) Percent Amount ($) Percent Source Distribution Distribution Distribution General Revenue Total 712,700 100.0% 940,733 100.0% 1,374,948 100.0% Taxes 502,619 70.5% 660,557 70.2% 938,372 68.2% Property 115,613 21.8% 203,451 21.6% 296,683 21.6% Sales & Gross Receipts 177,885 25.0% 237,268 25.2% 337,787 24.6% Individual Income 105,640 14.8% 137,931 14.7% 199,407 14.5% Corporate Income 23,566 3.3% 31,406 3.3% 31,369 2.3% Other 38,915 5.5% 50,521 5.4% 74,726 5.4% Charges & Miscellaneous 211,061 29.6% 280,156 29.8% 434,976 31.6% 82 Financial Resource Management: Sport, Tourism, and Leisure Services

of the fair market value, would have an Subtract tax-exempt property: assessed value of $120,000. $10,500,000 Each potential jurisdiction with real Equals net assessed valuation: property taxing powers has a tax base. $439,500,000 The tax base is the total assessed value of all taxable property in a community. As- The tax rate is based on net assessed sessed values of communities will differ valuation. If this community requires $4 considerably and are difficult to compare million from taxes to operate, the follow- within a state and almost impossible for ing formula is used, and the example tax comparison between states. rate is calculated: Tax rates are based on revenue needs of the government and the value of the tax Required Taxes / Net Assessed base. To understand how tax rates are de- Valuation = Tax Rate termined, consider the following illustra- $4,000,000 / $439,500,000 = .0091 tion. A government decides that it needs $4 million from taxes to pay for its op- There are three ways in which tax erations in the upcoming fiscal year. This rates can be expressed: (1) as a percent of decision is made after the public agency the value of property; (2) as a mill rate; has completed its budgeting process and or (3) as mills. The tax rate from preced- identified what portion of its operating ing illustration would be expressed in the budget needs to come from real property three alternatives as: taxes. For example: Tax Rate Expression Total amount needed to operate: Percent Tax Rate 0.91% $4,650,000 Mill rate 0.0091 Subtract revenue (from user fees, Mills 9.1 grants, permits, etc.): - $650,000 The relationship between “Percent Equals revenue (to be collected from Tax Rate” and the “Mill Rate” is obvious. taxes): The 0.91 percent means 0.91 per hun- $4,000,000 dred, which is 0.91/100, which equals .0091. A “mill,” on the other hand, is The tax rate is then determined by equal to 1/1000 of the assessed property dividing the property tax requirements value. The net assessed property value is ($4 million) by the assessed valuation. $439,100,000, which means that the val- Note that assessed valuation does not ue of 1 mill is $439,100,000/1,000, which include all real property within the ju- equals $439,100. How many mills (val- risdiction because some organizations or ued at $439,100) does it take to make the groups have a tax abatement. When the $4,000,000 to be collected from taxes? It tax abatement property is removed from takes 9.1. Figure 8.1 shows the conversion the total assessed value, what remains is a factors for the three tax rate expressions. net assessed value. For example: Knowing the tax rate, the owner of a property can calculate the property tax Total assessed valuation of the that is owed. If the owner of a home with community: an assessed value of $240,000 is subject $450,000,000 to the tax rate used in the above example, Chapter 8 83 the tax bill will be $2,184. This amount is owner’s contribution to the tax revenue calculated as follows: total should be proportionate to his or her share of the value of the taxable prop- A. Applying the 0.91% Tax Rate erty in the community.

(% Tax Rate/100) x Assessed Value = Other Types of Taxes Property Tax Personal property taxes are allowed (0.91/100) x $240,000 = $2,184 in 41 states. Taxing of personal property occurs in three common forms: (1) B. Applying the 0.0091 Mill Rate household tangible property (e.g., auto- mobiles, recreational vehicles, and sport Mill Rate x Assessed Value = transportation devices); (2) business tan- Property Tax gible property (e.g., inventory, business 0.0091 x $240,000 = $2,184 ﬁxtures, furniture, equipment, and ma- chinery); and (3) intangibles (e.g., stocks C. Charging 9.1 Mills and bonds). In most states, individuals Mills x (Assessed Value/1000) = declare the value of their personal prop- Property Tax erty to tax assessors. 9.1 x ($240,000/1,000) = $2,184 Sales tax is administered at the state level, but there may be provisions for ad- The property tax system is based on ditional local sales taxes. State sales tax the idea that the more a person owns, the rates vary from three percent to eight more that person should pay. The meth- percent. In some states, a portion of the ods of tax calculation previously illus- tax may be reserved for state and local trated follow the principle that a property sport, tourism, or leisure service func-

Tax Rate (%)

100 10 Tax .01 Rate .10 Converter (Multipliers)

Mill Rate 1000 Mills .001

Figure 8.1 Conversion factors for three expressions of the tax rate 84 Financial Resource Management: Sport, Tourism, and Leisure Services

tions. For example, Missouri voters sup- added to the state sales tax. In 2005, local ported the allocation of one-tenth of each option sales taxes accounted for about 12 cent collected through the state sales tax percent of all local government revenue. for operation of their state park system. There is enabling legislation for some type Eighty-five percent of Missouri’s state of local option taxes in every state. Sup- park system’s operating expenses are now porters of local option sales taxes argue covered by the dedicated sales tax. Sales the taxes allow local governments (city tax is applied to a broad range of goods and county) to diversify their revenue and is determined by state legislatures. bases. They also argue that this form of Only four states (Delaware, Montana, taxation allows geographically large areas New Hampshire, and Oregon) do not to provide programs and services from have a state sales tax. local funds rather than tapping state re- A use tax is imposed in some states sources. Local hotel/motel taxes are also on individuals who purchase items out- a common form of the local option tax. side of their state of residence and who These taxes were initially focused on con- do not pay any state sales tax on those vention and travel destination localities, otherwise taxable items. The use tax is de- but have become much more widespread. signed to replace uncollected sales taxes Local option taxes are used for a broad for items purchased outside of the taxing variety of purposes. In most cases, the jurisdiction. Use tax is gaining popularity enabling legislation is very specific about in some jurisdictions. the use of these taxes, while in other in- Excise tax is imposed on the sale of stances, the legislation can provide for specific goods, such as gasoline, ciga- almost unrestricted use of the funds col- rettes, and alcoholic beverages, and spe- lected. cific services, such as those provided by hotels and motels (sometimes called a Other Sources of Compulsory lodging tax), restaurants, and auto rental Income agencies. These taxes may be levied at the Special assessment taxes are en- state or local level. Excise taxes, which are abled at the state level and administered authorized at the state level and collected at multiple levels. Most often, however, at either the state or local level, are never they are administered at the local level. popular with those who have to pay. These types of taxes focus on a specific Income taxes are administered at the geographical area, such as the downtown municipal, state, and federal levels. There or a particular residential neighborhood. are two types of income taxes—personal Consequently, the taxes collected may be and corporate. Personal income taxes are spent only in the source neighborhood. present in 43 states. Personal income tax- They may be used for improvements in es are typically levied on individuals re- a particular area, for land purchases, or siding in the state and/or earned income for salaries to maintain an area. The in- in the state. Corporate income taxes are troduction and elimination of special as- prescribed by state law and administered sessment taxes are generally agreed upon at the state and/or the municipal level. by those who will be taxed. Local option taxes are applied at the Dedication ordinances and regula- local level, but legislatively enabled at the tions are available to local governments state level. One of the most popular lo- and are typically instituted by county and cal option taxes is a local sales tax that is city councils within guidelines established Chapter 8 85

CASE STUDY Who Should Pay for Sport Stadium Construction?

A major debate prevalent in many large American cities revolves around who should finance the construction of new sport stadiums, primarily for professional sport teams. Recent research suggests new stadiums do not enhance tourism or produce new economic growth in urban areas, but rather affect local patterns of economic activity. The sport team rather than the community appears to benefit most from the increased economic activity is as a whole. For example, in New York City it was projected thar enhancements to Shea Stadium and Yankee Stadium would add an additional $111 million in economic output for the city, of which $76 million would be new revenues for the teams (mostly in earned income) and $5 million in new tax revenues (compulsory income). Regardless of the debate about who should pay for new stadiums, cities regularly move ahead with the construction for new stadiums and place the bulk of the burden upon residents. The Indianapolis Colts are moving in 2008 from the current RCA Dome, built 20 years ago at a cost of $94 million, to the new Lucas Oil Stadium projected to cost $625 million. Negotiations for financing the stadium took several years to accomplish and were finally concluded after the state stepped in to assist in the financing. The projected funding sources for the stadium include $100 million from the Indianapolis Colts (gratuitous income). Marion county, where Indianapolis is located, raised taxes (compulsory income) for food and beverage sales, auto excise taxes, innkeeper’s taxes and admission taxes. Additionally, a small increase in food and beverage taxes (compulsory income) in the eight surrounding counties and the sale of Colts license plates (earned income) completes the total revenue required to construct the stadium. Not all stadiums are built with public funds or in partnership with private developers. Most recently, the San Francisco Giants baseball team financed their new stadium after efforts to secure public funding failed. It was the first major league baseball stadium built with private money since the Los Angeles Dodgers in 1962. The Giants do lease the land from the Port of San Francisco, a public agency, but pay fair market value for the use of the land. The Giants, in cooperation with the city of San Francisco and private developers, built their new ballpark on a former landfill that was eligible for reduced taxes under a law titled Federal Brownfields Tax Incentive. Taxes on the site were reduced equivalent to the cost of the cleanup, making the financing plan more attractive to investors. In addition to the 13-acre stadium site an additional 102 acres are planned for development as residential and commercial sites. The city put $15 million into the larger project and has realized $10 million annually in new tax revenues. The Giants Construction of a new stadium is most often wholly or partially financed by compulsory income sources. 86 Financial Resource Management: Sport, Tourism, and Leisure Services

CASE STUDY Who Should Pay for Sport Stadium Construction? (continued)

were able to leverage the project into $1 billion in investments for the entire 115 acre site. Actual construction costs exceeded $300 million for the stadium. The Giants and their partners have seen increased revitalization of a formerly blighted waterfront area, validating their belief that private ﬁnancing, when creatively applied, can be an effective income source.

by state legislatures. When dedication or- streets, utilities, schools, and other essen- dinances and regulations were initiated, tial services. Sport, tourism, and leisure they required developers of neighbor- service organizations have successfully hoods to set aside a portion of the land argued in a number of communities that for park and recreation use. While this they are an essential service and, there- was commendable, all too often the land fore, eligible recipients of funds collected set aside was not acceptable for park and as impact taxes. recreation use, but was land the developer could not use. Local governments quickly Licenses and Permits began to look at alternatives to land dedi- Licenses and permits are a relatively cation. In some instances, they tightened small source of income for sport, tour- up local ordinances and became more ism, and leisure service organizations. specific in the type of land they deemed A license is an authorization to act or to acceptable. In other instances, they began engage in an activity. Probably the most to accept money in lieu of land dedica- common example is a driver’s license. tion. The money generally had to be used Licenses in sport, tourism, and park and to improve or add to existing property or recreation organizations are frequently to purchase new property for parks and granted for the distribution or sale of a recreation. One common use was to pur- particular product. For example, the Na- chase greenbelts linking the community tional Football League entered into an and its parks together. exclusive agreement with Pepsi, guaran- The imposition of impact taxes is teeing exclusive rights to the sale of its another method of recovering develop- products in NFL stadiums. ment costs, and has been in use for over A permit is an authorization for a 30 years. Impact taxes are intended to person to engage in a particular activity— require developers and new home own- not necessarily recreational—or to use a ers to help pay for public improvements facility or equipment. A common permit that may be needed as a result of new is a building permit issued by a local ju- construction. It is argued that existing risdiction. In sport, tourism, and leisure city residents should not have to pay for service organizations, a permit might be the development of new home and com- issued for the serving and consumption mercial sites, but that the cost should be of alcoholic beverages at a public facility, borne, at least in part, by those who will for the rental of a facility, or for the use benefit most directly from the develop- of a significant natural resource. Usually, ment. Impact taxes are most frequently permits are good for a shorter period of used for infrastructure costs such as time than licenses. Chapter 8 87

Federal Government Sources Some of the legislation and programs The federal government has long that the federal government transfer funds been a source of revenue for state and lo- to states and local jurisdictions include cal governments. Funds collected by the the Land and Water Conservation Fund, federal government and redistributed the National Recreational Trails Act, the to state governments are called transfer National Highway System, Intermodal payments. In 1980, the federal govern- Surface Transportation Efficiency Act of ment made transfer payments worth $83 1992 (ISTEA), highway safety programs, billion. By 1995, that amount had risen scenic highway programs, and metropoli- to $229 billion, and in 2003, it was $389 tan planning. Each program has provided billion. The greatest share of transfer pay- varying levels of funding to sport, tour- ment money is used for public welfare, but ism, and leisure service organizations. other programs, such as highways, edu- The Land and Water Conservation Act cation, health and hospitals, and housing (LWCF) has been in place for more than and community development have also 40 years. During its early years, it pro- received significant amounts. Histori- vided significant levels of revenue to state cally, sport, tourism, and leisure service and local governments. Beginning in the organizations are well served by transfer mid-1980s, levels of funding declined to payments and federal government pro- the point where it now provides minimal grams. However, federal government fis- funding at the state and local levels. The cal support for state and local sport, tour- National Recreation Trails Act has re- ism, and leisure service organizations has ceived limited funding since 1993. It is set been on the decline in recent years. For up so that 30 percent of the funds go to example, state parks received $31 million motorized trails, 30 percent to non-mo- in 2006 from federal sources, but that is torized trails, and 40 percent to multipur- a major reduction from the $630 million pose trails. The money can be spent on they received just two decades earlier. maintenance, as well as on construction

Impact fees and other taxes and fees can be one- time sources of income to offset new construction. 88 Financial Resource Management: Sport, Tourism, and Leisure Services

of trails. The National Highway System Earned Income provides a potential source of money for trail development next to any National Earned income consists of cash re- Highway System highway (excluding the sources generated from fees, as well as interstate system). The ISTEA has been charges assessed by the sport, tourism, the steadiest federal government source and leisure service organization. Types of income for public sport, tourism, of fees can include program fees; charges and leisure service organizations in re- for use of equipment, areas, and facilities; cent years. As with other transportation income from sales of supplies; gift shop sources, ISTEA focuses wholly on trail and pro-shop revenues; entrance fees; development and maintenance. admission fees; rental fees; and user fees. Fiscal investments that earn interest are also considered earned income. In recent Gratuitous Income years, the greatest growth in revenues for sport, tourism, and leisure service organi- Gratuitous income receives signifi- zations has been from earned income. For cant attention in Chapters 10 and 11. most tourism and sport organizations, Grants are an important source of poten- earned income is the primary source of tial income for sport, tourism, and leisure operational funds, and the emerging em- service organizations. In 2005, $30.3 bil- phasis on earned income has helped to re- lion in grants were awarded from public shape public leisure service organization and private grant sources, and it is esti- management over the last 20 years. As a mated that sport, tourism, and leisure result of this emphasis, management has service organizations received almost become more entrepreneurial and busi- $950 million (3.1%) of that total. ness focused. Even charitable not-for- Fundraising is an organized process profit organizations report that as much of seeking out gifts to support leisure ser- as 73 percent of their operating budgets vice organization and capital improve- come from program service revenues. ments. The growth of fundraising and Earned income comes primarily support organizations for sport, tourism, from fees and charges. The Government and leisure service organizations has been Finance Officers’ Association, suggesting dramatic over the last 15 years. Many a technical difference between fees and community park and recreation agen- charges, agrees that in most cases, the cies have created their own foundations terms “fees” and “charges” are used in- or a sport promotion corporations thatt terchangeably. A fee may be imposed as a are financially supported by a companion result of a public need to regulate activi- foundation or a corporation through its ties, safety, or other protective measures. own philanthropic mechanism. In 2005, Fees constitute the purchase of a privilege individuals, bequests, and foundations gave over $260 billion, and of that total, or an authorization and are applied to individuals were responsible for $180 services rendered, such as an inspection billion (69%) of all giving. Grant-seek- or the issuance of a building permit. In ing and fundraising are intertwined, and sport, tourism, and leisure service orga- entrepreneurial sport, tourism, and lei- nizations, the term “fees” has come to sure service organizations look to both be associated with the delivery of proof them as important elements of their grams and services. Examples of major income structure. classifications of earned income include Chapter 8 89 entrance and admission fees, rental fees, period) over 900 programs with fees at- user or program fees, sales revenue, and tached to them. In this instance, fees were special fees. Entrance and admission fees different for residents and non-residents, are charged for entrance to any public with the latter paying a higher rate. User or private sport or leisure facility, movie fees can also be charged for the use of theater, art museum, children’s museum, facilities and might, on the surface, ap- monument, historical building, etc. In- pear to be just like rental fees. However, come from fees may be used to cover the user fees grant access to facilities whereas cost of operations, but in some cases, it rental fees usually grant exclusive use may also be intended to provide addition- thereof. al revenue for such needs as debt retire- Sales revenue comes from the sale of ment and capital improvement funding. goods and services through gift shops, Rental fees are charged for the ex- stores, concessions, restaurants, and sim- clusive use of a tangible property, such as ilar types of operations. Many profession- a Santa suit, park pavilion, sport equip- al teams own apparel and souvenir shops ment, sport complex, picnic equipment, located at the sport arena, local malls, game equipment, public address system, and airports. Concession operations are stroller, lawn chairs, paddle boats, coin becoming a major source of income for telescopes, cabin, lodge, resort room, sport, tourism, and leisure service orga- horse, camping equipment, bicycles, and nizations. Sales activities are almost al- golf clubs. The list of potential rental rev- ways implemented in conjunction with enue sources can be very long indeed. some other service operated by the sport, Revenue from rental fees may be used tourism, and leisure service organization. to recover the cost of the purchase and In a fitness center, for example, there may replacement of the rental item(s), stor- be a pro shop, a snack bar, and a full-ser- age and handling, or maintenance and vice restaurant. In Tacoma, Washington, cleaning. Sport, tourism, and leisure ser- the city parks and recreation department vice organizations may also use rental contracts with an outside organization fees to offset operational costs in other to operate a full-service restaurant on areas, provide renters with additional the recreational waterfront. Many golf recreation opportunities, and/or con- courses have pro shops and restaurants tribute to profits. as part of their operations. Museums User and program fees are defined as have gift shops, restaurants, snack bars, charges made for the use of a facility or and other revenue-generating amenities. for participation in an activity, program, State and national parks may accommo- or service. The fee may be used for capi- date grocery stores, gas stations, motels, tal development, debt retirement, main- and lodges. The purpose of sales activity tenance operations, and operation of the is to provide a service to the user and to facility or program. User and program generate revenue for the organization. fees could be charged for almost any type Special fees are generally charged of program offering, such as figure skat- for providing some extraordinary ser- ing classes, pottery classes, modern dance vice to consumers. In many cases, special classes, tie-dyeing classes, child care, etc. fees might also be included in one of the The 75-page brochure for one service previously identified fee types. Examples organization that serves a community include lights for tennis courts, park se- of 150,000 included (for a three-month curity for special events, and use of por- 90 Financial Resource Management: Sport, Tourism, and Leisure Services

State resort parks provide opportunities for users to experience state parks who choose not to camp and provide the agency with earned income.

table stages, sound equipment, etc. In always made in consultation with an in- some communities, a fee is charged for vestment professional who has expertise after-dark use of facilities, such as night in the public, not-for-profit, or commer- softball, where teams are charged a fee to cial sector. In some instances, especially recover the cost of lighting and addition- with public agencies, the investment is al maintenance. Other examples include for short periods of time (less than six fees charged for special camps (basket- months). Even investments over a short ball, baseball, cheerleading, computer, period of time allow the organization etc.), equipment storage, and facility res- to realize additional income for its op- ervation privileges (group picnic shelters, erations. Investment income reduces the for example). need for other types of income, such as compulsory income. Such investments are usually made in opportunities that Investment Income are “safe,” in the sense that they are less strongly affected by major downturns or Investment income represents those upturns in the stock market. Not-for- funds generated from the investment of profit organizations may use investment currently available resources. Most public, income as a major source of revenue for not-for-profit, and commercial enterpris- their operations. Many state park and es are allowed to invest either all or por- recreation associations and universi- tions of their available funds according to ties have made investments in mutual sound investment strategies. Some of the funds, bonds, or other sources and then most common investment strategies and used the annual interest income to fund opportunities are municipal and corpo- scholarships. rate bonds, money market certificates, stock transactions, and mutual funds. The investment of any money is almost Chapter 8 91

Contractual Receipts nancial liability. Good contract management requires time and expertise. Contractual receipts are revenues that are generated from legal agreements with other organizations. Income-generating Partnerships and Collaborations agreements are entered into for the management of resources, rental of facilities, Partnerships and collaborations are rental of equipment, and the manage- becoming more common approaches ment of special operations, such as golf to generating income. The terms part- courses, marinas, food concessions, ten- nership and collaboration are frequently nis centers, zoos, stadiums, or gift shops. used interchangeably; however, they have They can also include those varied opera- very different meanings. Partnerships are tions collectively referred to as subjects of formed through agreements between two privatization—a concept that has become or more parties with a mutual interest popular in the management of public or- and common need. A partnership may ganizations. be for a fixed or indeterminate length of A contract is a term that describes time. The key to success in a partnership a unit of trading for a financial or com- is for all parties to clearly understand and modity future. Contract management easily identify their needs. By contrast, requires proficiency in a set of business in collaborative arrangements, differ- and fiscal management skills from both ent organizations may work together to the contractor and the owner. In the early achieve a common goal, but they do not years of contract management, it was not entirely share the same vision, resources, uncommon for a public agency to un- or risks. The foundation of collaborations wisely “give away” potential for revenue is the hope that, by working together, from the contract and then provide inad- several organizations will have a bet- equate oversight to contract compliance. ter opportunity to resolve an issue than In response, one city eventually canceled would a single organization. Sport, tour- the private contract for its golf course op- ism, and leisure service organizations use erations after the facility regularly posted both partnerships and collaborations, but annual losses of over $500,000. The city partnerships are more likely to produce managers determined that they could no income. longer justify using tax dollars to support A partnership results from a formal golf operations with such major losses. In or informal agreement between two or the first year after canceling the contract, more organizations to work together to the city discovered that the driving rang- provide a service or to fund a project. es actually had revenues of over $250,000 Partnerships can include any combina- and expenses of only $40,000. Under the tion of public, not-for-profit, and com- previous contract, all of the driving range mercial organizations. For example, a profits had been going to the golf pro. In partnership may result from co-spon- this case, the golf pro had done nothing sorship of a 5K run by the public parks wrong (according to the terms of the con- and recreation department, the YMCA, tract), but the city had failed to manage a women’s shelter, a local bank, a sport- the contract closely enough to see how ing goods dealer, the convention and it was limiting the revenue potential and visitor bureau, and the local hospital. The forcing the city to assume too much fi- parks and recreation department plans 92 Financial Resource Management: Sport, Tourism, and Leisure Services

and jointly conducts the event with the will, or legitimization. YMCA; the hospital’s marketing depart- Further examples of partnerships and ment develops brochures, logos, T-shirt the benefits of partnership can be found designs; the convention and visitors bu- in numerous communities, such as India- reau distributes advertising and sets up napolis, Indiana, and Naperville, Illinois. lodging and sightseeing opportunities for The Indianapolis Parks and Recreation out-of-town participants; the bank and Department worked with neighborhood sporting goods store provide the awards community groups to formalize their in- to the runners and help pay for advertis- volvement and leadership in local parks. ing costs; and the women’s shelter receives Community groups and local churches the bulk of the revenues earmarked for its accepted a shared responsibility for main- operations. tenance and the general upkeep of the Each of the partners receives some parks (mowing, trash removal, graffiti re- benefit from the partnership. In the pre- porting, etc.). As partners, they received ceding example, the parks and recreation a stipend of either cash, special services, department, the YMCA, the hospital, the or availability of department resources to sporting goods store, the convention and the church or neighborhood association. visitor bureau, and the bank all received The work was done at a lower cost than recognition for their efforts. The parks department maintenance crews, and lo- and recreation department, the conven- cal involvement has resulted in a higher tion and visitor bureau, and the YMCA level of maintenance and lower levels of were perceived as fulfilling their mission vandalism. In Naperville, Illinois, the to serve the community. The bank, the city and park district (the park district hospital, and the sporting goods store is a separate taxing district) have part- succeeded in enhancing their image as nered with the Riverwalk Foundation socially responsible entities. The women’s to develop and maintain a downtown shelter received financial support, addi- riverwalk. In celebration of the city’s tional legitimization as a social service 1981 sesquicentennial anniversary, vol- agency, and a positive image boost. Each unteers developed the riverwalk, and participant received support, recogni- since then, it has become a focal point tion, and a feeling of contribution that it of the community. Its covered bridges, might not have been able to secure inde- fountains, landscaping, and distinctive pendently. shepherd’s-crook light poles have be- Partnering is about working toward come symbolic of Naperville’s ties to common goals and outcomes. It brings its historic past as the oldest settlement to the table unique resources from each in DuPage County. The city, the park organization that may be unavailable to district, and a community foundation the other organizations. It strengthens worked together to ensure the contin- the assertion that “the whole is greater ued success. Fittingly, city hall and the than the parts” and reinforces the con- park district headquarters are adjacent cept of working together so that all to the riverwalk, and the high school partners can receive a positive return is within walking distance. Numerous on their respective and collective invest- major park and recreation facilities are ments. The return does not always need linked to the riverwalk, and it continues to be a financial benefit and could be an to figure prominently in community intangible benefit, such as image, good- festivals and special events, as well as Chapter 8 93 provide one more feature to attract visi- a single leisure service enterprise. Figure tors to the area. 8.2 illustrates an example of the different types of revenue sources reported by state park agencies. Revenue Structure Plan The revenue structure plan focuses attention on the need to strive for an The amount of revenue that an or- acceptable balance of income sources. ganization needs, and the source of that Table 8.4 shows how one municipality’s revenue, is detailed in the revenue struc- income is derived. As might be expect- ture plan. The purpose of the revenue ed, property taxes constitute the largest structure plan is to help the financial source of income for the municipality, manager understand the organization’s and sales tax is the second largest source expenditure needs and potential sources of revenue. In today’s changing fiscal of revenue. A revenue structure plan is environment, some public sport, tour- typically prepared for each fiscal year. ism, and leisure service organizations Commercial and not-for-profit sport, are generating more than 50 percent of tourism, and leisure service organiza- their income from non-tax sources. In tions might identify a small number of this illustration, there are 11 sources of income sources, but the expenditures income for the municipality. may be distributed across multiple divi- A private not-for-profit or commer- sions or profit centers. Conversely, public cial sport, tourism, or leisure service or- agencies might identify many different ganization’s revenue structure would be sources of income to cover expenses in different and would likely show a higher

General Fund 44% Other Funds 5%

Unappropriated Revenue 9%

Federal Funds 3%

Dedicated Funds 10% Appropriated Revenue 29%

Figure 8.2 Example revenue structure for state parks 94 Financial Resource Management: Sport, Tourism, and Leisure Services

percentage that is derived from charges consistency and promotes efficient ex- for services or other types of earned in- ploitation of revenue sources. Further- come. more, following the fiscal policy ensures It is important that any revenue revenue generation activities will be structure plan be based on an established supported by policy makers. fiscal policy. That policy should articulate the revenue goals and describe, in general terms, how revenue should or may Summary be generated. For example, Indy Parks developed its revenue structure model Income generation is an important and identified two major funding cat- aspect of financial management in sport, egories: enterprise funding and under- tourism, and park and recreation orga- writing (Table 8.5). The establishment nizations. The various revenue sources of these two categories helped to further discussed in this chapter can provide the identify and classify revenue sources funds necessary to conduct programs, and place them on a service continuum offer services, and maintain equipment with fair market pricing (where user and facilities. There are five types of in- fees cover full costs) at one extreme and come: compulsory income, gratuitous city budgeting (where all costs are cov- income, earned income, investment in- ered by tax revenues) at the other. Each come, and contractual receipts. All of program or service can be matched to a them provide different levels and types point on the continuum, depending on a of funding for sport, tourism, and lei- variety of factors, such as need, ability to sure service organizations. Not all sport, pay, community willingness to support, tourism, and leisure service organiza- consistency with the mission of the city tions will secure income from the same and the department, vision of the city sources. Understanding and awareness and the department, consistency with of income sources, along with the relat- the core principles of the organization, ing of that knowledge to policy direc- appropriate revenue sources for those tions, allow sport, tourism, and leisure programs, and services emphasized. service managers to more effectively Developing the revenue structure meet the revenue demands of their or- plan as guided by fiscal policy maintains ganizations.

Table 8.4 Example of a revenue structure for a municipality

Property Utility Sales Shared State Other Licences & Tax Tax Tax Tax Taxes Permits 16.7% 7.4% 15.2% 34.0% 5.0% 1.4% $17,854,577 $7,906,570 $16,317,115 $36,420,521 $5,316,027 $1,448,228

Inter- Fines & Investment governmental Charges for Forfeittures Income Services Services Other Total 1.4% 3.0% 3.7% 3.3% 9.0% 100.0% $1,551,597 $3,221,994 $3,976,524 $3,574,485 $9,602,968 $107,190,606 Chapter 8 95

Table 8.5 Revenue structure for enterprise funding for Indy Parks.

Fair Market Price (fee covers total cost)

Enterprise Funding Fee Schedule (fee covers partial cost)

Sponsorships (sponsor receives exposure as beneﬁt)

Self Funding (funds shift from another internal budget)

Underwriting Donor Base (corporate, individual giving, and grants)

City Budget (compulsory income)

References McLean, D. D. (Ed.). (1993). Models of change in parks and recreation: A 2-part training video. Bloomington, IN: Department of Recreation Crompton, J. L. (1987). Doing more with less in and Park Administration, Indiana University. parks and recreation services. State College, PA: Venture Publishing, Inc. McLean, D. D. (Ed.). (1993). Models of change in parks and recreation: Proceedings of a national conference. Bloomington, IN: Department of Recreation and Park Administration, Indiana University.

NOTES 96 Financial Resource Management: Sport, Tourism, and Leisure Services C H A P T E R 9

Pricing

Introduction source of the resource that is exchanged vary tremendously, but there will always One of the most challenging tasks as- be an exchange in the consumption pro- sociated with financial management in cess. Every service has a price, and every sport, tourism, and leisure service orga- pricing strategy is designed to achieve nizations is that of setting prices. In set- particular purposes. ting prices, the financial manager must be able to collect and appropriately ana- Purposes of Pricing lyze relevant data, make reasoned predic- tions about consumer behavior, and be In most situations, pricing is used creative in developing pricing strategies to recover the costs of production, but it to help achieve the financial objectives of can also be used to create new resources, the organization. This chapter discusses establish value, influence behavior, and the purposes of pricing in sport, tour- promote efficiency and equity. ism, and leisure service enterprises and explores the ways in which prices are es- Pricing to Recover Costs tablished and adjusted. In addition, this Cost-recovery pricing is best illus- chapter examines the effects of pricing trated by its application in public, private on consumer behavior. Price quantifies not-for-profit, and commercial organiza- the financial and other resources that a tions. Though not exclusively, commercial consumer of sport, tourism, and leisure organizations produce and deliver servic- services exchanges with the provider of es on a for-profit basis, which means that those services. The nature, amount, and the agency uses pricing to recover more 98 Financial Resource Management: Sport, Tourism, and Leisure Services

resources from the consumer than were dicator of the relative quality or value of used in production and delivery. Organi- a product. For example, a sporting event zations in the public and private not-for- for which the admission price is $40 is profit sectors typically price their services expected to be much better than one that on a break-even basis (i.e., approximately charges $2 at the gate; a $19 resort room the same amount of resources are recov- is not likely to be as nice as a $200 room; ered through pricing as are expended a golf putter that sells for $15 is inferior to in production and delivery), and public one that sells for $150; and so on. When sport, tourism, and leisure organiza- the price for a particular sport, tourism, tions frequently offer subsidized services or leisure service is determined, the value which are priced in order to recover only of that service is established in the mind a certain portion of their production and of the consumer. It is not unusual, there- delivery costs. fore, to find sport, tourism, and leisure Cost-recovery pricing assumes that services that are priced well above the full the production costs are known and can cost-recovery level simply to establish be apportioned and assessed to a known and maintain a perceived level of value or number of consumers who are to pay quality. the price. Production and delivery costs include fixed and variable costs, and the Pricing to Influence Behavior consumers (i.e., those who pay the price) When consumers pay a price for a may include non-users as well as direct sport, tourism, and leisure service, they users of the service. The method for cal- recognize that the service has value to culating prices based on cost recovery them. The price is considered fair; other- will be described in detail later in this wise, they would not have paid it. If, how- chapter. ever, that fair price is increased because of failed performance or irresponsible Pricing to Create New Resources behavior on the part of the consumer, the (Added Value Pricing) price may no longer be consistent with Where pricing is used to recover the value of the service. For example, more resources than constitute the cost of $50 for 10 canoeing lessons may sound production and delivery, value is thereby like a good price, but only if the student added to the service, and new resources attends all 10 lessons. If he attends only (profits) for the organization are created. one lesson, it is a very expensive lesson. The sport, tourism, and leisure service or- In this case, the student is encouraged to ganization can retain those new resourc- attend all 10 lessons because of the price. es to develop additional services, support He would not likely be so motivated if other existing services, or maintain the the price of all 10 lessons were only 49 support of investors by paying dividends cents. Similarly, the price of admission to or increasing the value of stock. a session of roller skating may seem reasonable, unless the skater violates safety Pricing to Establish Value or other rules of conduct and is ejected While most people like to believe that from the facility without a refund of the “the best things in life are free,” they also admission price. The fear of having the accept that, usually, “you get what you experience reduced, but not the price, of pay for.” The latter assertion reinforces having to pay the full admission price for the suggestion that price is used as an in- re-admission to the same session strongly Chapter 9 99 influences the value-conscious skater to ficiency. For example, the summertime conduct himself according to the estab- demand for a commercial campground lished standards. Many sport, tourism, with 100 sites will normally exceed its and leisure service organizations use capacity, but many sites will be empty pricing to promote desired behaviors. during the spring and fall (especially on Consider the following examples: weekdays). If the campground operator added 50 new sites to accommodate the • Lower early-registration fees are summer campers, he would be offering charged as an incentive to partici- an inefficient solution, because the off- pants to sign up for programs early season surplus would then be even great- enough to give the agency adequate er. A more efficient response might be to preparation time. raise prices during the summer and lower • Late fines or replacement fees are them during other times. Some campers charged by libraries or movie rental have flexibility in their vacation and trav- stores to encourage users to return el plans and can be enticed, by the price books and videos promptly and in differential, to camp during the off-sea- good condition. son rather than during the busy summer • Performance bonds are required of months. teams to make it seem too costly to Bulk pricing, in the form of season withdraw from a tournament at the passes or ticket blocks, can also promote last moment. efficiency by reducing the cost of selling • Care of facilities and equipment is individual tickets and reducing the un- promoted through the assessment certainty in estimating demand. Many of damage/cleaning deposits from amusement theme parks, for example, groups renting recreational facilities have abandoned the inefficient practice and areas. of selling individual tickets or coupons • Discounts are given for season tick- for attractions in favor of the all-inclusive ets to promote regular attendance. admission price. • Special prices are available for trav- Efficiency can also be promoted elers who book their transportation through the use of two-tiered pricing or lodging on-line, thus avoiding the structures. While some amusement costly commissions that providers parks, for example, have an all-inclusive would normally pay to travel agents admission price, others have the stan- or other intermediaries. dard admission price that grants park guests access to most of the rides and services. However, an extra ticket or pass Pricing to Promote Efficiency must be purchased to go on some of the The sport, tourism, and leisure ser- more popular or thrilling rides, or to have vice industry is subject to seasonal and guaranteed access to the ride regardless other fluctuations in demand. There are of how busy the park is. times when the demand for certain services or products exceeds the supply, and Pricing to Promote Equity there are times when the supply far ex- Equity refers to fairness in the al- ceeds the demand. Pricing is often used location of resources. Equity decisions to shift the demand from peak periods are based on response to need and merit to low periods and, thereby, promote ef- and, therefore, may result in unequal al- 100 Financial Resource Management: Sport, Tourism, and Leisure Services

location of services. Pricing can be used practice of having no direct user charges, to promote equity by redistributing the coupled with the difficulty or inefficien- wealth of those who pay a higher price cy of limiting access for the purpose of for a service to more needy or deserv- charging admission, makes public ser- ing people who would pay a lower price vices unlikely candidates for pricing. for the same service. For example, an A type of service for which pricing adult may pay $5 to use a public swim- may be more appropriate and feasible is ming pool, while a child may pay only a merit service. Merit services are those $2 for the same opportunity. This price that indirectly benefit the community, structure is considered fair because chil- but are most beneficial to those who re- dren have fewer financial resources than ceive the service. Many of the facilities adults, and because they need to devel- and programs provided by public recre- op aquatic safety skills and have avail- ation agencies qualify as merit services. able healthy recreation activities in their For example, a minor soccer league is growing years. Pricing promotes equity good for the community because it pro- by making the swimming pool more ac- vides positive, wholesome outlets for the cessible to a needy or deserving market energy of young girls and boys. It also (the children) through fees that are made promotes many of the qualities of leader- more affordable by the higher financial ship and responsible citizenship. contribution of a more resourceful and Aside from benefiting the commu- less needy market (the adults). nity indirectly, participation in the soccer league promotes the physical health of those who participate and also pro- The Appropriateness and vides a great deal of personal enjoyment. Feasibility of Pricing Because of the benefit received by the community, it is appropriate for some As stated earlier, every sport, tour- community resources (e.g., playing fields ism, or leisure service has a price. That built and maintained with tax dollars) to price, however, may be or may include a be used in support of the league. On the non-monetary resource that the consum- other hand, the individual participant er is required to give up in exchange for benefits the most, so it is also considered the service. Only certain types of services appropriate and desirable for each boy can appropriately or feasibly be priced in or girl to pay a fee in order to play on a direct monetary terms. In other words, league team. Because player registration charging a fee for a service is not always and game scheduling are required for the desirable or practical. successful operation of the soccer league, An example of a type of service for it is feasible to charge a fee for individual which it may not be desirable or practi- participation. cal to charge a user fee is a public service. Public, private not-for-profit, and Public services, such as neighborhood commercial sport, tourism, and leisure parks and playgrounds, trails, parades, service organizations might also provide and ecological reserves, are of value and what are classified as private services. benefit to a broadly defined community Though more common in commercial and, for that reason, have traditionally agencies, private services are those that been supported by public funds (i.e., tax- are exclusive and that benefit only the in- es) rather than user fees. The customary dividuals who use the service. It is, there- Chapter 9 101 fore, considered to be both desirable and The Nature of Price feasible for the agency to charge a fee. Ten- nis lessons, dog grooming classes, weight Price, as a quantification of the re- training, movies, amusement parks, lake sources exchanged by a consumer for a or ocean cruises, sky diving, river rafting, desired service, is usually expressed in and professional sporting events are just monetary terms. The price of a hot sum- a few of the thousands of private sport, mer afternoon at the swimming pool, for tourism, and leisure services available to example, is said to be $3—the amount consumers. Participation in them is at charged by the pool owner for admission the discretion of the consumer, and while to the facility. Likewise, the cost of tak- they may be highly enjoyable and benefi- ing a cruise might be $750—the cost of cial to the participant, their value to the the cruise ship ticket. There are, however, general community is not readily appar- other non-monetary elements of price ent, so there is little reason for financial that may play an equal or more important support of the services by anyone but the role in the decision about whether or not direct consumers. to purchase the service than the dollar It is important to recognize that a amount displayed on the price tag. In ad- service is not inherently public, merit, dition to the monetary cost, the consum- or private. A weight-training facility at a er of a sport, tourism, and leisure service particular university, for example, may be will incur opportunity costs, psychologi- open to all students by virtue of the man- cal costs, and effort costs. datory activity fee. Viewed as a benefit to all, it would be considered a public service Monetary Price in that campus community. Another uni- The monetary price of a sport, tour- versity may provide access to its weight- ism, or leisure program or event includes training facilities only to those who pay direct and indirect expenditures attribut- the voluntary student activity fee. In able to participation in that activity. Ob- recognition of the extended value of per- viously, the registration or admission fee sonal physical health to the university will be one part of the monetary price. community, the university may subsidize Another part will be money that had the activity fee. In this case, the weight- to be paid for services that facilitate the training facility is a merit service. A third individual’s participation in the program. university, meanwhile, may determine These facilitation costs include the fol- that weight training benefits only the user lowing: of the facilities and that all costs of maintaining and operating a weight-training • Transportation: all the costs of get- center need to be recovered from single ting to and from the activity, includ- usage or semester pass fees charged to in- ing fares, gasoline, maintenance, de- dividual users. The sometimes challeng- preciation, and insurance. ing task of classifying sport, tourism, and • Clothing and Equipment: the costs leisure facilities, programs, and activities of specialized clothing and/or equip- as either public, merit, or private services ment required for participation in is central to the debate about whether the activity. user fees should be charged. • Proxy: the costs of someone else fulfilling other obligations of the par- 102 Financial Resource Management: Sport, Tourism, and Leisure Services

ticipant while he or she is engaged in are, however, opportunity costs that defy the activity (e.g., expenses for child quantification, such as family cohesive- care, pet boarding, house sitting, em- ness, spiritual health, a clear conscience, ployment substitution). a sense of accomplishment, and so on. • Refreshment/Sustenance: the addi- Though not always measurable, the op- tional cost of purchasing meals or portunity price is perceivable by the con- refreshments during the time of the sumer and is considered in the purchase/ activity. participation decision. • Qualification: the costs directly associated with making the individual Psychological Price eligible to participate in the activity Participants in sport, tourism, and (includes preparatory training and/ leisure activities experience a certain or certification, medical clearance, amount of psychological stress. The stress membership fees, etc.). may result from the uncertainty of a con- • Reference: the costs of acquiring test’s outcome or the anxiety associated artifacts, such as souvenirs and with performing at a level near the lim- photographs, that help the partici- its of the participant’s capabilities. Other pant to later recall and describe the forms of stress manifest themselves as experience. boredom, fear, or even embarrassment. All these conditions are a part of the psy- Opportunity Price chological price of the activity. Participa- By participating in a sport, tourism, tion may require the individual to step or leisure activity, an individual dedicates out of his or her personal comfort zone to that activity time and other resources and place his or her self-esteem or social that could have been utilized in alternate position at risk. By participating, the in- ways. The participant always pays the dividual exchanges the psychological po- price for lost opportunity. Fathers who go sition of comfort for the expected stresses out in the evening to play basketball with and anticipated outcomes, thereby paying their co-workers give up the opportunity the psychological price. to spend that time with their families. College students who spend the weekend Effort Price skiing lose the opportunity that those two Sport, tourism, and leisure activities days presented for rest, study, and prepa- usually require substantial physical or ration for an upcoming exam. Children mental exercise, and by so doing, exact a who take piano lessons forfeit the oppor- price of personal energy. Some programs tunity to watch after-school cartoons on may be too expensive for certain individ- television. A recreational seamstress may uals—not because the monetary, oppor- spend carefully saved money to take a tunity, or psychological price is excessive, quilting class but, in so doing, lose the op- but because the prospective participant is portunity to buy a new sewing machine. “just not up to it.” The opportunity cost of time can be mea- Figure 9.1 presents a summary of the sured in hours and minutes; the oppor- many costs that constitute the price for a tunity cost of lost wages or spent savings man to spend his hot summer afternoon can be measured in dollars and cents; at the community swimming pool. It pro- and the opportunity cost of not studying vides examples of the monetary, opportu- can be measured in grade points. There nity, psychological, and effort prices that Chapter 9 103

Product: Swimming $3 (admission), $25 (swimsuit), $2.50 (transportation), $2 snack, opportunity to watch football game, opportunity to work overtime, enduring noisy kids, embarrassment due to uneven tan, embarrassment due to obviously poor physical condition, embarrassment due to limited swimming skills, risk due to poor swimming skills, physical fatigue, potential sunburn, emotional effort to drive to pool and ﬁnd shaded PRICE parking stall, initial discomfort/shock of cold water, disfavor of spouse who wanted me to stay home and ﬁx the dishwasher.

Figure 9.1 The varied elements of the price tag for going swimming

the man must be willing to pay in order resources, costs, and market conditions. to go swimming. For example, the price for a recreational swimming session at a new YMCA Fami- ly Fitness Center may reasonably be set at Approaches to the same amount as is charged for admis- Establishing Price sion to the local public swimming pool because the costs of operation are com- One of the easiest ways to establish parable, the range of aquatic services is a price is to just pick a number and de- similar, the market is identical, and both cide that it will be the dollar price for the agencies are pricing their services at the service. This arbitrary approach ignores break-even level. If, however, the YMCA market conditions and requirements for has a wave machine in the new pool and cost recovery, and settles on a price with requires more lifeguards than the pub- which the financial decision maker is lic recreation agency, then charging the most comfortable. For example, the di- same as the public agency would likely rector of a summer sport camp may de- result in reduced profits or increased op- cide to charge $20 just because $20 is a erating deficits. nice round number. Unfortunately, the A third approach to pricing sport positive simplicity of this approach is and leisure services is to charge whatever usually overshadowed by the negative in- the market is willing to pay. This market effectiveness of such a strategy in meeting pricing strategy assumes that consum- the financial goals of the organization. ers are willing to pay at least the amount Another relatively simple approach is required by the organization for cost re- to establish a price that is consistent with covery and then seeks a higher amount the price charged for the same or a simi- that will optimize financial returns. Us- lar service by a competing service providing the market pricing approach, a col- er. Competitive pricing can be an efficient lege athletic department with a nation- and effective strategy if the competing ally ranked basketball team may decide provider has similar goals, production to charge non-student spectators $20 104 Financial Resource Management: Sport, Tourism, and Leisure Services

per game because that is the amount that detail in Chapter 7, it is appropriate here these basketball fans have demonstrated a to emphasize that estimation of demand willingness to pay. These same fans, how- is an art founded in science and measure- ever, may only be willing to pay $5 per ment. In other words, “knowing” how game if the basketball team goes for three many people will participate in a sport, seasons losing every game by as many as tourism, or leisure program requires an 50 points. educated guess. Finally, a cost-recovery pricing strat- Contingency refers to being pre- egy is based on the principle of seeking pared for the unexpected. There is obvi- a return from the consumers that repre- ous wisdom in adding to the itemized sents a predetermined portion of the re- costs of a product an amount that can sources that are required to provide the be used if additional costs arise. How sport, tourism, or leisure service to them. many contingencies should be built into That portion may be less than, equal to, the costs? Some managers are comfort- or greater than 100%, depending on the able with only five percent of the costs organization’s financial objectives and being contingent, while other more cau- how the service being priced is supposed tious financial managers may want to to help achieve those objectives. Clearly, have an amount as much as 15 percent two pieces of information are essential of the itemized costs be available to deal before determining price based on cost with contingencies. For long-standing, recovery. The first is accurate informa- established programs, or for programs tion about the costs of providing the ser- requiring limited financial investment, vice, and the second is information about the reduced risk would justify a relatively the extent to which the pricing strategy small contingency, but new, untried, or is expected to generate revenues equal to short-term programs, as well as those those costs. The latter item of informa- for which the consequences of financial tion is referred to as either the subsidiza- failure are severe, should have a relatively tion rate or the mark-up. high contingency built into their cost estimates. Fixed and variable costs are the finan- Calculating Costs for cial resources that are used in produc- Unit Pricing tion and delivery of the sport, tourism, or leisure service. They can be itemized In order to calculate the costs in- and are the basis of cost-recovery pric- curred in the provision of service to each ing. Fixed costs are those financial costs consumer, the financial manager needs that the sport, tourism, or leisure service to know what the fixed and variable costs organization incurs, regardless of the are, how much contingency is required, status of the program. They are unavoid- and how many consumers are likely to able, even if nobody registers for the pro- participate in the program or purchase gram or attends the event. the service at a given price. Estimating de- Figure 9.2 identifies the fixed costs mand (i.e., the quantity desired at a given associated with the maintenance of a price) requires an understanding of the skating rink. If the facility is maintained needs, interests, capabilities, constraints, as a rink, but nobody comes to skate, and opportunities of the target market. there will still be mortgage installments Although demand has been discussed in due and bills to be paid. There will still Chapter 9 105 be a portion of the agency administra- on its use; hence, the term variable costs. tors’ salaries that are actually rink-related Figure 9.2 identifies sample variable costs, because maintaining the rink part- costs for the rink to operate for a seven- ly justifies the administrator’s position. month skating season. There will be the direct costs of install- The actual cost of one unit of a prod- ing and removing the ice surface at either uct is calculated by applying the formula: end of the skating season. And even this P=(F+V)/N where P=the cost of a unit, unused and empty facility would require F=the total fixed costs, V=the total vari- repairs and upkeep, as well as basic utility able costs, and N=the number of units services. expected to be sold. Variable costs are those costs that re- Using the data from Figure 9.2, the sult from the actual operation of the sport, recoverable hourly cost of operating the tourism, or leisure service. The more the ice rink is calculated by applying the for- service operates, the greater the variable mula: costs will be. Operating at full capacity, the skating rink lights would be on, P=(F+V)/N the dressing rooms and spectator areas would be heated, showers would deliver P=($56,425 + $45,000)/2,250 hours thousands of gallons of hot water, floors would need cleaning, supervisory staff P=$45.09/hour would be retained, and so on. The cost of operating the rink will vary depending To calculate the price that should be

Kotkawagan Ice Rink COST SUMMARY (October - April)

Fixed Costs Capital cost $4,300/month x 7 months $30,100 Administration (overhead) $375/month x 7 months $2,625 Ice installation/removal $2,000 Basic maintenance $2,000/month x 7 months $14,000 Basic utilities and services $1,100/month x 7 months $7,700 TOTAL FIXED COSTS $56,425 HOURLY FIXED COSTS* $25.08 Variable Costs Utilities and maintenance $11/hour x 2,250 hours $24,750 Staff $9/hour x 2,250 hours $20,250 TOTAL VARIABLE COSTS $45,000 HOURLY VARIABLE COST* $20 TOTAL COSTS $101,450 HOURLY COST* $45.09 *based on expected 2,250 hours of ice time sold

Figure 9.2 Sample cost summary for ice rink 106 Financial Resource Management: Sport, Tourism, and Leisure Services

charged in order to recover all costs, a re- (e.g., capital, administrative overhead) vised formula that considers contingency and often do not relate costs to specific may also be used. Contingency costs are activities or program components. the unforeseen costs or revenue shortfalls The advantages of ABC over tradi- for which the host or sponsoring organi- tional cost measurement strategies in- zation needs to be prepared. For example, clude the following: if the price is based on an estimation that ten people will participate and only nine • ABC helps to identify manageable actually do, then a contingency cost that contributing factors to cost (thereby was added to the price will at least partial- facilitating improvements to opera- ly cover the revenue shortage. Similarly, tional efficiency). if a piece of equipment breaks down or • ABC allows cost comparisons for the additional materials need to be obtained same activity provided by different after the program or event begins, then a units within the organization or for contingency cost that was included in the different market segments. price will help to pay for the unexpected • ABC generates data for benchmark- expense. The formula for calculating the ing and comparing the cost of an price, with a built-in contingency, is: activity provided in-house or by contracting out. P=C(F+V)/N • ABC tells the true story of cost and where P=the average price per unit, facilitates appropriate pricing based and C=the contingency rate. on cost recovery objectives.

If the operator of the ice rink chooses Subsidization and Unit Pricing to build a 5% contingency into the pric- Once the cost-based price has been ing model, then the average price for one determined, the next step in establishing hour of ice time will be: the unit price for a particular consumer or target market is the application of a rate P=((F+V)+C(F+V))/N of subsidization. The rate of subsidization refers to how much of the unit cost is go- P=(($56,425 + $45,000)+ .05($56,425 ing to be recovered from sources other + $45,000))/2,250 hours than the consumer. In the public sport, tourism, and leisure service organization, P=($101,425 + $5,071.25)/2,250 subsidization means using tax revenues to hours reduce or eliminate user fees for services. Private not-for-profit and commercial P=$47.33/hour sport, tourism, and leisure service organizations may subsidize some programs Note that the $47.33 per hour cost or services by using the profits generated calculated in the preceding example in- by another of their enterprises to reduce cludes all of the costs associated with pro- or eliminate the consumer’s contribution viding the specific activity. This approach to meeting the costs of the programs or to cost quantification is referred to as ac- services. tivity-based costing (ABC) and is different Using the profits of one program to from traditional approaches to account- reduce the price of another is often called ing, which often ignore major fixed costs cross-subsidization. A common pricing Chapter 9 107 strategy involves subsidizing different shown in Table 9.1. The price for youth market segments at different levels. For programs such as minor hockey, figure example, the pricing strategy for the pub- skating, and ringette are subsidized 35% lic skating rink could reflect a political and calculated as follows: decision to keep skating activities very affordable for special populations in the Pm=(1-Sm)(((F+V)+C(F+V))/N) community while, at the same time, expecting commercial ventures to pay the Pm=(1-.35)($47.33/hour) full share (or more) of the costs of any public facilities or services that they use. Pm =$30.77/hour The sample subsidization rates displayed in Table 9.1 demonstrate a commitment The subsidization rate for the Junior to youth recreation. Subsidization rates A hockey club (a commercial enterprise) are used to convert the average per unit is -25%, which means that the hourly cost of a sport or leisure service to the cost will be marked up to establish a price final consumer price(s) for the product. for this user group. The formula given The appropriate formula for calculating above can be used to calculate the price price is: to be charged ($59.16/hour, which is 25% greater than the cost to be recovered). Pm=(1-Sm)(((F+V)+C(F+V))/N) where Pm=the price to be charged to Pm=(1-Sm)(((F+V)+C(F+V))/N) a specific market (m) for one unit, and Sm=the subsidization rate applied to Pm=(1-(-25))($47.33/hour) market m. Pm =$59.16/hour Note that the subsidization rate can be as high as 100% (a free service) or as low as a minus percentage (a profit-gen- Other Considerations in erating service). A service that is “marked Establishing Price up” 30% is subsidized at -30% and priced at 130% of its cost. While cost recovery is usually the The prices charged to various skat- most important consideration in estab- ing groups for one hour of ice time are lishing prices, there are other factors to

Table 9.1 Sample subsidy rates and hourly prices for ice rink rental

User Group Subsidy Rate Price Minor Hockey 35% $30.77/hour Figure Skating 35% $30.77/hour Ringette 35% $30.77/hour Public Skating 0% $47.33/hour Open Skate 100% free Gentlemen’s Hockey 10% $42.60 Junior A Hockey (practice) -25% $59.16/hour 108 Financial Resource Management: Sport, Tourism, and Leisure Services

keep in mind when determining how product. The $30 price tag helps to pro- much to charge for a sport, tourism, or tect the perceived value of the service. leisure service. The potential customers’ The “problem” of what to do with the $20 willingness to pay the established price is profit that would be realized by this not- certainly an important consideration, as for-profit organization may be quickly is their sensitivity to price changes. resolved if the organization also has a worthwhile program for which the pro- Willingness to Pay/The Going Rate duction costs exceed the price that con- When cost-recovery goals are easily sumers are willing to pay. All the organi- met because the calculated unit price is zation needs to do is to shift the profits below an amount that all or most con- of the former program to cover the losses sumers are accustomed to paying or will- of the latter. Clearly, consideration of the ing to pay, it may be appropriate (and, willingness of patrons to pay the going perhaps, necessary) to price the sport, rate is important in pricing decisions, es- tourism, or leisure service at a higher “go- pecially when the sport or leisure service ing rate.” Conversely, a service that costs organization uses cross-subsidization to more to produce than the consumers are achieve its financial objectives. willing to pay may also need to be priced Consideration of the going rate in at a going rate that results in a financial pricing decisions is also important for loss. In either case, the reasons for pricing protecting the self-esteem of consumers. at the going rate may be varied and may Generally, people like to feel that they also include protection of perceived val- have earned what they receive. When ue, protection of consumer self-esteem, they receive benefits from a sport or lei- and promotion of competition. sure service, they feel better about them- A sport, tourism, or leisure service selves if they worked, sacrificed, or some- that is highly valued by consumers may how paid a fair price for those benefits. not necessarily be costly to produce. Pricing decisions should allow for con- However, if that low-cost service is priced sumers to maintain or enhance their self- too low, the potential appeal of and com- esteem in the knowledge that they will mitment to it may actually be diminished have “paid their dues.” At the same time, because of the commonly held belief that pricing decisions should protect consum- “you get what you pay for, and if it doesn’t ers’ self-esteem by demonstrating sensi- cost much, then it’s probably not very tivity to the desire to believe that all basic good.” Even if a private not-for-profit or- needs and, perhaps, a few leisure wants ganization’s excellent fitness program in- are available and affordable to everyone. curs a cost of $10 per participant, it might In other words, prices should not make a be wise to charge around $30 per partici- consumer feel that it is impossible to sat- pant if that is what he or she is used to isfy perceived needs, but instead should paying for services of similar value (i.e., make him or her feel that paying the price perceived personal benefit) or for simi- is an appropriate way to demonstrate de- lar services offered by another provider. servedness of the benefits derived from In this example, the consumers have consuming the sport, tourism, or leisure indicated a willingness to pay $30 and product. thereby have implicitly suggested that a Sometimes the going rate is used as significantly lower price would probably a means to promote competition. For ex- generate doubts about the quality of the ample, a state park agency may be able to Chapter 9 109 provide serviced campsites at an average may vary because of age limitations/ cost of $8 per night, but will choose to opportunities, income, ability, in- charge the going rate of $15 per night in tensity of consumption, etc. order to help the neighboring commer- • Product Levels. Consumers are will- cial campground stay in business. The ing to pay more for advanced levels commercial campground also charges or elitist tourism, leisure, and sport $15 per night, but its average campsite opportunities and less for basic ser- costs are $12. The state park is able to vices. produce campsites at a lower cost be- • Distribution. Differential pricing cause it does not pay off a mortgage on may reflect the advantages of one the land, does not pay local property service location or time over an- taxes or sales and income taxes, and does other. For example, concert tickets not pay directly for marketing. In some are priced according to the location respects, the state park has an unfair ad- of reserved seats, and rental fees for vantage and could exploit that through sports facilities are higher during its pricing. The state park, however, can- prime-time hours. not always satisfy the demand for camp- • Merit. Prices and expectations of ing, but is required to facilitate extensive price differentials may reflect the use of the park. It needs the commercial historical contribution of the con- campground to stay in business in or- sumer to the product. For example, der for the state park to continue to at- lower program registration fees for tract visitors and to avoid expanding the club or association members serve public campground to the detriment of as recognition and expectation re- protected natural areas. By establishing sulting from the earlier payment of prices that are consistent with the go- membership. Bulk pricing (such as ing rate, regardless of production costs, season passes and ticket packs) is the state park promotes competition and also a practice based on recognition ensures adequate camping opportunities of the contribution and merit of the for overnight visitors. high-quantity/frequency customer. It should be noted that the going rate for a particular service might vary according to product and market con- Sensitivity to Changes in Price ditions. Products that are seasonal in their appeal will have a lower going rate The measure of price-induced de- in the off-season than during periods of mand fluctuations is called price elas- high demand. Products oriented toward ticity of demand, and was discussed in children or economically disadvantaged Chapter 7. It is clear from that discus- population segments also tend to have sion that any change in price is going a lower going rate than those offered to to have an impact of consumption and, adults and wealthier persons. There are most likely, on revenue. As a general rule, several appropriate justifications for dif- price increases should be avoided when ferential pricing that are based on will- dealing with an elastic market, but may ingness to pay and the going rate: be applied more liberally when dealing with a market or market segment that is • Customer Characteristics. Both the relatively inelastic. willingness to pay and the going rate 110 Financial Resource Management: Sport, Tourism, and Leisure Services

Adjusting Prices that a consumer uses to describe the dif- It is natural to expect that a drop in ference between the reference price and sales or attendance will result from an in- the objective price are referred to as the crease in price. When a price increases, subjective price. Essentially, the subjective there will inevitably be a portion of the price is how the consumer feels about the market that feels that the new price is too objective price, based on his or her refer- high, and therefore cannot or will not ence price. The subjective price is a word pay the higher amount. Some of those or expression, not a number. Examples customers will need time to adjust to the include the following: “expensive,” “rea- new price and may eventually find the re- sonable,” “cheap,” “bargain,” “rip-off,” sources or the will to return and continue “prohibitive,” “a good deal.” participating. Others will not be able to There are several effective approach- convince themselves that the higher price es to adjusting the consumer’s reference is worth paying, but could be convinced price. One approach is to inform the con- by the service provider. In doing so, the sumer of the actual costs that the price is sport and leisure service provider is chal- supposed to recover. For example, the lenged with finding a way to adjust or soccer camp may cost the agency $65 redefine the consumer’s reference price. per participant. Knowing this, the con- Reference price is the amount that the sumer would be inclined to adjust her consumer feels that the service might or reference price upward and recognize should cost and is derived from the con- that the objective price ($55) is really a sumer’s experience with similar services pretty good deal. A second approach to and/or from introductory information changing the consumer’s reference price provided by the sport, tourism, and lei- is to emphasize the value or the benefits of sure service organization. The reference the product to the consumer. In the youth price for a youth soccer camp, for exam- soccer camp example, the sponsoring ple, might be $40. Last year the consumer agency could point out that participa- paid $45 for a basketball camp with a tion in the program provides the boy or similar format, and her neighbor report- girl with a wholesome, health-promoting ed paying $38 to register his daughter in way to spend time, a positive social en- the children’s soccer camp offered by the vironment, opportunities to experience YMCA. Hence, $40 seems to be a reason- success and failure (and help in learning able expectation (reference price). how to deal with them), skill develop- The sport, tourism, and leisure ser- ment, leadership experience, etc. Surely vice organization only needs to adjust these benefits are worth at least $55! The the soccer moms’ reference price if it is third approach involves comparing the significantly different from the objective cost of the service with a similar service price. The objective price is defined as the or activity offered elsewhere. The con- actual price charged for the service. For sumer could be informed that the price example, the registration fee for youth for the local soccer camp is $55, but that a soccer may be $55. Expecting to pay $40 similar program in a nearby community and then being presented with a bill for would cost $80. Furthermore, the soccer $55, the consumer would be inclined to camp is $15 cheaper than both the bas- consider the program to be a bit expen- ketball and volleyball camps offered by sive. She may even consider it to be much the same agency. The fourth approach to too expensive. The words or expressions adjusting the reference price is to enhance Chapter 9 111 the image of the product in the eyes of the Summary consumer. In order to raise the reference price for the youth soccer camp, promo- Th e price of a sport, tourism, or lei- tional emphasis could be placed on the sure service is the quantifi cation of the success achieved by camp alumni or on level of exchange between the service the international reputation of the camp provider and the customer. It is what the director. customer gives up in order to receive the Figure 9.3 shows the relationship of service. In addition to fi nancial resourc- past experience and direct communica- es, the price includes opportunity, ef- tions to the establishment of reference fort, and psychological stress. Monetary prices. It also identifi es four approaches pricing helps the organization to recover to adjusting reference price. Th e opportu- costs of production, manage consumer nity to infl uence the reference price is im- behavior, and establish value for the ser- portant to the sport, tourism, and leisure vice. Pricing of certain services is desir- service manager, because the reference able and necessary, but others may not price is the price with which the objective be suitable for direct pricing. Th ere are price is compared in order to establish a several ways to establish a price, but the subjective price. Purchase decisions are most common approach is to determine based on subjective price.

Establishing the Changing the Reference Price Reference Price

- Experience with similar - Show costs products - Show value - Compare with similar - Introductory prices service - Enhance image

LO REFERENCE PRICE HI

LO OBJECTIVE PRICE OBJECTIVE PRICE OBJECTIVE PRICE HI lower than close to higher than reference price reference price reference price

SUBJECTIVE PRICE SUBJECTIVE PRICE SUBJECTIVE PRICE “cheap” “reasonable” “expensive”

Figure 9.3 Relationship of reference price to subjective price 112 Financial Resource Management: Sport, Tourism, and Leisure Services

production costs and then price accord- sumers to price changes. Price changes ing to particular cost-recovery objectives. will affect demand and consumption, It is important for financial managers to which will ultimately affect revenue and understand and consider the sensitivity profits. of sport, tourism, and leisure service con-

NOTES C H A P T E R 1 0

Grantseeking

Introduction more common to use grantseeking as part of the sport, tourism, and leisure service Grantseeking is an area of financial organization’s revenue plan. Successful management in which many sport, tour- grantseeking provides opportunities to ism, and leisure service professionals extend programs and services in ways must develop proficiency. Grantseeking that might not otherwise be possible. is a systematic, logical process of articu- This chapter describes the grantseeking lating and matching needs with the goals process and suggests approaches that and expectations of a granting agency. have proven to be successful in a variety Unfortunately, many sport, tourism, and of situations. leisure service managers are deterred The termsgrantseeking and grantwrit- from grantseeking by a process that they ing are frequently used interchangeably, believe is complicated. While some grant- but have different meanings. Grantseek- ing organizations do require detailed ing refers to the broader process of finding proposals that are strongly supported and securing a grant, while grantwriting by additional sources of information or is a particular reference to the process of money, there are many simpler grant pro- writing a proposal. posals that can lead to equally successful results. There is no guaranteed formula for success, but there are procedures that, Why Pursue Grants? when followed, increase an applicant’s potential for success. In today’s competi- Indiana University’s Bradford Woods tive budget environment, it has become Outdoor Center is a 2,600-acre outdoor 114 Financial Resource Management: Sport, Tourism, and Leisure Services

campus located about 20 minutes south of The Granting Environment Indianapolis. During its 55-year history, it has evolved from a youth camp facil- According to the Foundation Cen- ity to a multifaceted outdoor education ter’s 2006 edition of Foundation Growth resource and demonstration center that and Giving Estimates, the United States includes camping, professional develop- had nearly 68,000 granting foundations ment, environmental education, a retreat in 2005. That year, granting organizations center, and a training center. For its first awarded $33.6 billion in grants. Of that 35 years, Bradford Woods operated with amount, the largest portion of grants (26 little change. Its primary function was to percent) went to human service organi- provide summer camping opportunities zations, and the largest share of money and dedicated areas for outdoor youth- (24 percent) was given to education. serving agencies. By 1978, Bradford Granting organizations can be viewed as Woods was operating with a significant fi- potentially important sources of income nancial deficit. The university determined for sport, tourism, and leisure service or- that changes needed to be made and ganizations. Bradford Woods was expected to become Foundation granting organizations more financially self-sufficient. Dives- are divided into three categories: indepen- titure of the property, which had been dent foundations, corporate foundations, bequeathed to the university in 1941, was and community foundations. Independent not an available option. A new director or private foundations are self-defining. was hired and given a charge to diversify They are not specifically connected with operations and create new opportunities. an organization, corporation, or com- One of the early strategies for increasing munity. Private foundations are usually financial strength was the use of grants to created by a single individual or family support operations, programs, and capital through a bequest of funds. These be- improvements. This approach has made quests frequently have restrictions placed Bradford Woods increasingly more effec- on the granting. These independent foun- tive in securing short-term and multiyear dations make grants to other tax-exempt grants. For example, the 1998–99 revenue organizations to accomplish their chari- budget for Bradford Woods was more table purposes. They do not program than $2.25 million, of which about 20 directly, but provide money to organiza- percent came from the parent institution. tions that do program. Another 15 percent came as gratuitous A foundation invests its assets to income through an ongoing aggressive generate revenue that is used primarily to program of grantseeking. The 1998–99 provide money for grants. Independent capital improvement budget for the out- foundations must make charitable ex- door education center was $150,000, penditures of approximately five percent of which 80 percent came from grants. of the market value of their assets annu- Bradford Woods is more successful in really. If an independent foundation has ceiving grants in some years than it is in assets totaling $100 million, it will need others. The management team’s approach to award at least $5 million in grants. Of to grantseeking has yielded very positive course, it may award more than that. results. Bradford Woods’ need for and ap- A foundation is generally organized proach to grantseeking is typical of that as a not-for-profit organization under ap- experienced by many public and not-for- propriate state codes and registered as a profit organizations. (501 (c) (3)) charitable organization with Chapter 10 115 the Internal Revenue Service. It typically strengthening the community of has a board of directors and may hire an the metropolitan region. Our mis- executive director. The board of direc- sion is to: tors makes decisions for grant awards. As shown in Table 10.1, independent foun- • Develop the widest range of dations are the largest single source of endowed funds and services to grants. In 2005, independent foundations donors on behalf of the region accounted for 89 percent of all granting and its counties and commu- organizations and awarded 73.3 percent nities; of all grant dollars. • Administer a growing grant- A corporate foundation, as the name ing program focused on suggests, is linked to a corporation and helping where the needs are frequently focuses its giving in those greatest and the benefits to the communities where the corporation has region are most extensive; operations such as offices, factories, or • Support the development of other interests. Funds for these founda- the services and institutions tions come primarily from the corpora- of the charitable sector of the tion, but granting decisions are, in most region; and, cases, separate from corporate decision- • Serve as a catalyst for com- making processes and officers. munity-based convening Community foundations represent a consensus building and prob- relatively new phenomenon. The focus of lem solving in the region.” these locally instituted foundations is on their communities and on investing into In today’s rapidly changing and the community. Some large corporate competitive society, securing grants is es- foundations, such as the Lilly Foundation, sential to fulfilling the missions of public have made major commitments to com- and not-for-profit sport, tourism, and munity foundations as a way of enhanc- leisure service organizations. The avail- ing their efforts to achieve their purposes. ability of traditional funding sources The purposes of community foundations has forced organizations such as Brad- vary somewhat, and may appear as those ford Woods to seek alternative funding articulated in the following example mis- opportunities. Simultaneously, the di- sion statement: minishing role played by government in social service areas has increased the “The Community Foundation demand upon granting organizations. It is committed to improving and is, therefore, essential that grantseekers

Table 10.1 Foundation statistics for 2005 (Foundation Center, 2005 giving)

Foundation Type Number Grants* Assets* Independent 60,520 $24,528 $454,574 Corporate 6800 $5,712 $16,644 Community 6880 $3,360 $38,782

* thousands of dollars 116 Financial Resource Management: Sport, Tourism, and Leisure Services

learn the art of matching their seemingly to the grantseeking process. Th e identi- infi nite needs with the fi nite off erings of fi cation of an idea is not as diffi cult as it grantmakers. Th e following step-by-step may at fi rst appear. Th ere are many good discussion of the grantseeking process is ideas that are worthy of a grantseeking, designed to help sport, tourism, and lei- but the key is to work the idea into a sure service managers achieve profi ciency problem statement and then match it to as grantseekers. a willing grantmaker. Th e development of a good idea is a problem-solving process. It does not ini- The Grantseeking Process tially seek to match ideas with potential grantmakers, but instead seeks to iden- Successful grantseeking preparation tify ideas that cannot be met with exist- involves far more than just asking and ing resources. Th e following questions writing. A well-planned grantseeking can assist an organization in determining process involves six steps (Figure 10.1) whether the idea might have merit with a that take the applicant from idea genera- potential granting organization: tion to grant administration. Each step requires the development and assessment • Is the idea new or innovative, and of time-tested approaches to grantseek- does it meet an identifi ed need ing. Grantseeking is an opportunity to among potential or existing constitu- increase resources and thereby allow the ents? Can it solve an existing prob- organization to accomplish its mission in lem or enhance the potential for the ways not normally possible. solution of a problem? • Is there a general recognition of Step 1: Identifying a Potential Idea the need within the community or Beginning with the end in mind is a among organizational members? key element of grantseeking. Step 1 in- • Is funding available within the or- volves identifying an idea that lends itself ganization to support the idea? If

6. Administer grant or seek a new grantmaking source

5. Grantmaker responds to grant

4. Submission of the grant proposal

3. Preparation of the grant proposal

2. Discovery, selection, and contact with grantmaker

1. Idea identiﬁ cation

Figure 10.1 Steps of the granting process (adapted from Smith & McLean, 1988) Chapter 10 117

no, then what external sources and ganizations, and (5) individual founda- amounts can be considered? tions. Identification of the philanthropic • Are local or organizational funds organization that best fits your problem available as a matching support for can be daunting, but fortunately, assis- a potential grant (e.g., other govern- tance is available. ment or not-for-profit organizations, There are several organizations that individuals, in-kind contributions, assist grantseekers in their search for the etc.)? perfect match. For example, the Founda- • Are the community and the organi- tion Center has branch libraries with staff zational members willing to support in Atlanta, Cleveland, New York, San a grantseeking process? Francisco, and Washington, D.C. In ad- • Does the idea support the organiza- dition, there are cooperating collections tion’s mission and strategic plan? in over 200 public and university libraries, where support materials and pub- Once an idea is generated, it needs lications are available. The Foundation to be refined. The most important part Center publishes several directories, in- of this phase of the process is to clearly cluding the two-volume The Foundation identify and describe the problem. This Directory, the single-volume National phase will require sound research to Guide to Funding in Arts and Culture, and show that a problem exists. Just because The Foundation Grants Index. The Foun- someone may “think” this is a problem dation Center suggests that, through its does not make it a problem in the eyes resources, searches can be accomplished of the granting organization. It is becom- by using one of three criteria: geographic ing more common for grantmakers to re- location, subject, or type of support. quire documentation of the needs and to The Chronicle of Philanthropy is an- justify the problem. If other, similar types other source of information about grants. of projects already exist in other orga- TheChronicle is especially useful if the in- nizations, the grantseeker may be asked tent is to make grantseeking a part of the to show how his proposal is different. At organization’s funding and growth strat- this stage of the process, the development egy. The Chronicle is a bi-weekly news- of the idea should be the primary focus. paper that tracks what is going on in the Collection of data to justify the need philanthropy arena and provides detailed should be started, but only sufficient to information about grantmakers, types of begin phase 2 of the process. grants that are being awarded, trends in grants, and so forth. Step 2: Discovery, Selection, and The same resources are available on Contact with a Granting Agency the Internet. Users can access the Foun- Of the thousands of grantmakers dation Center (foundationcenter.com), serving U.S. communities, grantseekers The Chronicle of Philanthropy (philan- must identify those that are most closely thropy.com), and The Grantsmanship linked in their purposes for applying for Center (tgci.com). Each site provides the grant. Grantmakers can be classified information for the grantseeker to as- as (1) government organizations, (2) cor- sist in this search for granting organiza- porations, (3) national or international tions. Most grantmakers also maintain a philanthropic organizations, (4) regional web presence. These are accessed by con- or local or community philanthropic or- ducting an Internet search for a specific 118 Financial Resource Management: Sport, Tourism, and Leisure Services

CASE STUDY (part 1): Identifying and securing a grant

The case study presented in this section carries throughout the chapter. It appears at the conclusion of each step and provides an example. The case study applies to securing a grant for a public park and recreation agency and focuses on providing programming for people with disabilities.

Identifying the Need The director and assistant director were discussing upcoming issues facing the recreation division when there was a knock at the door. The aquatics director walked in, obviously concerned about something. Her first words were, “The local job agency,for people with disabilities is no longer going to provide support for its employees to participate in Special Olympics. This is terrible.” The job agency had a long history of providing support for Special Olympics and had become a mainstay in the community’s support of individuals with disabilities. The loss of their support would leave a big gap in services. The aquatics supervisor was appropriately concerned and saw the loss as a community failure. The director and assistant director saw an opportunity. The department had done little in providing services for people with disabilities. It was an issue of funding and staff. The aquatics supervisor had additional responsibilities for people with disabilities during the aquatics off-season, but this gave her little time to provide programming. The director had indicated the department would not initiate any programs for people with disabilities if the department could not provide adequate and sustained support. As long as the aquatic supervisor could not provide year-round support to the programs, it was not feasible to initiate new programs. Instead, the strategy developed involved creating strategic partnerships, facilitating programming with other agencies, and taking the lead for special projects, but not for sustained programming. The loss of sponsorship for Special Olympic funding provided an appropriate and viable problem for a grant. The issues of funding and staff could be resolved with an appropriately constructed grant. As the director and assistant director laid out their ideas, the aquatics supervisor saw distinct advantages to securing a grant. After some discussion a problem statement was arrived at: “Adult members of the community with physical and mental disabilities need recreation opportunities to make their lives more fulfilling. The act of preparing for and participating in Special Olympics provides unique opportunities for this population to experience leisure. The loss of the opportunity to the community significantly erodes their quality of life.” foundation, for a specific type of grant, tified problem. Finding the right grant- or for a type of foundation. Searches can maker can be a time-consuming and be conducted through a foundation sup- sometimes frustrating process. This dis- port site, such as the Foundation Center, covery phase is a necessary second step. or using a traditional Internet search en- The search can be conducted by looking gine such as Yahoo!, Google, or others. through the various resources available from one of the previously mentioned Searching for Grantmakers sources, by making direct contact with There is no single best way to search foundations, or by securing support and for a foundation that supports an iden- ideas from other individuals. No single Chapter 10 119 source will be sufficient. It requires a has been thorough, then the grantseeker combination of sources to identify and can make an informed judgment. Most select the one or more grantmakers that likely, several grantmakers will emerge match a particular problem statement. as potential sources of funding. If this The search will likely turn up several occurs, the grantseeker must determine potential grantmakers, from whom some how to select the grantmakers with the basic information should be secured. highest potential to fund the project. Us- First, the name, contact person, and ad- ing the collected information, the grant- dress of the foundation should be noted. seeker compares the various grantmakers Second, financial information related to with the specific criteria for the grant and the organization should be collected. This the grant’s goals and outcomes. information should include the total as- Table 10.2 provides an example of sets of the grantmaker, the total grants how to evaluate the gathered information. awarded in the most recent reporting The decision to select a single grantmaker year (many foundations issue annual re- is based on finding the one most closely ports), the dollar value range of grants matching the funding problem. If there awarded (high to low), and the average are no foundations matching the funding period of time for which the grantmaker problem, then maybe it is appropriate to is willing to fund a project. Total assets rethink the problem or to rethink the type consist of the economic resources avail- of grantmaker being sought. While some able to the grantmaker. They make up the grantmakers may seem better suited to a principle that the grantmaker has avail- particular problem or idea, there may be able for investment purposes and from other grantmakers who have not yet been which they draw interest income. Third, considered. the grantmaker’s areas of focus (in order of importance). Fourth, the grantseeker needs to know if funding is restricted on 1. Name of the Foundation: the basis of geographic locations. Private The National Parks Foundation 2. Assets: $81,588,053 (June 30, 2005) grants are frequently restricted to the Expenses: area where the benefactor either lived or Program Grants – $20,099,877 Program Support – $8,200,892 had some special ties. Fifth, there may be Grant Ranges: $400,000 to $1.5 million restrictions or specific types of support Funding Periods: up to 5 years that are identified by the grantmaker. 3. Broad Focus: Education The population that is served, such as Community Engagement children, the disabled, or the elderly, is Volunteerism another important piece of information. Visitor Experiences Priority Projects Finally, identify the types of recipients 4. Local Focus: that the grantmaker has made awards to African American Experience in recent years. Figure 10.2 depicts the re- Crater lake Flight 93 Memorial sults of this information search as applied Greater Washington to The National Parks Foundation. Glacier National Park Mississippi River Fund Shenandoah National Park Trust Selecting a Grantmaker South Florida Selection of the appropriate grant- Washington’s National Park Fund maker is based on the research completed Figure 10.2 in the early part of this step. If the research Example of a search result 120 Financial Resource Management: Sport, Tourism, and Leisure Services

Figure 10.3 is a prospect worksheet done the same thing with local founda- that grantseekers can use to assist in the tions in their areas. decision-making process. Grantseek- When contact is made, some ques- ers could carefully deselect potential tions need to be addressed by the grantmakers at this stage in the process. grantseeker. The questions include the Keeping options open and being creative following: (1) How do they want the in the approach to seeking a grantmaker proposal written? (2) Do they provide allows an organization a higher degree technical assistance, including a review of potential success. Many grantseekers of proposal drafts? (3) How are propos- are not successful in their ﬁrst try, so an als reviewed and decisions made? and (4) attitude of perseverance becomes an es- Are there budgetary requirements and sential quality for all good grantseekers. preferences (examples include matching funds, in-kind services, payment prefer- Contacting the Grantmaker ences, and so forth)? The contact is an Depending on the type of grant- important source of information and fu- maker that is contacted, the nature of ture reference for the grantseeker. the relationship between the would-be grantseeker and the potential grantmak- Securing Grant Guidelines er will vary. Large grantmakers may send It is important to secure a copy of the a packet with a form letter telling about grantmaker’s published grant guidelines themselves and their expectations. Small- from the potential grantmakers. Many er, specialized, or regional grantmakers grantmakers have their guidelines printed may take a more personal interest. In one and available for distribution. Figure 10.4 community, the grantseeker made per- provides an example of the grant guide- sonal contacts with the grantmaker over lines from a philanthropic organization a period of several years and had estab- that supports not-for-proﬁt agencies. lished a credible relationship. Many have

Table 10.2 Grantseeking selection criteria

Grantseeker Grantmaker Criteria

Problem Statement Focus The problem statement and grantmaker primary focus should match.

Appropriateness Examples of Recipients Examples provide additional information to the grantseeker depicting how previous resources were awarded. This is a guide to the grantseeker who recognizes funding priorities do change.

Location of needed Geographic limits Many grantmakers geographically restrict their awards. Use this as a quick eliminator of potential grantmakers.

Required support Types of support Provides detailed discussion of types of support the grantmaker might provide. Grantseekers need to match needs with willingness.

Population Population served Requires addressing at who the grantmaker is targeting their funding. Does the grantseeker population in need match the grantmaker population willing to serve? Chapter 10 121

Date: Funder: Your Organization

1. Name Address, Contact Person 2. Financial Data: Total Assets Total Grants Paid Grants Ranges/Amount Needed Period of Project Funding 3. Subject Foucs 4. Geographic Limits 5. Type(s) of Support 6. Population(s) Served 7. Type(s) of Recipients 8. People (Ofﬁcers, Trustees, Staff) Application Information Does the funder have printed guidelines/applications forms? What type of initial approach is required? What are the deadlines? Board meeting dates? What are the sources of information? Notes:

Followup:

Figure 10.3 Funding prospect worksheet (after Foundation Center worksheet)

Step 3: Preparation of the Grant chances that the proposal will be given Proposal serious consideration. Figure 10.5 illus- A grant proposal has several ele- trates elements of a grant proposal as sug- ments. Collectively, they provide a com- gested by four diﬀerent grantmakers and prehensive justiﬁcation and plan for what grantwriting support organizations. the grantseeking organization sees as a The elements of a grant proposal will problem and for which it hopes to secure vary according to the grantmaker’s re- funding. Unfortunately, there is no stan- quirements, but there are some common- dardized format for preparing grant pro- ly agreed upon elements of a proposal. posals. One grantmaker may require an The eight common elements are a cover extensive funding proposal, while anoth- letter, an executive summary, a statement er may require a single-page summary of of need, a project description, organiza- the proposal. Paying careful attention to tional information (including key per- the grantmaker’s guidelines increases the sonnel and/or credentials), a budget, an 122 Financial Resource Management: Sport, Tourism, and Leisure Services

CASE STUDY (part 2): Identifying Funding Sources

The task of identifying a potential funding source was not as difficult as it might have first seemed. When the current recreation director was new to the position, a former recreation director introduced him to his friend of 50 years who was also the executive director of a foundation located in the community. The foundation had a history of providing support to good causes in the community. When a proposal for a new public library could not get past a bond referendum, the foundation had paid for it and provided $500,000 each year for five years in support of library acquisitions. With this history of community support the recreation director felt that the search for a funding source for a disability services was over. To engender interest in the project, the director met with the foundation executive director and discussed the project’s purposes and needs. The foundation’s executive director felt that it was a worthy project and believed that the foundation board would be positively inclined to support it. However, he could not speak officially for the board, since it made the ultimate decision. The recreation director felt encouraged by the response and gathered the assistant director and aquatics supervisor together to build a strategy for the grant proposal.

evaluation process, and the grantseeker’s pose and why a grant is being sought. commitment and ability to complete the The grantseeker’s needs are written in a project. manner that matches the grantmaker’s purposes. This match clariﬁes the grant- Cover Letter seeker’s intentions and provides a gateway The cover letter is the formal intro- to the grantmaker’s goals and objectives. duction of the grantseeker to the grant- The cover letter should be addressed to a maker. It should be a clear and concise speciﬁc person, rather than to the grant- statement about the organization’s pur- making organization, and it should in-

We strongly recommend that prospective applicants submit the following in the form of a letter of inquiry before a full proposal is sent:

• Information about the organization’s purposes and specific activities. • A brief description of the program for which funds are being sought, including the time period to be covered. • The principal outcome(s) expected. • Budgets for the program for which funds are sought, as well as for the organization. • The amount being requested of the Foundation. • Funding received to date for the program, as well as sources from which funding is being sought. • The names and qualifications of the key personnel who will be responsible for the program. • The most recent audited financial statements of the organization and its operating subsidiaries, if any. • IRS certification of 501(c)(3) status of the organization. • E-mail address for contact person at the organization.

Figure 10.4 Grant guidelines from a typical foundation Chapter 10 123

The Foundation Corporation for Public The Grantsmanship Center Broadcasting LRR.net Center

Cover letter Cover letter Executive Summary of Abstract/Summary summary cover sheet Introduction Statement of need Statement of need Problem statement Need Project description Approach Methodology Plan of operations Methods of evaluation Evaluation Evaluation Project timelines Program goals and objectives Budget and cost effectiveness Budget Budget Budget Organizational Credentials Qualiﬁcations Key personnel information Conclusion Commitment and capability Supporting materials Appendices

Figure 10.5 Comparative analysis of elements of a grant proposal clude a brief description of the content practice and several rounds of editing to of the proposal. The letter should not be write a good executive summary. overly long. One page normally suffices. Statement of Need Executive Summary The statement of need is the most crit- The executive summary is a one-or ical part of the grant proposal. It provides two-page descriptive summary of the a description and justification of the need project. It contains all of the essential and/or description of the problem the information present in the full proposal. project will resolve. The statement should This snapshot of the proposal allows the enhance the reader’s understanding of grantseeker to set the stage for the pro- the issues. It presents facts in support of posal in a clear and concise way. It pro- the project’s need and validates the grant- vides a narrative explaining the problem, seeker as the best organization to meet its importance, the proposed solution the need. It provides information about (the projects and anticipated results), five areas: (a) involvement of beneficia- budget needs (including what has already ries of the grant; (b) statement of need been committed), and information about in terms of the participants or beneficia- the organization and its competence. The ries; (c) explanation of how needs were executive summary should be written last identified; (d) supporting statements and and requires considerable thought and statistical data and authoritative docu- framing. It is often easier to write the pro- mentation or statements; and (e) linking posal than an executive summary. It takes the needs and proposed solutions to the 124 Financial Resource Management: Sport, Tourism, and Leisure Services

goals and strategic plan of the organiza- lem.” It is better to focus on what a tion. The Foundation Center’s Proposal community center would mean to Writing Short Course suggests six points the community. “The problem is the to follow in preparing the arguments: lack of available facilities for community members to use, and espe- 1. Determine which facts or statistics cially youth-at-risk and gang-related are going to best support the project. issues.” Emphasis in this section is on accuracy and detail to ensure that a valid Project Description case is built for the issue or problem. The project description should con- Eliminate information that is not tain three subsections: (a) goals and ob- germane to the proposal. jectives, (b) methodology, and (c) staff- 2. Determine whether it is reasonable ing and administration. The proposal to portray the problem as acute. If has already dealt with need. This section this is an acute problem, then explain describes how the proposal, when fund- why the organization should receive ed, will operate and solve the problem. the grant. It provides sufficient detail, facilitating a 3. If the problem is an issue that may clear understanding of the process and seem unsolvable, then give the read- how the project will meet the described er hope about the organization’s in- need. Goals and objectives establish a ba- volvement and potential to solve the sis for measuring outcomes of the proj- problem. ect. Each provides a clear level of distinc- 4. Could the project be presented as a tion. Goals separate the problem or need model solution? Determine if that into achievable work units. For example, is the best approach for this grant. If a problem statement that reads, “How the grantseeker has a model solution can we reduce the rise in juvenile crime and it fits the grant proposal, then and its impact upon at-risk youth in our include it. If not, then don’t make it neighborhood?” might generate several part of the proposal. Using a model goals that could read: solution can increase the base of potential grantmakers. 1. To determine the at-risk youth popu- 5. Demonstrate that the project ad- lation and who among the popula- dresses the need differently or bet- tion has the greatest potential to enter than other projects that may have gage in criminal behavior. preceded it. Be sure not to be critical 2. To establish an outreach program to of other projects that are competitive reach targeted youth. or have preceded this proposal. Show 3. To establish a collaborative program collaboration where possible. This of after-school activities and neigh- characteristic is frequently viewed as borhood resources meeting the a strength by grantmakers. needs of targeted youth. 6. Avoid circular reasoning, where the absence of a problem is presented as Goals provide a general direction. a problem. For example, “The prob- They take the broader problem or need lem is we have no community center statement and divide it into workable in our community. Building a com- units. For the grantmaker, it shows that munity center will resolve that prob- the organization has established a direc- Chapter 10 125 tion and a plan leading to a solution. Ob- tion of the grant administration. Smith jectives are a natural subdivision of goals and McLean (1988) suggest that several and more clearly delineate how the goal items should be considered: will be established. Objectives are more specific, are based on a goal, and are mea- 1. The overall design of the project surable. There are four common types of should include an overview of how objectives. Behavioral objectives suggest the project will be administered some type of human behavioral impact. from start to finish. This is a narra- An example would be, “Over a period of tive beginning with a restatement of nine months, targeted youth will exhibit the problem followed by a summary a more positive feeling about themselves.” of the entire design process. Objectives should address a single out- 2. Specific activities that are planned, come. An objective stating, “Over a pe- and the sequencing of the activities riod of nine months, targeted youth will within the project. have a more positive feeling about them- 3. The relationship between planned selves and about their families” should be activities and the stated goals and written as two separate objectives. Perfor- objectives. Linking the activities with mance objectives deal with proficiency or the goals and objectives is essential skill development. For example, “At-risk to the grantmaker’s understanding youth participating in the program over a of how outcomes are achieved. Goals six-month period will develop and exhibit and objectives do not stand alone. study skills resulting in improved school They must always be tied to process. performance.” The objective may appear 4. Identify the specific procedures used to have two outcomes, but the actual out- to implement the program. A dis- come is improved school performance. cussion of how the procedures will This is a measurable outcome. The devel- operate, as well as when they will be opment and exhibiting of study skills are implemented. This may include a dis- processes that facilitate the measurable cussion of the sequencing of actions outcome. Product objectives suggest a de- occurring before planned activities liverable item or hands-on product that are implemented. other people can use or that is used by the 5. Explain how program participants grantseeker. An example is the statement, are selected. “To develop a manual for outreach work- 6. Identify project completion timelines ers that provides proven approaches to for each phase of the grant. reaching at-risk youth.” Both the product 7. Discuss plans for collaborations with and the users of the product are clearly other organizations. defined. A process objective looks at how 8. Describe the project “deliverables,” a methodology was implemented and such as newsletters, process manu- modified. It suggests, in many cases, an als, training materials, publications, assessment process (e.g., “Methods used seminars, and workshops. in the outreach program will be docu- Staffing and administration are im- mented and assessed to determine which portant parts of any grant proposal. are most effective”). This section explains the competence of Methodology describes how the the organization’s members who will be problem will be solved once the grant is administering the grant. One of its pur- awarded. This section provides a descrip- poses is to convey to the grantmaker con- 126 Financial Resource Management: Sport, Tourism, and Leisure Services

fidence in the organization’s capability to also be articulated. Finally, a description successfully carry the project to comple- of the organizational activities and the tion. Included are key people involved in identification of the services provided to the project, their experience, education, the various constituencies should help to and training as related to the project. emphasize the appropriateness of the ex- Résumés for existing staff should be in- pertise of the organization as it fits with cluded in the appendix with a narrative the proposal. summary in the text. When new staff are proposed as part Budget of the grant project, it is necessary to jus- The budget can be a key factor in tify the positions and demonstrate how successful grantseeking. Convincing the the staff will have adequate responsibili- grantmaker that the budget effectively ties related to the project. Projects that and efficiently responds to the needs relat- propose new positions but fail to provide ed to the grant is important. A well-con- for continuation of the positions after structed budget with a strong supporting the conclusion of the grant may find it a narrative is a positive reinforcement to detriment to successful grantseeking. Fi- the grant proposal. Budgets normally nally, a project relying primarily on new identiify two primary sources of funds: staff will be less attractive than a mix of those requested from the grantmaker, permanent and new staff. and those provided by the grantseeker. The grantmaker normally provides mon- Organizational Information ey, but may also provide other types of The introduction to this section is a resources. The grantseeker can provide description of the grantseeker’s qualifi- a variety of different types of resources. cations or evidence of credibility for the These include money from the operat- proposed project. The introduction tells ing budget, in-kind services (such as staff the grantmaker about the organization, or secretarial assistance), or external re- its mission, its purpose, a brief history, sources (such as sponsors or volunteers). and its general goals and objectives. There In-kind donations are services rendered is a discussion about the organization’s by individuals who are members of the current programs, activities, service sta- organization, the cost of their services, tistics, strengths, and accomplishments. and contributions of services such as of- This section needs to focus on the stra- fice space, utilities, telephone service and tegic plan and progress toward achieving so forth. The total in-kind contribution is it. Also included is a discussion about the determined and added to the budget as function and size of the governing board part of the grantseeker’s contribution. For and its involvement in the organization. example, a secretary who makes $30,000 The grantmaker should be able to get a a year and has 10 percent of her time as- feel for the composition, commitment, signed to the project would represent and involvement of that governing board. $3,000 in in-kind services. Office space Any special constituent groups serving as might be priced at $500 month with utili- volunteers are identified and it is stated ties adding another $30 monthly for an how they support the project’s goals. How annual in-kind contribution of $6,360. the staff will be involved in the proposed The budget should clearly reflect the types project and in the variety of activities fo- of in-kind services provided. The budget cusing on the organization’s mission will process follows the budget procedures Chapter 10 127 explained in Chapter 14. As a guide, the viding a description of different budget budget should: items, or the budget narrative could be written as part of the document. In some • Address (in financial terms) exactly cases, grantmakers provide a budget form what the narrative of the grant has for grantseekers to complete. proposed; • Provide complete compensation in- Evaluation Process formation about each staff position, The evaluation section of the pro- including rate of pay, percent of time posal explains how project outcomes allocated to the project, fringe ben- are assessed. It provides the grantmaker efits, mileage rate, per diem rates, with measures of effectiveness for grant honorariums, and so forth; dollars awarded. Grantmakers increas- • Include actual costs for supplies and ingly demand accountability. Evaluation services related to the project; and is integrated throughout the project. The • Include items paid for by other evaluation process should include an as- sources. sessment of the process and continuous progress toward intermediate and final Figure 10.6 shows how a sample bud- outcomes. A well-prepared evaluation get for a project might be formatted. A process is an important criterion in their supporting budget narrative would only decision making. A checklist for the eval- be necessary to explain unusual or un- uation narrative, at a minimum, includes clear costs. A budget narrative is framed the following: in one of two ways: a footnote style pro-

Item Number Item Cost Total Cost Printing of envelopes & stationery 300 $80.00 $24,000.00 Questionnaire printing 150 $3.00 $450.00 Postage for questionnaire 150 $2.75 $412.50 Data input (student hours) 40 $8.50 $340.00 Data analysis (student hours) 40 $8.50 $340.00 Telephone interview 60 $10.25 $615.00 Qualitative date analysis 120 $15.00 $1,800.00 Travel $0.00 Dissemination of data - conference partial $1,500.00 $1,500.00 Dissemniation of data - conference partial $1,500.00 $1,500.00 Sub-total $30,957.50 Overhead 40% $12,383.00 $12,383.00 Total Requested $43,340.50

In-kind Contributions Co-primary research time 12% $72,000.00 $8,640.00 Co-primary research time 8% $65,000.00 $5,200.00 Beneﬁts 28.70% $13,840.00 $3,972.08 Clerical 23.10% $732.00 $169.09 Total In-Kind Contributions $18,713.17

Figure 10.6 Sample grant budget 128 Financial Resource Management: Sport, Tourism, and Leisure Services

• Explain how the evaluator and the • Describe the evaluation reports. process will be selected. • Explain how evaluation is used to en- • Include an evaluation procedure for hance the project’s progress and out- each goal and objective. comes. • Identify interim outcomes and match them to timelines for the project and Commitment and Capability reporting periods. The grantmaker appropriately asks, • Describe data-gathering methodolo- “What is the potential for success of the gy and connect it to goals, objectives, project?” The answer to this question and timelines. comes only after a careful review of the • Describe any instruments or tools grant proposal reveals soundness in con- used and how they support the proj- ceptualization, effectiveness in design, ect. and confidence in delivery. Confidence in • Explain how evaluation data are used delivery comes, in part, from demonstra- and disseminated to stakeholders. tion of the grantseeker’s commitment to

CASE STUDY (part 3): Building the Grant Proposal

Following the meeting with the foundation executive director, the recreation director returned and met with the aquatics supervisor and assistant director. The director described the process that the department needed to follow. It would involve a letter describing the program, how much money was requested, how it would be used, and how the program would achieve sustainability. The working group of three created a strategy for acquiring the grant. The aquatics supervisor provided information about all agencies currently providing recreation programs for people with disabilities. The assistant director began to gather information about operating costs for the program, available department facilities, program adaptations, etc. The director focused on funding strategies and gaining city council support. For the director, the first step was to determine a strategy leading to sustainability. After conversations with a number of colleagues and the city council member responsible for parks and recreation, a strategy was formulated. Selling the strategy to the city council was the next step for the recreation director. This small but committed project team met at least weekly to discuss what was learned, identify new issues, and refine strategies. For example, the aquatics supervisor felt that, if the grant was successful, other agencies might expect the city to provide all services and discontinue their current involvements. It was determined that 11 agencies were currently providing services. A meeting was scheduled with individual agencies, and the aquatics supervisor and director met with each agency’s manager. Two questions were asked. First, each organization was asked to write a letter of support for the grant. Second, each organization was asked to commit to its existing level of service for at least five years. Every agency agreed. This could not have occurred without the groundwork that the aquatics supervisor had done over a four-year period of working with these groups. Next the director and assistant director organized the budget. It required them to look five years into the future to anticipate costs. They arrived at a $100,000 first year costs for salaries, travel, and supplies. Then, working with the city comptroller, a 5.5 Chapter 10 129

CASE STUDY (part 3): Building the Grant Proposal (continued)

percent annual growth was projected. Detailed costs were developed for the first year, and years two through five depicted the adjusted growth. Next, the director focused on funding the grant. The foundation executive director suggested that strategic partnerships and creative financing would enhance the grant’s potential for funding. The recreation director proposed a six-year model of cost sharing. The proposal called for 100% funding by the foundation in year one and a 20% reduction in the foundation’s commitment in years two through five. The city would make no contribution in the first year, but beginning in the second year would contribute 20% to the cost of the program and an additional 20% each year until, in year six, the city would cover the cost of the program. The recreation director also committed the department to actively seek out additional grant sources with a goal of meeting 50% of the cost of the program by year six. The director met with each city council member individually to secure their support. It was forthcoming in a letter signed by the mayor and committing the city’s funds to the project. The director put a packet together under an appropriate a cover letter. The packet included the request, nature of the project, funding level requested, explanation of the city commitment, and the timeline. The letter from the Mayor was attached, as were the 11 support letters from the not-for-profit agencies. The letter was submitted to the foundation’s executive director.

and capability of achieving success. The good grammar, and be easy to read. Be- grantseeker explains how similarly fund- fore sealing the package for delivery to ed projects have been successful, how the grantmaker, the grantseeker should the presence of staff, facilities, and other complete one final review, ensuring that resources all contribute to the potential all materials are included and in the re- success of the proposed project. A con- quested/intended order. cise discussion of strengths, resources, and successes allows the grantmaker to Step 5: Grantmaker’s Decision gain a clearer picture of the grantseeker’s The grantmaker can make one of sev- capability. This section of the proposal is eral decisions regarding a proposal. The not long, but provides critical support to grantmaker may (1) award the grant in the preceding sections. full, (2) make a partial grant award, (3) defer consideration of the proposal to a Step 4: Submitting the Grant later date, or (4) deny the grant request. If Proposal the final option is taken, the grantmaker The culmination of the grantwriting is under no obligation to explain why the process is the submission of the grant proposal was rejected. In the same re- proposal to a grantmaker. All of the com- gard, the grantseeker should not read a ponents described in Step 3 are included lack of worthiness or value into a rejec- in the proposal. The submitted proposal tion. A grant rejection may be due to a must have a professional look. It should lack of available funds, an overabundance be bound if it is large, should conform to of similar proposals, or it may have fallen 130 Financial Resource Management: Sport, Tourism, and Leisure Services

outside the guidelines of the grantmaker. Even when full funding is awarded, In some cases, the grantmaker will ask for the grantseeker still must choose to accept changes in the proposal with a resubmis- the grant. A grantmaker may attach con- sion. Regardless of whether the grant pro- ditions to the funds, and the grantseeker posal is rejected, funded in part, or needs will have to determine if they are appro- modiﬁcation, the grantseeker should call priate. An important deciding factor in the grantmaker and ask how the proposal the acceptance of a grant is whether the might be strengthened. This feedback project can be accomplished and whether may be important in strengthening the it remains consistent with the values and grant proposal for future submissions. mission of the organization. In cases where only portions of the grant were funded or where there was Step 6: Grant Administration a decision to defer to a later time, the Grant administration involves man- grantseeker must decide whether to ac- aging the project for which the grant cept the decision of the grantmaker or was awarded, along with maintaining to withdraw the proposal and seek an- appropriate communications with the other grantmaker. This can be a diﬃcult grantmaker. Some grantmakers choose decision, as the grantseeker has invested to have little contact with the organiza- considerable energy in the process. If tion after an award is made, but most re- the grantseeker determines that it may quire some type of ongoing contact. The have a better opportunity elsewhere, grant administrators should consider then it may be appropriate to seek an- the following: other grantmaker.

CASE STUDY (part 4): Administration of the Grant

The funding proposal was successful and it was awarded in February, with a July 1 starting date to conform to the city’s budget calendar. Several tasks occurred simultaneously. The department set up a separate account to administer the program from money received from the foundation. Later, two accounts were established, one tracking city contributions and expenses and the original to track expenses and revenue received from the foundation, or other anticipated gratuitous income sources. The city established a relatively seamless approach for the administration of funds and determination of cost centers. The aquatics director was charged with preparing a job description for the new staff person (funded by the grant), and to conduct the search process (working with human resources and coordinating with the not-for-profit agencies). A few not-for-profit organizations were invited to participate in the interview process. The assistant director, working with a local university, established an assessment process to begin with the receipt of grant funds on July 1 and continuing beyond the life of the grant. The director committed to quarterly progress reports with distribution to the foundation, city council, and the park and recreation board. Several years later, the program was working well, meeting the defined outcomes, jointly funded by the city and the foundation and by several local individual and organizations. Some not-for-profit organizations made efforts to reduce their services, but were reminded of their commitment. Chapter 10 131

• Where feasible, have a single point of Knowledge of all the requirements contact from the grantseeking orga- of the grantmaking organization, as well nization to the grantmaking organi- as the criteria of the grant, will ensure a zation. This simplification enhances more effective administration process. communication and reduces the po- Summary tential for confusion. • Don’t leave questions about the grant Grantseeking is neither a complicat- unanswered. Make contact with the ed nor a mystical process, but it can be grantmaker to resolve issues before a time-consuming process. Successful or- they become problems. ganizations have implemented the steps • Always make contact with an indi- outlined in this chapter. Identifying po- vidual, and not with an organiza- tential grantmakers, paying careful attention. tion to detail, and taking time to learn the • Include the project name and grant grantseeking process frequently results in identification number on all corre- successful receipt of grants. Thankfully, spondence. most worthy ideas can be matched to the • All correspondence should be clear interests of generous, willing grantmak- and specific. Do not assume people ers. The decision to award a grant is based know the issue being discussed. on the sustained efforts of the grantseeker • Always seek permission before mak- to find a grantmaker that is a good match ing changes in the budget. for a proposed project. • Make regular progress reports to the grantmaker. Any deliverables such as References news letters, reports, brochures, and annual reports should be provided. Foundation Center. (2006) Foundation Growth • Stick to the timeline. If changes are and Giving Estimates. Foundation Center: New York, NY. required, seek approval from the Smith, S. H., & McLean, D. D. (1988). ABC’s grantmaker. of Grantsmanship. Reston, VA: American • At the conclusion of the report, sub- Alliance for Health, Physical Education, mit all required information in a Recreation and Dance. timely and complete manner.

NOTES 132 Financial Resource Management: Sport, Tourism, and Leisure Services C H A P T E R 1 1

Philanthropy and Fundraising

Introduction not-for-profit fundraising. Furthermore, many and varied training programs on In contemporary government enter- fundraising designed for sport, tourism, prises and among not-for-profit orga- and leisure service professionals are of- nizations, the traditional reliance upon fered by major fundraising organizations support from the general fund is waning. and universities. This chapter looks at the Although the expectations for meet- concept of philanthropy and the process ing social needs placed on many sport, of fundraising as it applies to sport, tour- tourism, and leisure service and other ism, and leisure service organizations. not-for-profit organizations are increasing, budgetary resources are stagnant in many organizations and declining in oth- Philanthropy ers. Partnering with philanthropic and not-for-profit organizations and individu- A charitable act is a social exchange als is increasingly becoming an attractive that occurs each time a gift is made. and necessary approach to securing ad- The decision to make a gift comes after ditional resources. It is not unusual in someone trusted by the donor asks. A forums conducted by the National As- gift implies a considerable level of con- sociation of State Park Directors, for fidence and trust in both the asker and example, to have as much as 60 percent the charitable organization’s ability (and of all presentations focused on partner- faithfulness) to do what is “right” with ing, friends’ groups, and philanthropy. the donation. One state reported the simultaneous cre- Philanthropy is synonymous with ation of almost 200 friends’ groups with charitable giving. While charitable giving 134 Financial Resource Management: Sport, Tourism, and Leisure Services

is perceived as giving for the social good, Organization Handbook for the express the social good is increasingly being in- purpose of extending the resources of the terpreted in a broader context of issues. Florida Park Service. Hundreds of Amer- In the narrowest sense, charitable giving ican cities have developed foundations is giving resources to those in need or to to support their social service programs. organizations that assist them. This per- Many state sport corporations are highly spective of giving has been broadened to dependent on charitable giving for their include all types of philanthropy, which support. Philanthropy has become inter- can be defined as an act of trust on the twined with daily services and programs part of a donor toward the organization provided by sports and sport, tourism, that will receive and use the donation. and leisure service organizations. The philanthropic process is uniquely Both independence and volunteer- American. No other region in the world ism characterize philanthropy. Indepen- has the same level of giving, nor the so- dence is a characteristic in the sense that cial and governmental structure to allow individuals and organizations making such massive levels of giving. In 2004, donations give independently of condi- over $248 billion were donated to chari- tions that could have been associated table causes. Of that amount, $187 bil- with the gift. In philanthropy, the gift is lion were donated by individuals, and the given voluntarily; that is, the donor does balance was donated by foundations and so of his or her free will with the intent of corporations. promoting a particular purpose or meet- Philanthropy is an activity of and re- ing a particular need. source to individuals and not-for-profit organizations. It is not-for-profit organizations working in conjunction with Why Fundraising is Important individuals and public and private organizations that secure donations from There are many good reasons to use individuals and other not-for-profit or- fundraising to develop and sustain pub- ganizations and foundations. Sometimes lic and not-for-profit sport, tourism, and referred to as the third sector, philan- leisure service organizations. The Philan- thropic organizations focus on meeting thropy and American Outdoors Work- social needs that are neglected by other shop (Ross, 1997) suggests 10 reasons sectors. In public park and recreation or- why organizations should include fund- ganizations, for example, there has been raising in their revenue structure plan: a steady decline in financial resources made available from the public purse 1. There is growing evidence that public to fulfill the public recreation mission. agencies at all levels of government To counteract this, public agencies have are becoming increasingly depen- turned to the philanthropic sector. The dent upon external philanthropic National Park Service is probably the support. Traditional services offered leader in this movement, although other by public agencies are either dwin- federal land-managing agencies, state dling or being replaced by for-profit park agencies, public recreation depart- enterprises. ments, and many not-for-profit sport or- 2. Philanthropy is one of America’s ganizations are close behind. The Florida most distinctive virtues. Giving to Park Service produces a Citizen Support public/society benefit purposes and Chapter 11 135

giving to leisure, sport, and environ- philanthropic dollars are spent. ment and wildlife has experienced 9. We are faced with what Andrew significant increases in recent years. Carnegie called “the proper admin- 3. The “Greening of America:” Con- istration of wealth.” He formulated tributions to environmental causes, three alternative ways of disposing of including our parks, forests, open wealth: bequest it to one’s relatives, spaces, and wildlife, is big business— endow it to the public good, and ad- almost $7 billion annually. The nu- minister it during one’s lifetime for merous not-for-profit environmental public benefits. Carnegie preferred and park support organizations hope and practiced the third alternative. to benefit as current generations pass 10. From fundraising to the stewardship unprecedented wealth to the baby of gifts received, sport, tourism, and boomer generation—an estimated leisure service organization profes- $12 trillion by 2015. sionals demonstrate their public 4. Tax-law changes are having an im- trust. pact on the amounts and kinds of gifts Americans make today. Capital gains, appreciated property, estate The Role of Fund Development planning, charitable trusts, endow- ments, gift annuities, bequests, etc., The roles of fund development can be are becoming part of our everyday many. Regardless of how the organization language in the public and private is structured, it is how the philanthropy not-for-profit community. dollar is used and how effectively the do- 5. Sport, tourism, and leisure service nor or potential donor perceives that use organizations are well positioned to that is of most importance. Some of the make the case for philanthropic sup- roles include the following: port. They are in the quality-of-life and resources business. • Building community: Sport, tourism, 6. Socially and environmentally ori- and leisure service organizations ented public service professionals have long been involved in building have those desired qualities to make communities. They are seen as con- fundraising a success: a dedication tributing to the quality of life of com- to fulfilling a public trust; a desire munities. The Riverwalk Foundation to work with both the general public in Naperville, Illinois, focuses on and those with affluence or influence securing funding that will build the (hopefully, both); a willingness to ask quality of life along the community’s the hard questions; and an ability to river that runs through the down- communicate a sense of urgency. town. Other community foundations 7. Partnership building is here to stay have focused on improving the com- and is critical in obtaining the diverse munity. philanthropic support available. • Funding opportunities to invest in 8. Individual citizen donors and vol- human capital: This is a frequent unteers are marching to a different source of giving. Sport, tourism, and drummer today, demanding ac- leisure service organizations have countability, ownership in what they their foundations in human capital give to, and a direct voice in how the and continue to strengthen their in- 136 Financial Resource Management: Sport, Tourism, and Leisure Services

volvement in this area. anthropic organization makes sure its • Seeking a design to allow the accom- potential and actual donors understand plishment of objectives: The City of the tax advantages of giving. Another Baltimore, Maryland, when faced reason for giving is for gratitude or for a with a $500,000 annual deficit in its commitment to public service that will golf course operations, reorganized lead to a better society. Some individuals them under an independent not-for- hope to gain appreciation and public rec- profit corporation. The not-for-profit ognition for their efforts. In some cases, corporation was able to receive gifts, givers may hope for redemption. Some but more importantly, it reorganized give out influence in the form of guilt or golf operations in such a way as to re- competitiveness by challenging others lieve the public from a significant tax to give at the same level or by offering burden. a matching grant as an incentive. Other • Offering a means for donors to ful- philanthropists want to create a memo- fill their aspirations: Friends of the rial to themselves or others who are dear outdoors, friends of parks, friends to them. Many buildings, parks, monu- of wildlife, sports corporations, state ments, and tourist attractions are created tourism bureaus, and similar types of as memorials to an individual or a family friends groups provide donors with (e.g., Rockefeller Center, Carnegie Hall). the opportunity to give of both their An observant walker on any college cam- time and money. These are among pus or public park will note the names the most popular approaches to giv- on benches, fountains, and buildings that ing in the United States. were made possible by the generosity of a successful alumnus, family, or friends. Finally, some donors want to keep their Why People Give life’s work in the family and make sure it is perpetuated for future generations Understanding why people give is through the creation of foundations. as important as knowing how to ask for money. Not all people are motivated to give for the same reasons. Several reasons Charitable Organizations have been suggested for giving. For some, it fulfills social, religious, or philosophi- Most charitable organizations are cal convictions. Religious organizations organized under the Internal Revenue receive the largest amounts of charitable Service (IRS) tax code as 501(c)(3) classi- contributions. Social and philosophical fication. In order to qualify for 501(c)(3) reasons are inherent in society as mo- status, an organization must meet certain tivations for giving. When Ted Turner, requirements. Included for foundations founder of the Cable News Network and (which are the most common in support other major cable television channels, of sport, tourism, and leisure service or- pledged $1 billion to the United Nations’ ganizations) are articles of incorporation efforts, it was for philosophical and social that have been filed with the appropriate reasons. state authorities. Requirements for incor- The government has made charitable poration vary in each state. The IRS also giving an obvious tax advantage, both at requires that the organization provide a the federal and state levels. Every phil- detailed narrative of all of the activities of Chapter 11 137 the organization—past, present, and fu- Fund Development ture. The Florida Park Service has provided the following narrative as an example Fund development is a planned pro- to consider: cess that involves promotion of understanding, participation, and support. It Activities of a Charitable is a process of encouraging the public to Organization Established to give of its time, talent, and resources to Support the Park System play an active part in achieving the or- • Development of Educational Me- ganization’s goals. Figure 11.1 illustrates dia: The development of at least five a perspective of the development of do- educational videos relating to the re- nors. The development process involves sources, management practices, and the three stages shown to the left in Fig- recreational opportunities in Florida ure 11.1. They include the contact phase, state parks. the growth phase, and the commitment • Promotion of Florida State Parks: phase. Fund development is a process of Undertake a program to promote finding and nurturing potential contacts Florida state parks through the pro- until they become donors committed to duction of three driving tours of the cause of the organization. Such a pro- three representative Florida ecosys- cess can take years to accomplish. tems. Also, help sponsor traveling Fund development is a strategic mar- exhibits on Florida state parks. keting process designed to bring together • Development of Endowment Fund: potential donors with the not-for-profit Commence the establishment of a organization in such a way that both ben- dedicated endowment fund for the efit from an exchange. The donor may support of major needs in Florida be giving for altruistic reasons or for fi- state parks. The fund will be estab- nancial benefit. The marketing process lished and administered by a com- is different from the type of marketing mittee of the board of directors. that a commercial organization practices. While there are some similarities, there The charitable organization also are also some significant differences. The needs to identify its sources of income, product that a commercial organization describe its actual and planned fundrais- sells is a tangible benefit or commodity to ing program in detail, and provide the the customer. In some sense, charitable names, addresses, and titles of the of- organizations provide the same advan- ficers of the board of directors. If public tages, in terms of tax benefits, but as pre- officials are involved in the organization, viously discussed, they also provide some they must be mentioned by title. Many of philosophical, social, and cultural ben- these organizations receive all or part of efits that commercial organizations are their administrative support from the or- not well suited to provide. The marketing ganizations they serve. If so, this must be campaign of the charitable organization noted in the IRS submission. Additional focuses on securing committed donors. information requested by the IRS includes The three phases depicted in Figure 11.1 activities and operational functions fo- are further divided into eight levels within cusing on the assets of the organization, the pyramid. The initial contact phase is as well as financial data for the current important for maintaining a base of new year and the three previous years. and committed donors. The universe of 138 Financial Resource Management: Sport, Tourism, and Leisure Services

The Commitment Ultimate Phase Donor

Planned Gift Donor Personal contact only

Capital Donor Personal contact only Growth Phase Special or Major Gift Donor Personal contact/ Letter/Personal phone call

Renewed/Upgraded Donor Personal phone call

First-Time Donor Direct mail/Telemarketing/Door-to-door/ Media/Special event/Internet contact Initial Contact Phase Prospective Donor Prospect research and cultivation for giving

All Potential Donors/The Consumer Base Mass media interpretation/Broadcast market

Figure 11.1 The donor pyramid

suspects, or consumer base, is seen as all sponsive prospects. Table 11.1 illustrates individuals who might be contacted. This three characteristics for segmenting the is a global population of potential do- population by a cultural organization. nors from which the organization could The elitist group was seen as its primary potentially draw. In reality, only a small long-term benefactors, while the other part of the population is going to become two groups were seen as less promising actual donors. With limited funds avail- sources of donors. able for the search for new donors, the First-time contributors are the life- charitable organization must begin to blood of an expanding donor pool. Not narrow its list of potential donors. Some only does this group represent a new organizations maintain proﬁles of donors source of money, but also a new contact. to assist in eﬀorts to target the most re- The charitable organization immediately Chapter 11 139

Table 11.1 Population titles and characteristics as donors (Golan, 1998)

Sociodemographic title Population characteristic Targeted nonproﬁts

Elitist Socio-economically top tier Arts and culture individualists. Provide cutting edge International affairs corporate and foundation support. Environmental issues Targeted for planned gifts. Political and social issues

Elite and Democratic Access All of the above, plus mass appeal Higher education and special events. Environment Social services

Mass Appeal Some of the above. Direct mail Health care approach. Some advertising Education campaigns will reach. Social services

moves the new donor to the growth phase. organizational needs is the greatest im- The narrowing of the population of do- portance. Growth in this phase comes nors to those who might give is critical. when the donors see their gift as some- Whether the winnowing is done through thing that meets their desires. They have a mass mailing, telephone calls, or indi- become committed to the charitable orga- vidual contact, the charitable organiza- nization or some aspect of its operations tion needs to maximize the efficiency and and are willing to commit some of their effectiveness of the contact. Researching financial resources to it. At this level, per- and knowing potential donor sources is sonal contact becomes more and more critical and discussed in more detail in important to the success of the effort. the section on annual campaigns. A few donors will move from the In the growth phase, the donor begins growth phase to the commitment phase, to receive more frequent or sustained con- and, as might be expected, the size of tact from the charitable organization. The their gifts will increase. The frequency of intent is to encourage the donor to change gifts may decrease, although this is not al- from a once a year minimal contributor ways the case, but the size of their gift and to one who makes multiple annual dona- its impact on the charitable organization tions. The goal is to create a commitment will be significant. These are the donors to the charitable organization’s goals and who will give $1 million or more to en- mission that will continue to grow, along dow a chair, or $500,000 to build a com- with donation size. As depicted in Fig- munity structure, or $200,000 to endow a ure 11.1, there are three levels of contact scholarship fund. and giving used in this phase, each one Finally, as illustrated in Figure 11.1, requiring a higher level of involvement the once-large pool of donors continues on the part of the charitable organization to get smaller as the charitable organiza- and resulting in a higher level of giving tion moves toward securing the ultimate by the donor. donor. The willingness of the donor to The growth phase typically occurs give is a function of both economics and over several to many years. In the growth commitment to the charitable cause. An phase, matching of donors’ desires with individual with a desire to give much, 140 Financial Resource Management: Sport, Tourism, and Leisure Services

but whose economic resources are lim- drawn to charitable organizations because ited, may always be a special or major gift they believe that they have the ability to donor. The ultimate donor has the eco- make a difference. For example, the Ri- nomic resources to make a gift that has ley Foundation has supported Bradford a major impact on the charitable organi- Woods summer camp programs for indi- zation’s ability to achieve its mission. As viduals with disabilities for over 50 years, each organization strives to develop the during which time it has funded many ultimate donor, it would be unwise for it major capital improvements. The Riley to focus all of its energies on this limited family established and made the initial field of donors. It must rely on diverse, investment in a foundation that supports multitiered fundraising and donor devel- the Bradford Woods summer camp pro- opment efforts. gram, along with many other programs for children with disabilities. Cultivating major donors requires a long-term com- Fundraising Sources mitment on the part of the board and the chief executive officer (CEO) of the char- A successful fundraising program itable organization. It requires personal draws upon at least seven different po- communication from peers, prompt ac- tential sources of funds. These include knowledgment of communication and individuals, boards and board members, gifts, and the dissemination of advanced corporations and industry councils, foun- news of the charitable organization’s ac- dations, special events, government, and tivities. planned giving. Corporate and industry councils have Individuals constitute the most sig- been consistent givers to philanthropic nificant source of all philanthropic dollars causes. Since 1950, they have given about available to charitable organizations. Ma- five percent of total contributions (about jor donors are cultivated over a period $12 billion annually). Many corporations of time and provide the core of success restrict their giving to local communities to many charitable organizations. These where they have operations. They do so individuals are important because they for many reasons, including strengthen- generate an enduring personal loyalty ing the community, enhancing board to the charitable organization. Typically, connections, stimulating economic de- these individuals have the interest and velopment, and providing educational wealth necessary to act on their enthu- outreach. Most corporations have a sep- siasm for the benefit of the charitable arate corporate foundation into which they make donations and from which organization. Major donors have become they award grants. Gaining access to cor- benefactors for risky projects, provid- porate foundation grants is facilitated by ing necessary capital to successfully continuous nurturing of a relationship undertake a project that the charitable between the foundation and the sport, organization might not otherwise fund. tourism, and leisure service organization. Finally, these individuals have extensive The Battle Creek, Michigan, Parks and contacts and can bring others (and their Recreation Department, for example, money) to the charitable organization. has consistently worked with the Kellogg Although they will be few, the major in- Foundation to ensure a steady source of dividual donors should be recruited and capital income for park and recreation nurtured with great care. Individuals are facilities. Chapter 11 141

Boards and board members are an in the form of grants to sport, tourism, important source of income and prospec- and leisure service organizations, but tive donors. Board members of charitable may also include special supportive leg- organizations have usually made large islation. The value of the latter is well donations or are expected to contribute understood by the Miami–Dade County during their tenure on the board. In ad- Parks and Recreation Department, which dition, board members identify and work maintains a full-time liaison with the with potential major gift givers. state legislature. This person’s assignment Charitable organizations and sup- is to lobby for the department’s interests. port foundations occasionally reach Government is an especially important out to other foundations as sources of source of funds for capital projects. How- funds. Many foundations only give to ever, capital development funds from intermediary foundations or charitable the government are not usually forth- organizations. The search for and use of coming without an intense amount of foundations as a major income source re- lobbying and preliminary work. The cost quires considerable effort, but can result and uncertainty associated with seeking in sizable contributions. government funding may sometimes be Special events can be a major source too great. Many small communities have of income for some charitable organiza- learned not to hold out too much hope tions. The extent to which special-event for the government to provide them with fundraising is used depends upon the money that may not be forthcoming, or purpose and focus of the charitable or- have found that, when government fund- ganization. Sports organizations, cultural ing does come, it is too little to support groups, and symphonies are a few ex- what was planned. amples of groups that use special events Planned giving is discussed later in extensively. Whether it is a “run for this chapter. It is a core process that helps youth” or a “jazz festival in the park” or to make a charitable organization self- a “riverwalk festival,” the purpose is the sustaining and also allows it to grow. same: to raise community awareness about the charitable organization and its function and purpose, and to raise mon- Goal Setting, Relationships, and ey. Special events bring in diverse donor the Gift Pyramid groups that might not otherwise be interested in the charitable organization. A Any successful fundraising effort is positive spin-off of special events is the grounded in goal setting. Figure 11.2 il- publicity it generates and the potential lustrates the relationship of organization it offers for board development. On the goals to gift-giving potential, as well as to negative side, the cost-benefit ratio of a the organization’s mission statement, to special event is sometimes quite low. Spe- the board, and to the staff. A sport, tour- cial-event fundraising is not always an ism, and leisure service organization’s effective long-term single-focus strategy, mission statement answers the follow- but it does serve as an important ingredi- ing: (1) who is served, (2) what services ent in the mix of effective fundraising. are provided, and (3) how the services Government at all levels is perceived are delivered. The mission statement is a as a potential supporter for charitable starting point for the charitable organiza- causes. Such support frequently comes tion’s fundraising efforts. Some charitable 142 Financial Resource Management: Sport, Tourism, and Leisure Services

Mission/Vision Statement

Board Staff

Opportunities for Gifts

Figure 11.2 Goal relationships in fundraising

organizations call their mission state- to the size and nature of the organization, ment a “statement of purpose.” Th e Parks their level of expertise in fundraising, and Wildlife Foundation of Texas, Inc., and the expectations of the board when it identifi es its purpose as being “to provide comes to staff involvement. private support for the eff orts of Texas Opportunities for gift s represents the Parks and Wildlife Department.” It fur- range of potential program areas and ther states that the department and the services to which donors might give. foundation play a leading role in ensur- Th ey are defi ned by the charitable orga- ing both the protection of Texas’ unique nization and represent the development heritage and the provision of full outdoor and accomplishment of their mission. opportunities for future generations. Th e leaders of the organization develop Th e staff plays an important and on- and implement strategies that build on going support role in fundraising. Th e their individual and collective strengths. annual giving program is a major focus Such strategies might include signing let- of the charitable organization’s employees ters, attending top-level meetings with and volunteers. Th ey are the behind-the- potential donors, making strategic calls, scenes workforce ensuring the success of attending media opportunities with do- the campaign without becoming directly nors, attending receptions, and generally involved in the publicly visible parts of creating a high level of public visibility. the process. Public appeals are reserved Th e board defi nes the opportunities for for the CEO, members of the board of di- gift s with the help of signifi cant input rectors, or honorary spokespersons. Th e from the chief executive offi cer and the activities of the staff will vary according support staff . Th e strategy to actually re- Chapter 11 143 ceive the proposed gifts is part of organi- to providing funds to another organiza- zational goal development. tion, this is taken into account as part of Each charitable organization has a the committed funds. Another goal-set- unique perspective on its expectations ting activity is the identification of which of the board’s role in fundraising. All programs and functions will require ex- boards of directors have multiple respon- ternal funding and which can be support- sibilities. They have a general responsibil- ed either by internal funding sources or ity to govern the organization in such a through direct cost recovery from sales, way as to ensure the success of its mis- fees, etc. sion—which also assumes a fiduciary, The act of setting an achievable goal programmatic, and capital responsibility. for contributed income is based on sev- Secondly, the board is responsible for the eral factors, such as the history of giving recruitment and selection of board mem- to the charitable organization, the level of bers who agree with the mission of the current giving, current economic condi- organization and can potentially give to tions, the frequency of past appeals and the organization. Most boards have some their effectiveness, and the attractiveness type of annual retreat, where they dis- of the programs. cuss the charitable organization’s mission Table 11.2 illustrates a budget that and functions, build board relationships, defines a gift goal. In general, projected and strengthen staff and board relation- contributed income should be set at 90 ships. Board members are expected to percent of the previous year’s donation make major efforts in securing funds for level. This practice allows for the inci- the charitable organization. These efforts dence of donors who may not continue may include an expectation for them to contributing to this charitable organiza- personally make donations. One major tion. The remaining 10 percent of the gift symphony, for example, expects each goal must be met through the contribu- board member to make a minimum an- tions of new donors, or else the need pro- nual contribution of $650,000. Failure jection should be reduced. to do so means removal from the board. While not all boards have this same type The Gift Pyramid of requirement, almost all expect con- The rule of thirds (see Table 11.3) tributions and fundraising efforts from represents a commonly accepted stan- their members. dard for planning levels of giving. It is a useful tool in goal setting. The rule of Goal Setting thirds suggests that a third of the fund- The annual campaign involves the ing goal will come from 10 to 15 gifts; the establishment of fundraising goals. The next third will come from the next 25 do- goals should be realistic and designed to nors; and the final third will come from meet the charitable organization’s iden- all other gifts. The rule of thirds reminds tified needs. Goal setting begins by ex- fundraisers not only where their potential amining the charitable organization’s fi- donors are coming from, but also where nancial needs for the coming year. This to concentrate their energies. Obviously, examination involves constructing an the rule of thirds is to be used as a guide operating budget that shows all commit- and not as a formal expectation. ted and desired services and programs. If the charitable organization is committed 144 Financial Resource Management: Sport, Tourism, and Leisure Services

Table 11.2 Example goal setting using a budget

Budget Amount Totals Goal Expenditures Committed funding $750,000 Desired funding $450,000 $1,200,000 Income Earned income $350,000 Deferred income/Investment income $600,000 Special events $50,000 $1,000,000 Desired contributed income (Goal) $200,000

Fundraising Strategies rect mail or telephone solicitation will secure a first-time donor and may retain A successful fundraising process re- a donor in the early stages of commit- quires a variety of strategies designed to ment, it will not likely entice individuals take advantage of different donor lev- at the top of the gift pyramid. Diversify- els. A fundraising campaign recognizes ing fundraising strategies is essential. different types and levels of donors and This section looks at annual campaigns, makes appropriate overtures. While di- planned giving, special events, and sup-

Table 11.3 Rule of thirds—example of gifts/prospects needed for a $2,500,000 capital or endowment campaign

Gift Level Gifts Needed Prospects Needed Total Dollars

Top Third $250,000 1 1 $250,000 $150,000 1 2 $150,000 $100,000 3 6 $300,000 $75,000 4 8 $300,000 Subtotal $1,000,000 Middle Third $50,000 10 16 $500,000 $25,000 15 45 $375,000 Subtotal $875,000 Bottom Third $10,000 20 75 $200,000 $5,000 40 100 $200,000 $2,500 50 125 $125,000 Under $1,000 Many Many $100,000 Subtotal $625,000 Grand Total $2,500,000 Chapter 11 145 port organizations as differing strategies. on ongoing operations. These donations The strategies do not represent all those are typically unrestricted, allowing the available, but constitute effective strate- organization’s managers to determine gies organizations utilize. how to best use the money. There are four types of fundraising The two most common methods of campaigns. The annual campaign focus- conducting an annual campaign are mail es on raising funds for annual operating and telephone solicitations. Direct mail expenses. Planned giving takes a longer- is the least expensive annual campaign term perspective and focuses on different fundraising methodology. Most annual types of gifts that may not be available campaigns use some type of direct mail for years. Special events are a less effec- strategy. The development of a success- tive way of securing income, but raise ful mailing list requires considerable ef- the level of community awareness. Capi- fort. Returns from cold, or untested, lists tal campaigns (which are described else- can be as low as one percent, while on a where in this book) reflect the need for more predictable, or tested, list, as high not-for-profit organizations to invest in as 66 percent. The more refined the list, construction, land acquisition, or other the higher the expected return. Greater major purchases. accuracy and currency in the mailing leads to a higher rate of return. Another Annual Campaigns factor affecting the rate of return is how Annual campaigns are the primary well those who receive the mailing know source of income for annual operating the charitable organization. This factor funds for many organizations. An annual is termed “name recognition.” Organiza- campaign is an organized process that tions with greater name recognition can raises a specific amount of money over expect a higher rate of return from direct a specified period of time. Examples in- mailings. clude the United Way, public radio and When retention is the goal of the television stations, the Red Cross, Boys mailed message, additional strategies and Girls Clubs, and the Girl Scouts. The are developed. The strategies should in- development of a well-planned annual clude multiple (two or more) mailings (or campaign requires considerable effort on contacts requesting donations) per year, the part of the not-for-profit organiza- thank-you notes, newsletters, and other tion’s staff, its board, and volunteers. The methods of communication. Effective di- annual giving campaign has two primary rect mail campaigns should: functions: (1) to acquire new donors; and (2) to retain donors and upgrade their • Raise funds cost-effectively. level of giving. • Dramatically increase the number of The annual giving campaign gener- donors to an organization. ally results in low levels of donations ($1 • Increase the visibility of the organiza- to $50), but this is more than offset by the tion among the general public. number of donations made. Annual giv- • Help identify better prospects for ing campaigns are seen as a predictable other giving strategies. source of income because income tends • Identify potential volunteers and new to fluctuate minimally. The donations workers for the organization. received are intended to provide a short- • Reach a greater number of those you term benefit to the organization focusing want to reach in the way you want to 146 Financial Resource Management: Sport, Tourism, and Leisure Services

reach them. regard to how they will be used, or the • Give more control to the develop- donor may choose to put specific condi- ment aspect. tions on the gift. The larger the gift, the • Provide instant gratification. more likely some parameters will be es- • Give the not-for-profit organization tablished. the opportunity to tell the full story. Bequests, by contrast, are made avail- • Be individualized/personalized and able to the charitable organization only segmented to a specific audience. after the donor dies and the will has gone through probate. Bequests are the single Telephone solicitations have a higher most important source of income for rate of return, but are more difficult to charitable organizations. Bequests allow conduct. They are usually reserved for the donor to retain control of the dona- those individuals from whom a donation tion throughout his lifetime while simul- is realistically anticipated. Often a letter taneously reducing the estate tax for the to the potential donor precedes the tele- donor’s heirs. Bequests come in many phone campaign. Telephone campaigns forms. They may include a fixed amount are more costly and time-consuming than of money, a percentage of the total estate direct mail campaigns and are therefore or a part thereof, or a specific item in es- expected to result in larger donations and tate (e.g., land, stock). provide a greater percentage of revenue. A life income gift is given to the chari- Staff, volunteers, and board members table organization as an irrevocable gift. should all be involved in telephone cam- The asset is invested by the organization, paigns. with all or part of the income earnings paid either to a single beneficiary or to Planned Giving multiple beneficiaries for a specified pe- Planned giving is an inclusive term riod of time. The charitable organization addressing a scope of philanthropic giv- can use that part of the investment in- ing. It may involve the annual campaign, come from the gift not given to the ben- but more frequently, planned giving is eficiary. Once the beneficiary dies or the associated with other major fund drives. predetermined period of income to the Planned giving is an effort by the orga- beneficiary expires, the full benefit of the nization to ensure its future through a gift is made available to the organization. program where donors are identified, A pooled income fund can be compared contacted, nurtured, and made part of to a mutual fund in the sense that the con- a giving program that benefits the orga- tributions of multiple donors are pooled nization and the individual. In many in- together and managed as a single invest- stances, the results of the planned giving ment. The obvious advantage is the size are deferred, with the actual donation oc- of the fund, allowing for a greater return curring years in the future. and broader investment opportunities. Table 11.4 identifies six different The investment generated from the prin- types of planned giving approaches. cipal provides support to the charitable Outright gifts are gifts of money or organization after the donor’s death. other tangible property given with an The charitable remainder annuity immediate benefit to the not-for-profit trust provides income to both the chari- sport, tourism, or leisure service organi- table organization and the donor. The zation. Such gifts may be given without donor makes a fixed contribution to the Chapter 11 147

Table 11.4 Overview of some planned giving instruments

Type of Gift Form of Gift Benefit to Donor Benefit to Nonprofit

1. Outright Gift Cash Deductible for income Funds available for Securities tax purposes immediate use by the Real securities organization Insurance Frequently without Personal restrictions or terms of property trust 2. Bequest: Anything one owns at the time of the death may be passed on to an organization or person through one’s last will and testament. Moreover, all forms of life income gifts may be in testamentary form to benefit family or friends and will then become available for use by named organizations. 3. Life Income Gifts A. Pooled income Appreciated Variable income that may Ensures future funding securities provide hedge against inflation Cash No capital gains tax on appreciated gift B. Charitable Real estate Same as pooled income funds, plus Ensures substantial future remainder Securities can be tailored to donor’s situation funding unitrust Cash Permits deferred income Includes real estate C. Charitable Cash Fixed income Ensures substantial future remainder Securities Tax deduction in year the gift is made funding annunity No capital gains on appreciated gift; trust alternative mimimum tax may apply D. Charitable Cash Fixed income for a lifetime Portion of funds are Securities Tax deduction early years of gift available to organization Ensures future financing Upon death of insured, remaining payable to the organization 4. Charitable Lead Real estate Allows property to be passed Provides organization with Trust Securities to other with little or no current income for the Cash shrinkage due to taxes length of the trust for a period of 10 years 5. Revocable Real estate All or part of amount placed in trusts Very high percentage of Charitable Securities is available if needed by donor revocable trusts are not Trust Cash Removed burden of managing revoked and thus provide assets future funding 6. Insurance Policies A. Organization is Life insurance Donor gets income tax deduction Organization may borrow made owner for value of policy when transferred on policy and beneficiary Future premium payments may be Organization may cash in of policy current deducted as gift policy in force Donor can make large future Organization may receive gift at small present cost full face value of policy at insured’s death B. Paid-up policy Life insurance Tax deduction based on current Organization may keep is given to an value of policy policy and receive face organization value upon death of insured C. Organization is Life insurance Enables donor to make large future Upon death of insured, named benefi- gift at small present cost organization will receive ciary of policy, Donor may change beneficiary later face value of policy but not owner Donor may borrow on policy

Source: KPMG Peat Marwick, Management Issues Note: This table was revised by the AAFRC Trust for Philanthropy. The trust gratefully acknowledges the advice of the National Committee on Planned Giving. The contents of the table are the responsibility of that trust. This table is for information purposes only and is not a substitute for legal or professional advice. 148 Financial Resource Management: Sport, Tourism, and Leisure Services

not-for-profit with the opportunity to desired. Not only does this type of trust add additional funds. The charitable or- remove the burden of the donor manag- ganization manages the contribution, ing assets, but in many cases, the trust and the donor receives a guaranteed re- ultimately is given to the charitable or- turn on the contribution annually. The ganization. donor can determine when the return When insurance policies are given, begins (e.g., after retirement) or can set it they are placed wholly or partially in the for a fixed length of time (e.g., 20 years). control of the charitable organization. This is known as deferring income. If the There are three methods of providing life return on the investment is greater than insurance proceeds to such an organiza- the amount promised the donor, then the tion. The first is to make the charitable charitable organization retains it as earn- organization the owner and beneficiary ings. The charitable organization even- of a policy currently in force. The donor tually receives the returns. Charitable secures an income tax deduction for the remainder unitrusts are very similar to a value of the policy when transferred, and charitable remainder annuity trust, ex- all future insurance premiums are treated cept instead of a fixed amount, the return as charitable donations by the IRS. The to the donor will vary, depending on the charitable organization has the option of market. cashing in the policy for its current value, The final type of life income gift is a borrowing on the policy, or waiting until charitable gift annuity. This is a combina- the death of the benefactor to receive its tion gift and investment, and it is among value. The second method is for a bene- the oldest and most popular of the meth- factor to give a paid-up policy to a chari- ods of making a life income gift. While table organization. To the donor, the ad- similar to the others previously present- vantage is a tax deduction based on the ed, the charitable gift annuity immediate- market value of the policy. The charitable ly becomes the property of the charitable organization benefits immediately by organization, which then guarantees the knowing, upon the death of the donor, it donor a lifetime income. has a certain level of income. The third A charitable lead trust provides as- method is for the charitable organization sets to the charitable organization for a to be the owner and the beneficiary of specified period of time, but not indefi- the policy. In this instance, the benefac- nitely. It allows the donor to preserve as- tor can make a large future gift at a small sets for himself while providing income present cost. The charitable organization for a charitable organization. The income receives the face value of the policy upon received by the charitable organization the death of the benefactor. One problem is either a percentage of the trust assets with this, however, is the possibility that as annually revalued or a fixed dollar the donor will borrow against the policy amount. A charitable lead trust can be in or change the beneficiary at any time. the form of property, securities, or cash. A revocable charitable trust puts the Special Events resources (real estate, cash, or securities) Special events provide a unique op- in control of the charitable organiza- portunity for an organization to put its tion, but allows the donor to access the mission forward to the public, to secure trust. The donation is placed in a trust new potential donors, and to generate a so it might be available to the donor, if profit. Special events come in many forms Chapter 11 149 and might include runs, festivals, dinners, port organizations may provide guides, social outings, golf tournaments, dances, as well as brochures, exhibits, interpre- and other types of creative approaches to tive areas, and conduct tours or special raising money. Special events are seen as programs. All support groups are mem- an attractive and relatively easy method ber based and may or may not have a of raising money. However, they are time membership fee. Members of the support consuming, require considerable effort to groups can provide special educational be successful, can be financially risky, and needs, serve as a communication liaison may not generate a profit. The easiest way to the community, develop special exhib- to ensure the financial success of a spe- its, and help in other ways. In addition, cial event is to have someone underwrite most support groups are organized in it. When this occurs, all the proceeds such a way that they are able to receive become profit. An underwritten special funds, seek grants, and accept gifts and event can also put a higher level of pres- bequests of money or tangible property. sure on the organization to be successful. Support groups are usually organized as tax-exempt organizations under the Support Organizations umbrella of the parent public or private Support organizations are increas- not-for-profit organization. Each support ingly popular among sport, tourism, and group must operate according to rules leisure service organizations. At the fed- and procedures approved by the parent eral, state, and local levels, “Friends of the organization. Funds, volunteers, mem- Park” or “Friends of the Zoo” or “Friends bers, and potential partners are directed of the Botanical Garden” or “Friends of to the parent organization in order for it the Sports Club” have grown dramatical- to fulfill its mission. Generally, the parent ly. The National Park Service has 64 co- organization has developed a set of pri- operating associations. In Ohio, the state orities and has identified needs to be met park system has over 4,000 volunteers (such as volunteers for special events, who annually contribute over two million funding for capital and interpretive proj- hours of service. In Oregon, a state parks ects, operation of concessions areas, etc.). trust program has been established and Priorities are generally agreed upon in has grown from four to 16 organizations advance by the support group and the since the mid-1970s. The trusts receive fi- parent organization. A well-organized nancial donations, land, and gifts for the support group has a board of directors state park system. In Maryland, friends and a variety of committees who focus groups have operated two smaller parks on meeting the needs of the parent or- and purchased cabins for rental by the ganization. The committees work interstate park as a revenue source. In Indiana, dependently and independently on dif- the state park division of the government ferent projects. The committees become cooperated with a private foundation to highly engaged in the process and meet develop a new state park. The state pur- the needs of individual members, as well chased the land, and the foundation un- those of the support group and the parent dertook a major development. organization. The Florida Park Service views sup- Support groups require the same care port groups, or citizen support organiza- and nurturing that annual campaigns tions, as valuable sources of volunteers to and planned giving programs require. support ongoing operations. These sup- Members of support groups are donors 150 Financial Resource Management: Sport, Tourism, and Leisure Services

and often give considerably more than rivers) can be very helpful in select- just their time. The parent organization ing an appropriate fundraising strategy: should find effective ways of nurturing support group members. These can in- 1. Does this strategy fit with the vision clude member-only lectures, special rec- and mission of the organization? ognition, newsletters, group travel tours, 2. Is this strategy cost effective (as a estate planning seminars, and others—all general rule, will it bring in at least designed to keep members active. twice what it will cost)? Although support groups are formed 3. Will our target constituencies (those to support the parent organization, they we are asking for donations from) re- require a certain level of independence spond well to this strategy? and autonomy. The delicate balance be- 4. Do we have the organizational skill tween independence and interdepen- and expertise we need to carry out dence is an ideal that parent and support this strategy? organizations need to achieve. Some par- 5. Do we have the resources (money, ent organizations have complained they people) to carry it out? have lost control of their support groups, 6. Does this strategy build or strengthen and some support groups protest they our organization and its staff/board/ are just “rubber stamp” organizations. volunteers? Not only should there be sufficient inde- 7. Does this strategy represent a stable pendence to allow the support group to (repeatable) source of income? Does make decisions and be flexible enough to the strategy strive to build repeat do- respond to changing demands and eco- nations, even for one-time activities? nomic conditions, but there should also 8. Can this strategy be integrated into be accountability and shared vision. program activities already planned? If there is an ongoing fundraising program, how does this strategy fit Selecting Fundraising into the existing program? Strategies 9. Has this strategy worked well for us or groups like ours in the past? At some point an organization must 10. Does this strategy take advantage of select a fundraising strategy. The chal- our special fundraising assets (a ce- lenge is to determine the most appropri- lebrity on the board, a member who ate strategy for the needs. For example, owns a restaurant, a large group of should the annual campaign be used for volunteers, etc.)? the purchase of new land or for the board 11. Timing: does this strategy fit well with to secure operating dollars for day-to-day other activities we have planned? support. While there are no formal rules, 12. Are there other benefits accruing there are suggestions for the use of vari- from this strategy beside money ous kinds of fundraising strategies pre- (media exposure, good will, etc.)? sented in this chapter. Table 11.5 identifies 18 approaches to fundraising and six scenarios to use the strategies. Summary The questions posed by River Net- work (a not-for-profit organization Philanthropy and fundraising are an supporting the development of clean increasing part of the budget and fiscal Chapter 11 151

Table 11.5 Suggestions for utilization of fundraising strategies (adapted from the River Network’s “River Fundraising Alert” 11(2))

General Building/ Operating Equipment Reserve Fund Best Strategies Start-up Support Projects Purchase Crises /Endowment Bank loan/line X Bequests X Board requests X X X X X Annual campaign X X X X Capital campaigns X X Corporate proposals X X Earned income X Foundation proposals X X X X Government proposals X In-kind requests X X X X Local business memberships X X Major donor requests X X X X X X (Employee) matching gifts X New members and renewals X Organizational memberships X Special appeals X X X X Special events X X X Workplace campaigns X

operations of sport, tourism, and leisure will find their organizations left out of a service organizations. Managers of these key source of income. organizations must be well versed in the different strategies and methodolo- gies of fundraising and know how phi- References lanthropy can assist their organizations. Sport, tourism, and leisure service orga- Golan, J. (1998.) Comments on fundraising: nizations have been among the recent Winning strategies and practices with a special eye to Carnegie Hall. From notes of beneficiaries of support groups and phil- November 10, 1998, lecture notes given to anthropic efforts. Sport, tourism, and a graduate philanthropy course at Indiana leisure service organization managers University. who ignore the impact of philanthropy 152 Financial Resource Management: Sport, Tourism, and Leisure Services

Greenﬁeld, J. M. (1994.) Fundraising fundamentals. Ross, J. R. (Ed.). (1997.) Philanthropy and New York: John Wiley & Sons. Americans outdoors: Fundraising and River Network. (2004.) Choosing your fundraising partnering workshop. Bloomington, IN: strategies. River Fundraising Alert 11(1 & Indiana University. 2). http:www2.rivernetwork.org/library/ fra2004_v11n2.htm.

NOTES C H A P T E R 1 2

Sponsorship

Introduction of sponsorship. The IEG Report also pre- dicted sport-related sponsorship agree- Sponsorship as a communication ve- ments in the U.S. alone to hit a record hicle for companies to reach targeted con- amount of $9.9 billion in 2007 (+10.8%), sumers has been growing rapidly for the (Sport Business News, 2007). last 25 years. Global spending for spon- Sponsorship can be described as a sorship contracts has increased from $2 “mute” or “non-verbal” medium that tar- billion in 1984 to an approximately $37.7 gets active sport participants, spectators, billion in 2007; that reflects an increase of and media followers in order to enhance 11.6 percent from the $33.7 billion spent the sponsors’ brand awareness and image, in the previous year. According to the IEG and consequently, increase the sponsor’s Sponsorship report, U.S.-based compa- product or services sales (Cornwell & nies increased sponsorship expenditures Maignan, 1998). It is formally defined as in 2007 by 11.7 percent, to approximately “a cash and/or in-kind fee paid to a prop- $15 billion. European companies had erty (typically sports, arts, entertainment, plans to spend $10.6 billion in 2007, an or causes) in return for access to the ex- increase of 11.6 percent from the $9.5 bil- ploitable commercial potential associated lion spent in 2006. Similar trends are also with that property” (Uckman 1995). It is, evident in other parts of the world; Asian in other words, the acquisition of rights Pacific companies estimated sponsor- to affiliate or directly associate with a ship spending to hit $7.4 billion in 2007 product or event for the purpose of de- (+15.6 %), Central and South American riving benefits related to that affiliation companies were expected to spend $3 or association. These benefits may take billion (+11.1%), and companies from all the form of brand image enhancement, other regions combined undertook ap- retailing opportunities through point-of- proximately $1.8 billion (+5.9%) worth sales and various promotional activities, 154 Financial Resource Management: Sport, Tourism, and Leisure Services

naming rights for a sport facility and/or Los Angeles, and the wide acceptance of sporting event, acquisition of media time tobacco corporate sponsorship in motor- for direct advertising, signage, and hos- sports events worldwide (due mainly to pitality. Specifically, sponsorship agree- U.S. government regulations against ciga- ments provide the legal foundation for: rette advertising on radio and television), the nature of sponsorship has dramati- • The right to use the sport property’s cally changed. A market-driven approach brand associations (name, logos, has replaced the previous philanthropic trademarks, mottos) in order to ac- nature of sponsorship activities, and in- centuate the sponsor’s direct associa- volvement in sponsorship agreements tion with the property (exclusive as- and relations is now considered as busi- sociation within a product or service ness-related behavior (Uckman 1995). category, official sponsor/supplier/ Corporations can utilize sponsorship as product, etc.) through advertising a strategic marketing tool to reach their spots, promotional activities, pub- targeted markets of consumers, helping licity opportunities, or any desired the organization in its quest for a sustain- means of communication. able competitive advantage (Amis, Slack, • Naming rights for the sporting event, & Berrett, 1999). As more management or the facility. executives become aware of the numer- • The right for the sponsor to execute ous advantages of sponsorship over the promotional happenings (e.g. con- traditional forms of direct advertising, tests), direct advertising, and sales- approaches to sponsorship from spon- focused activities in conjunction sors, sport properties and consultants are with the sporting event, the facility becoming more professional, research, and/or the web presence of the prop- and results-oriented. erty. In an era of escalating advertising • Hospitality benefits for the sponsor’s fees around mega sport events, where customers and/or employees. a 30-second ad during the Super Bowl half-time period has a price tag of $2.6 Sport sponsorship has its roots in an- million, sponsorship advantages are very cient Greece, where cultural and religious difficult to ignore. Sponsorship offers events (often games to honor the deities) higher levels of visibility for the sponsor, were financed from Chorigia (sponsor- extensive media coverage, and increased ship) by wealthy citizens of the City-Re- publicity opportunities (all of them lead- public. This practice was also observed in ing to brand awareness). However, the ancient Rome, where Roman aristocrats greatest of all advantages is the potential (patriarchs) sponsored gladiator games for brand image enhancement, and as a and spectacles to attract public support result of this, fan loyalty to the sponsor’s and recognition. In modern times, and products and/or services. until the early 1980s, corporate sponsor- Product loyalty is a sought-after mar- ship had the form of donations to various keting objective for corporations because cultural and sporting events with no spe- it is easily transformed into repeated sales cific expectations, on behalf of the spon- and increased revenues. Sports are often soring company, of taking anything in re- associated with fan engagement and loy- turn for their support. However, after the alty. As sport spectators are exposed to financial success of the 1984 Olympics in corporate messages under the favorable Chapter 12 155 conditions of excitement and enjoyment perienced a substantial growth. As that sporting events generate, they are a result of the plethora of print and more receptive to those messages (Dol- electronic media, the average con- phin, 2003). In addition, fans tend to sumer is bombarded with thousands appreciate and reward with their loyalty of messages for commercial products corporations that financially support and services every day. That situation their favorite club, team, or athlete, there- creates “noise” in the consumer’s by securing their success in and out of the mind, which does not allow adver- sport arena. The NASCAR case, where tising messages to achieve their full racing fans not only are highly associated potential. In such noisy environments with the league, but also fanatically sup- ,advertising dollars are almost wast- port a specific driver (and the products ed. Today, companies try to identify he endorses), is the desired outcome all methods that overcome these noise corporations wish to achieve through obstacles and allow their messages their sponsorship agreements. to reach the targeted consumers with as little noise as possible. Sponsor- ship is a great alternative because, Causes of Sport Sponsorship under certain circumstances, it can Growth minimize the noise effects observed in direct advertising (i.e., exclusivity There are several factors contributing clause in sponsorship agreements, to the growth of sport sponsorship for the purchase of naming rights, designa- last 25-30 years (Hardy, Mully, & Sutton, tion of the company as the official 2007). A list of the most significant fac- sponsor/provider of a product/ser- tors follows: vice, etc.). 3. Rising advertising costs for television 1. The U.S. government ban on tobacco exposure: Advertising costs for com- and alcohol advertising: The ban of panies that want to secure exposure tobacco advertising on TV in the in media with national appeal con- early 1970s forced tobacco firms tinue to rise. The cost of a 30-second to redirect marketing budgets and advertisement in the 2007 NFL Super brand-building efforts in promotion- Bowl was $2.6 million, an increase of al methods other than direct adver- 15 percent from the 2004 Super Bowl. tising. In the late 1990s, the tobacco This situation led corporations to the industry spent approximately $200 realization that advertising may not million in sport sponsorship, most of be the cost-effective proposition that it in motorsport-related events (Fur- it was in years before. Involvement long, 1994). in sponsorship partnerships with 2. Excessive “noise” in the print and elec- sport properties has been proven to tronic media: With the increase of achieve a higher level of exposure channel availability through cable for corporate partners and, in most television, the expansion of the In- cases, at lower costs compared to ex- ternet and world wide web, and the posure gained through traditional growing number of special-purpose advertising campaigns. magazines and newspapers, direct 4. The increasing commercialization of advertising in recent years has ex- sport: Sponsorship became an ac- 156 Financial Resource Management: Sport, Tourism, and Leisure Services

ceptable form of support for amateur fer, as sponsors and property worked sports as their National Govern- together to achieve common goals ing Bodies found in corporations (e.g., securing Games exposure, in- the ideal partner to help them real- crease in sponsors’ brand awareness ize their organizational goals and and positive image, prevention of growth plans. The financial success ambush marketing, success of hos- of the 1984 Summer Olympics held pitality events, achievement of out- in Los Angeles was the very first suc- standing event management etc.). cessful example of the tremendous The realization of corporations that potential this partnership might sponsorship is the desired platform have for sport properties all over of corporate exposure was given an- the world. Until then, mega sport- other boost after the IOC president’s ing events like the Olympics were decision to allow professional ath- mainly financed by public subsidies letes to participate at the 1992 Olym- and by the International Olympic pics in Barcelona, Spain. The partici- Committee (which, at that time, was pation of high-caliber professional at the verge of bankruptcy). The 1976 players for the first time in history Olympics in Montreal is a vivid ex- was received with much enthusiasm ample of financial failure; it took the and positive feelings from the public, city of Montreal more than 30 years and subsequently from major corpo- to pay off the debts generated to stage rations, which saw in this action, a those games. Peter Ueberroth, Presi- unique opportunity for exposure to dent of the Los Angeles Olympics greater consumer masses all over the Organizing Committee (LAOOC), world. faced the resulting reluctance of pub- 5. The increasing media interest in sport lic authorities to financially support programming: The public interest in the Games and developed a different sports has been growing steadily for vision for the event. His vision called the last 30 years as a result of chang- for corporations to become partners ing lifestyles, availability of leisure by developing a mutually benefi- time, and increasing participation in cial relationship. One of his actions fitness and sporting activities (e.g., was to limit the number of Olympic the fitness boom in the 1970s). This sponsors to 30 in order to reduce the interest is also translated into interest clutter (noise effect) of advertising. for additional sport programming. He also established category exclu- The advent of cable television as well sivity, where a corporation could buy as the growth of new media sources the right to become the only sponsor (the Internet, subscription services within that product/service category. via satellite, pay-per-view channels) The adoption of these actions allowed were instrumental in satisfying the Ueberroth to significantly increase public’s desire for more sports pro- the sponsorship fees that corporate gramming, and, at the same time, sponsors had to pay, thereby securing the needs of sponsors for additional the viability and financial success of means of exposure through them. the Games. At the same time, spon- These reasons, along with the fact sors realized the increased benefits that networks find sporting event that Olympic sponsorship had to of- broadcasting less costly to produce Chapter 12 157

compared to sitcoms, shows, or 7. The globalization of sports, and cor- documentaries, create a formula of porate desires to successfully penetrate success that media outlets find dif- foreign markets: Doing business in a ficult to ignore. The example of the foreign country is a challenging expe- X Games, created by ESPN in 1995, rience for many corporations, since demonstrates how a non-traditional they have to overcome cultural and sporting event, influenced by the language barriers, and adapt their alternative lifestyles characterizing production, employment, and mar- Generation X, found viewership keting practices to the local customs success in mainstream media sur- and traditions. The global appeal of rounded by devoted fans and major sports has presented a unique oppor- corporations and brands sponsoring tunity to those corporations operat- its activities, with a loyalty that is ad- ing in foreign markets. Sport sponsor mirable in the sponsorship business partnerships enable corporations to (Puchan, 2004). use sport properties as promotional 6. Changes in governmental policies relat- vehicles in their attempts to success- ed to sport activity around the world: fully penetrate foreign markets. The Although in the United States fund- 2008 Olympic Games in China, for ing for the national governing bodies example, were viewed by many inter- (NGBs) of various sports is coming national companies as the golden op- from private sources (through fund- portunity to promote, through spon- raising events, institutional grants, sorship partnerships, their products and other various activities), in other in an emerging marketplace. The parts of the world government fund- same purpose was served by the $400 ing for the development of grassroots million sponsorship of the national programs is the primary source of soccer team of Brazil by NIKE. The support. In Greece and China, two of company accomplished a number of countries that have recently accept- goals by signing a 10-year sponsored the responsibility for organizing ship agreement: (a) it established Olympic Games, government fund- NIKE as a reputable manufacturer ing was behind every action that the of soccer equipment, a reputation NGBs undertook. In difficult finan- the company’s rivals, ADIDAS and cial times, where public sources are PUMA, have enjoyed for years; (b) scarce, NGBs felt the need to look it allowed the company to penetrate for other sources of funding in or- (through joint promotions, grass der to cover their budgetary deficits roots tournaments, charity events) (DeSchriver & Jensen, 2003). Corpo- not only the Latin American mar- rations and private institutions were ket, but also the global market due to then targeted to contribute financial- the international appeal of the sport ly in exchange for media exposure. property-partner; and (c) it enhanced Companies were, through spon- the company’s brand image through sorship, also able to improve their the association with one of the most public image by demonstrating good beloved and successful teams in this corporate citizenship. very popular international sport. 158 Financial Resource Management: Sport, Tourism, and Leisure Services

Setting Sponsorship Objectives impossible to prove that the sport property has delivered on the objectives of When clear objectives for involve- most interest to the sponsor. ment in sponsorship have been articu- As an example, consider an inter- lated, potential sponsors are better able national company like SAMSUNG that to assess the value of their direct financial manufactures electronics. If one of its participation in a sponsored event. The sponsorship objectives is to increase sales selection of a sponsored activity requires for the brand, then that objective needs that sponsoring companies first decide quantification. The company needs to de- which objectives they desire to achieve termine the expected or desired impact through the partnership. Sponsors then of sponsorship using the following mea- choose the activity that is most likely to sures: enable them to achieve their predetermined objectives. Setting clear objectives (a) Type of sales/markets affected (new beforehand enables sponsoring compa- customer, repeat, extended); nies and sport properties to evaluate all (b) Distribution channels enhanced (re- related activities and actions more easily tail, web, catalogue); and more effectively (Farrelly, Quester, & (c) Time frame (duration of the sponsor- Mavondo, 2003). ship); It is obvious that one of the key ob- (d) Benchmarks (successes of comparable jectives for any sponsoring company is to activities); and increase its ability to reach, influence, and (e) Other critical success factors. involve existing and/or potential customers in something that excites them and Determining the corporate objectives attracts them to the company’s brands to be accomplished through sponsorship (or services) and thereby establish a com- is a challenging, time-consuming, and petitive advantage. Another key objective strenuous situation. Every corporation, is to provide the sponsor with a desired based on its size, resources, and appeal return on their investment. This return to regional, state, national, or global mar- on investment (ROI) may be expressed kets, has different marketing issues to in monetary terms (e.g., increase of quar- address through sponsorship. Research- terly sales and revenues) or in a variety ers agree that there is an integrated and of other ways (e.g., quantity and quality complex set of objectives that potential of broadcast coverage). Sponsoring com- sponsors consider when deciding if and panies need to attach great importance how much sponsorship to extend. to objective quantification in order to be Ukman (2003) divided sponsorship able (during the postevent evaluation) to objectives into three major categories: (a) assess ROI. Sponsors may need the sport image objectives, (b) sales objectives, and property’s assistance in undertaking that (c) media/promotional objectives. task. Each objective should be as clear and By meeting image objectives, spon- as specific as possible. Generalizations sors expect to: and/or ambiguities will almost guaran- tee that the primary results of a sponsor- • increase awareness of their brand; ship will be unquantifiable (Kolah, 2003). • showcase their social responsibility; Even if the event or property performed • change or enhance their corporate well in terms of attendance, etc., it may be image; Chapter 12 159

• build relations with external commu- (Cornwell, Roy, & Steinard, 2001). These nities and public policy makers; objectives might be used for positioning • build relations with employees, their or re-positioning products and/or servic- unions and other stakeholders; es for a targeted market (Tripodi, 2001). • increase the relevance of their brand Sponsorship research identifies the to specific markets; and following list of corporate objectives that • increase brand loyalty. most influence management’s decisions to enter into a sponsorship relationship Through meeting sales objectives, with a sport property (Clark, Cornwell, & sponsors expect to: Pruitt, 2002):

• stimulate retail and distribution a. To increase public awareness of the channels; product (brand), the company, or • expand their customer database and both; generate new leads; b. To change or enhance product • find new/incremental business op- (brand) and/or company image and portunities from major clients; reputation by fostering favorable as- • display products or services; sociations with the sporting event; • build business with co-sponsors; c. To improve the company’s commu- • stimulate their sales force; and nity relations (demonstrating good • increase sales to end customers. corporate citizenship); d. To identify the company with the tar- Finally, companies set media/promo- geted consumer segments; tional objectives in order to garner pro- e. To create promotional opportunities motions in new distribution channels, for the company’s products and/or and to reduce marketing costs (Ukman, services; 2003). f. To stimulate sales of products and/or Tripodi (2001) further suggested that services; sponsorship objectives can be grouped g. To enhance employee motivation, in- into two major categories: (a) corpora- volvement, and loyalty, and to facili- tion-related, and (b) product/brand-re- tate staff recruitment; lated. Corporate-related objectives refer h. To generate media exposure through to increasing public awareness of the publicity; corporation and its products/services, i. To create opportunities for hospital- enhancing company image, altering pub- ity and entertainment for the com- lic’s perceptions, fostering community pany’s business partners, clients, and involvement, building business/trade workforce, thereby influencing key relations and goodwill, and enhancing contacts; staff/employees’ relations and motiva- j. To develop business-to-business relation. Product/Brand-related objectives tionships (networking, cross-promo- serve the purposes of increasing target tions) with other sponsoring com- market awareness, building brand image panies that support the same sport within the target market (positioning), property; increasing sales and market share, and k. To create and sustain a competitive blocking/preventing competition from advantage through exclusive associa- being successful within that target market tion with a sport property; 160 Financial Resource Management: Sport, Tourism, and Leisure Services

l. To demonstrate unique product fea- focus groups). tures, advantages, and innovations; (b) Management team agrees on the m. To develop a database of prospective desired image of the brand and/or customers and leads for the compa- company that is to be promoted ny’s sales executives; and through the sponsorship partner- n. To build a new customer base. ship.

Phase 2: Sponsorship: The Corporate (a) Identify all potential sponsorship Perspective partners. (b) ‘Short list’ the sport property/events When corporations consider spon- that have an image that most nearly sorship activities, they look for sport fits the desired image of the compa- properties that can make a significant, ny/brand. valuable, and measurable contribution to current and future brand communica- Phase 3: tions. They believe that: Meet with the most promising partnership candidate(s) and closely ex- (a) the property (team, athlete, facility, amine: or event) should demonstrate a good (a) Communication objectives fit with the brand (or company) im- • What does the company want to age and, ideally, be unique to that accomplish through that sponsor- brand so that there is no confusion in ship agreement? the minds of the consumers (Meen- • What communication outcomes aghan, 2002; Sports Sponsorship, (brand awareness, brand image 2007); enhancement, hospitality opportuni- (b) the geographic reach of the sponsored ties, etc.) does the company seek? activity should cover an appropriate- • Does the existing image of the ly matched target market; and sport property best fit the desired (c) the timing and duration of the spon- image of the brand/company? (Job- sorship (multiyear contract, seasonal ber, 2001) event, etc.) should fit in with the company’s overall promotional campaign (b) The targeted consumers (Simpson, 1999). • What target group of consumers is the company trying to reach? Taking the above noted factors into • Where are these customers lo- consideration, sponsoring companies cated? normally apply the following process in • Does the audience/fan base for selecting the right property, event, or or- the sponsored event match the com- ganization for their anticipated “win-win pany’s customer base? partnership” (Martin, 1996): (c) The inherent risks associated with the Phase 1: sponsorship partnership (a) Assess customers’ perceptions and • What are the associated risks for attitudes (through survey instru- either the sport property or the spon- ments, informal interviewing, or soring company? Chapter 12 161

• Are there any image-related risks ing what it can deliver and what market associated with the termination of it can reach. the sponsorship agreement? The sport organization will need to know how many events will be held, how (d) Promotional opportunities many people will be involved as partici- • What are the promotional oppor- pants and spectators, and how extensive- tunities for the company’s products ly participation is shared through broad- and/or services? cast media. Not only is it important to • What are the promotional know how many people can be reached opportunities for the sport property/ by the corporate sponsor through the event? sport organization, but relevant details about those people must also be under- (e) The sport property’s past record in stood. Age, gender, family stage, income, sponsorship success and education are just a few of the demo- • What does the property’s record graphic characteristics that might be of with past sponsors look like? If spon- interest to a potential sponsor. soring companies had withdrawn in In addition to knowing what mar- the past, what were the reasons be- kets can be offered to the sponsor, an hind that development? inventory of all marketable assets, such • What were the results of previ- as signage, media opportunities, naming ous sponsorship partnerships with rights, hospitality events, promotions, that property? Did the sponsors meet etc., should be compiled. their desired objectives? The sport organization must then find potential sponsors. Begin by looking (f) The overall cost of this partnership at existing sponsorship activity in order • Does the cost of entering into to get a sense of what types of corpora- and participating in the sponsorship tions are involved in sponsorship. Note agreement justify the expected re- the type of organization, not just the turn on investment (ROI)? specific company. Sometimes a company will extend its sponsorship activity, and Phase 4: sometimes a currently involved sponsor’s Undertake a formal sponsorship competitor will be eager to get involved agreement. Be sure to include a statement in sport sponsorship. Never offer spon- of purpose, objectives, terms and condi- sorship opportunities for the same event tions, and a description of the process by to competing corporations! which the partnership will be evaluated. All of the information that the sport organization collects in determining its sponsorship offering and potential spon- Sponsorship Acquisition: sors is used in developing the sponsor- The Sport Organization’s ship package. The sponsorship package Perspective is a top-quality presentation that outlines the sport organization’s offer of benefits to Before looking for a sponsorship deal, sponsors, and a set of proposed partner- the sport property needs to evaluate what ship actions. Sponsorship packages “may it has to offer to prospective sponsorship be tiered to reflect levels of expenditure partners. It must be realistic in determin- that would just ‘make it happen’, to more 162 Financial Resource Management: Sport, Tourism, and Leisure Services

sophisticated versions that reach more ing major companies first in order to people with extensive publicity” (Sports sell its best (and most expensive) inven- Sponsorship, 2007). tory (naming rights, exclusivity packages, event TV rights, etc.). In addition to securing large sponsorship contracts early Selling the Sponsorship in the sales process, selling to major spon- Opportunity sors first has the advantage of momen- tum and example. That is, the property When it is time for the provider of a can take advantage of name recognition sponsorship opportunity and the poten- of major corporate sponsors and more tial sponsor to get together and make a easily convince smaller companies of the deal, the matter of ‘selling’ the sponsor- good business practice of being part of its ship should be relatively simple. After all, sponsorship program. the advance work and preparation should The sales process usually involves the have served to bring together partners following: with reciprocal interests and mutually beneficial resources, and the sponsorship • Soliciting interest in a face-to-face agreement is just the expression of details meeting with prospective sponsors of how those interests will be satisfied. using a proposal brief (a one-page Not all potential sponsors, however, document that contains basic in- readily see the benefits being offered to formation about the sponsorship them through sponsorship opportuni- opportunities with the sport prop- ties. The sponsorship sales strategy that erty). a sport organization develops must ac- • After the prospective sponsor ex- count for this, and the individual who presses an interest, scheduling a presents the proposal to enter into a meeting with management execu- sponsorship agreement will have to be tives who have decision power over very well prepared. Proper preparation sponsorship partnerships. At this includes thinking of ways in which the first meeting, it is imperative for the sponsorship partnership would be in- seller of sponsorship opportunities tegrated in the marketing campaigns of to spend most of the time listening the targeted companies, as well as read- to what the prospective sponsor has ing annual reports, company newsletters, to say. trade organizations, media reports, etc. in • Preparing for the meeting by learn- order to more fully understand the target ing about the prospective sponsor. corporation’s objectives, activities, priori- Answers to the following questions ties, and circumstances. Preparation also should be known: includes deciding what products may be (a) Where does the sponsoring com- sponsored (collectively or exclusively), pany spend its marketing budget at finding out who to contact, and estimat- that point in time? ing the level of sales to be realized. (b) Does the company have sponsor- After the sport property has decided ship partnerships with other sport the sales strategy it will follow in order to properties? successfully attract sponsors, it is time to (c) What does the sponsoring com- initiate the sales process. Typically, the pany think about these relationships? sport property will begin by approach- Have they been satisfied with the Chapter 12 163

outcomes/met their sponsorship ob- testimonials jectives? • Naming rights and/or exclusivity cat- • After the initial meeting is over, as- egories sessing the situation and examining • Sponsorship packages if the property can realistically de- • Post sponsorship evaluation process- liver what the sponsor wants. If the es assessment is positive, a follow-up • Summary of rights and benefits for meeting is scheduled (usually within the sponsor the next 7-10 days following the first • Sponsorship fee information meeting). • Returning to the second meeting The proposal should be written in with a detailed sponsorship pro- such a way that it captures the attention posal; this is a multipage document of the audience. Use of irrelevant data in that includes the offer letter with all order to impress the audience will have a supporting information. Sponsoring negative effect. Judicious use of attractive companies use this document to fa- graphics is encouraged, and care should cilitate their internal decision-mak- be taken to incorporate only the informa- ing process. tion that is necessary for the sponsor to • Allowing the prospective sponsors assess the value of the sponsorship deal. to intervene and modify the “draft” Descriptions of activities and benefits proposal in order to meet their orga- should be precise and related to the in- nizational needs. terests and uniqueness of the prospective • Negotiating the final terms of the sponsor. The proposal also needs to be so agreement and closing the deal. thorough that the prospective sponsor is left with very few or no unanswered questions. The Sponsorship Proposal Document Marketing Benefits of A sponsorship proposal may address Sponsorship various issues depending on the needs of the sponsorship company and the The main motivation for corporations complexity of the agreement (multiyear to sponsor a sport, tourism, or recreation contract, parties involved, etc.). The fol- event or facility is to gain access to the lowing elements are usually included in a vast number of individuals that are ex- sponsorship proposal document: posed to the events being sponsored and, by association, to the corporation or its • Property facts (i.e., history of the products. The most common ways of organization, organizational chart, promoting corporations through spon- contact info, etc.) sorships include the following: • Event(s) schedule • Photographic displays • Stadium signage (score boards, ad- • Audience demographics, purchase vertisement boards, etc.) behavior, and loyalty studies • Branding opportunities (logo place- • List of existing sponsors ment, promotional giveaways, • Sponsor case histories and clients’ uniforms, etc.) 164 Financial Resource Management: Sport, Tourism, and Leisure Services

• Corporate hospitality opportunities instance, virtual advertisements can be (luxury suites, premium-level season superimposed onto blank advertising tickets, ticket discounts, etc.) boards, allowing for animated messages • Naming rights and, more importantly, the same space to • Advertising (and virtual advertising) be sold many times over. Virtual adver- • Publicity opportunities (radio, televi- tising technology allows a sport property sion, print media) and its TV broadcast partners to define • Promotional events and contests advertising on the same board accord- • Cross promotions ing to the needs of advertising companies • Direct marketing, personal selling, across different regions in the country. and retail promotions Virtual advertisement digital boards are actually less costly than rotating boards, All these methods are used by most and are much more versatile (ibid). properties to maximize the marketing benefits of sponsorship. Three of the Hospitality above noted methods are deserving of Hospitality benefits provide sponsors further discussion. with unique opportunities to get to know clients in a relatively informal atmosphere Cross Promotions and develop a relationship that may oth- Promotion is the critical mechanism erwise have taken a significant amount of for positioning a product or service in the time and resources to nurture. The op- minds and the hearts of the consumers. portunity to impress clients while they Cross promotions is where two or more are attending a sporting event (especially sponsoring companies develop a busi- when the event has a wide appeal, like the ness relationship with the sole purpose Super Bowl or the Olympic Games) can of creating a joint-promotion themed be substantially increased. Hospitality around the sponsored property. This mu- deals also allow a large number of people tually beneficial solution allows sponsors (clients and sponsors’ employees) to be to exchange their resources, so that they invited to an event for which tickets may both efficiently advance their business be scarce and interest high. The appeal of objectives (Kolah, 2003). hospitality benefits is significant for both the property (low cost of offering) and Virtual Advertising the sponsor (high return on investment In virtual advertising, virtual im- through nurturing business relationships ages can be projected and broadcast or improving management-employee re- on top of existing inventory (ads, post- lations). ers, and signs) or digitally inserted into previously untouchable areas, such as the playing field. This type of advertis- Evaluation ing allows a sport property to carve up its international TV footprints and sell The effectiveness and value of a spon- multiple narrowcast advertising packages sorship partnership should be regularly worldwide. It also allows a sport property evaluated. Evaluations should generate to remove all in-stadium advertising and formal reports that are studied by the provide its TV partners with “advertise- sponsoring company and the sport prop- ment-free” stadiums and arenas. In this erty. Evaluation reports can be highly Chapter 12 165 effective not only in securing the spon- video clips with participant and spectator sor for the following year, but also can comments regarding the event and the af- be used as a marketing tool in recruiting filiated sponsoring company. new sponsors. In times when sponsoring Television Exposure: measuring and companies are forced to look closer at the reporting the amount of broadcast time cost effectiveness of their investments, given to the event, the number and reach it is imperative that sport properties are of the channels that carry the event, and fully engaged in post event evaluation ac- the estimated number of viewers watch- tivities (D’Astous. & Bitz, 1995). ing the event. A meaningful sponsorship evaluation Telephone Interviews: assessing the begins with the decision about what is to awareness level for a sponsor in a very be measured and against what criteria quick and inexpensive way. those measurements will be assessed. Jif- Mailed Survey Instruments: using fer and Ross (1999) suggest the following surveys to measure consumers’ knowl- as essential elements in an event sponsor- edge and attitudes regarding the spon- ship evaluation: sor’s products. In-depth Interviews and Focus Groups: 1. Exposure—How well was the spon- qualitative research involving samples of sors’ brand positioned in the mind of target markets and highly focused discus- the consumer? sion about the desired outcomes of the 2. Attention—What level of customer sponsorship arrangement. The discus- attention was given to the company’s sion is focused on generating new ideas products and/or services? to be used in future sponsorship partner- 3. Knowledge/Awareness—What is the ships through open-ended questions, and level of customers’ basic or extensive circulation of opinions and suggestions knowledge regarding the company’s from participants. products and/or services? SPINDEX Method: a method that 4. Attitudes—How well did the spon- is used in measuring the exposure time sorship enhance the sponsor’s ability obtained by each of the sponsors in all to influence customers’ perceptions TV broadcasts and on all broadcasting regarding its products? channels. SPINDEX values are calculated 6. Behavior—Did the sponsored event by employing four measures: advertising stimulate positive changes in the time obtained throughout the television consumers’ consumption patterns? broadcast; the number of times that an advertisement was shown; the duration Several methods can be employed in of the broadcast; and the number of view- measuring the success of a sponsorship ers watching the broadcast. The resulting agreement. These include: SPINDEX scores provide the sponsoring company with an accurate idea of the Print Press Monitoring: monitoring cost per advertising second, the cost per the press media and collecting any press television viewer, and the cost per SPIN- clippings that refer to the sponsored event DEX point (i.e., the cost per 30-second and the sponsoring company. TV spot). Photographic Record: recording all activity related to sponsors exposure Evaluation reports are a tool to gauge using digital photography and/or even what the sponsorship has actually done 166 Financial Resource Management: Sport, Tourism, and Leisure Services

for a sponsor. However, some sport prop- Sponsorship can manifest itself in erties have been reluctant to get involved many ways, but it always includes pro- in the post-sponsorship evaluation mea- viding the sponsor with unique oppor- surements in fear of losing the sponsor if tunities to promote its corporate image the research shows that the partnership or product line. How well the company has not generated the hoped-for benefits. or its products are promoted is the main In addition, some sponsoring companies question to be answered in the formal are reluctant to undertake evaluation re- sponsorship evaluation process. search because of the monetary cost and time factors involved in this process. Other concerns are the danger of getting References conflicting data through the surveys and the challenge of deciding what information is relevant. Amis, J., Slack, T., & Berrett, T. (1999). Sport The drawbacks to sponsorship evalu- sponsorship as distinctive competence. European Journal of Marketing, 33 (3/4), 250- ation are outweighed by its positive as- 272. pects. The formal report of the evaluation Clark, J., Cornwell, T. B., & Pruitt, S. (2002). is “hard copy” evidence that the sponsor- Corporate stadium sponsorships, signaling ship agreement between the two parties theory, agency conflicts, and shareholder wealth. Journal of Advertising Research, 16- either did or did not meet the original ob- 32. jectives. It serves as evidence of the prop- Cornwell, B. T., & Maignan, I. (1998). An erty’s commitment to the sponsorship international review of sponsorship research. partnership, and it shows the sponsoring Journal of Advertising (27)1. Cornwell, B., Roy, D., & Steinard, E. (2001). company that the property cares how the Exploring managers’ perceptions of the relationship is affecting the company’s impact of sponsorship on brand equity. bottom line. Journal of Advertising, 30 (2), 41-51. D’Astous, A., & Bitz, P. (1995). Consumer evaluations of sponsorship programmes. European Journal of Marketing, 29 (12), 6-22. Summary DeSchriver, T., & Jensen, P. (2003). What’s in a name? Price variation is sport facility naming Sponsorship in sport, tourism, and rights. Eastern Economic Journal, 29 (3), 359- 376. leisure service organizations is an effec- Dolphin, R. (2003). Sponsorship: Perspectives on tive way to generate revenues and create its strategic role. Corporate Communications: synergistic relationships within the com- An International Journal, 8 (3), 173-186. munity. Sport sponsorship, in particular, Farrelly, F., Quester, P., & Mavondo F. (2003). has made millions of dollars available for Collaborative communication in sponsor relations. Corporate Communications, 8 (2). sport properties and provided corpora- 128-138. tions with additional marketing opportu- Furlong, R. (1994). Tobacco advertising legislation nities. The objectives of both the sponsor and the sponsorship of sport. Australian and the sport property should be clearly Business Law Review, 22 (3), 159-189. Hardy, S., Mullin, B. J., & Sutton, W. A. (2007). articulated before entering into a formal Sport marketing. Champaign-Urbana: Human sponsorship agreement. Those objectives Kinetics. should also be understood early in the Jiffer, M., & Roos, M. (1999). Sponsorship – A way process of identifying and securing po- of communicating. Stockholm Jobber, D. (2001). Principles & practice of marketing tential sponsors and sponsorship situa- (3rd ed.). Berkshire: McGraw-Hill Publishing tions. That process involves many steps. Company. Chapter 12 167

Martin, J. H. (1996). Is the athlete’s sport important Simpson, C. (1999). A sporting try. NZ Marketing when picking an athlete to endorse a nonsport Magazine, 18 (8), 34-37. product? Journal of Consumer Marketing, 13 Sports Sponsorship. Retrieved in April 7, 2007 (6) 28-43. from http://www.sports-sponsorship.co.uk/ Meenaghan, T. (2002). From sponsorship to sponsorship.htm marketing partnership: The Guinness SportBusiness. Retrieved in April 7, 2007 from sponsorship of the GAA all-Ireland hurling http://sportbusiness.com.news/161115/ championship. Irish Marketing Review, 15 (1), sponsorship-spending-to-rise-and-rise. 3-23. Tripodi, J. A. (2001). Sponsorship: A conﬁrmed Kolah, A. (2003). Maximizing the value of weapon in the promotional armory. sponsorship. London: SportBusiness Group International Journal of Sports Marketing & Ltd. Sponsorship, 1-20. Puchan, H. (2004). Living ‘extreme:’ Adventure Ukman, L. (1995). IEG’s complete guide to sports, media and commercialization. Journal sponsorship. Chicago: International Events of Communication Management, 9 (2), 171- Group. 178. Ukman, L. (2003). Measuring the result of sponsorship. Chicago, IL: IEG Valuation Services.

NOTES 168 Financial Resource Management: Sport, Tourism, and Leisure Services S E C T I O N E

Expenditure Management

Budgets are important ﬁnancial management tools, and the chapters in this section describe how budgets are prepared and managed. Operating and capital budgets are contrasted, and a description of the budget styles or formats that are most frequently used by sport, tourism, and leisure service organizations is presented. This discussion emphasizes the need for detailed attention to all aspects of planning to receive and spend ﬁnancial resources. This section also provides helpful guidance in presenting a budget proposal.

Management of revenue includes accounting for all income received by the sport, tourism, and leisure service organization. In addition to personal integrity, the ﬁnancial manager needs skills in bookkeeping, accounting, and ﬁnancial reporting in order to deal with another very important management concern—that of managing expenditures (covered in the next section). Chapter 13 is not intended to serve as an all-encompassing treatment of the very complex world of business accounting, but it does provide an introduction to and overview of the most commonly used accounting and reporting tools, along with a discussion of the basic principles and generally accepted accounting practices.

C H A P T E R 1 3

Budgeting Basics

Introduction ery professional skill area has its own unique terminology and so does budget- Individuals who are new to budgeting. However, budgeting crosses profes- ing are sometimes overwhelmed with the sional disciplinary boundaries; that is, expectation of putting numbers together everyone has to do it! All organizations to create meaning. As fewer people bal- deal with budgeting, and thankfully, the ance their own checkbooks, and more basic concepts are common. Unique rely on computer programs, or pay oth- terms may be present within different ers to manage their finances for them, industries, but the process of budgeting the idea of taking on a task that requires is much the same, whether for a small even the most basic budgeting skills can summer recreation program, a commu- seem daunting. Putting together a budget nity festival, or the operation of a $26 for a program, profit center, or an entire million multisport complex. organization can be a challenging activity when budgeting skills and experience are lacking. This chapter addresses Budget Construction Guidelines budgeting basics. It discusses simple budgets, articulates some rules for de- There are some general rules that in- veloping program and activity budgets, dividuals, new or experienced, must fol- and provides direction for structuring a low when constructing budgets. Those larger budget document. who are new to budgeting would do well Most budgeting is a process of gath- to apply these rules strictly. ering, organizing, and reporting finan- One of the problems with budget- cial facts and plans in a format that is ing is that the individual constructing understandable to other individuals. Ev- the budget rarely has all the information 172 Financial Resource Management: Sport, Tourism, and Leisure Services

needed to complete the process. Budget- The challenge is to get the most correct ing then, is a process that begins with source. gathering what information is readily The organization of the budget data available and seeking out the additional is structured around common catego- required information. Some of this infor- ries. For instance, the most common cat- mation may be simple to acquire, other egories for all budgeting include salaries, information may be more challenging. It small cost equipment, supplies, rental, is important to involve as many individu- utilities, charges and services, and opera- als in the budgeting process as possible. If tions. Each of these categories might be budgeting for a recreation center, for ex- subdivided. Salaries can be subdivided ample, it would be prudent to have all the into full-time, permanent part-time, part- staff who have budget responsibility in- time, seasonal, contract, or others. They volved in the process. This might include can be subdivided again by type of func- the snack bar manager, the office man- tion, such as a department or operating ager, the facility maintenance manager, unit. An aquatics program may have the the program directors, and others. The following seasonal or part-time employ- staff should gather information related to ees: life guard, head life guard, junior life their areas of responsibility, such as the guard, learn-to-swim instructor, assistant number of employees, their schedules, manager, manager, cashier, concession total hours worked, supplies consumed, operator, concession manager, and so on. unique expenditure needs, and other Each position most likely has a separate budget facts for the previous year, along rate of pay that may include pay ranges. with anticipated revenue and expenditure For example, the life guard might earn activities for the next budget period. from $8.50 per hour to $12.50 per hour based on experience, number of years Gathering Information with the program, training, and so forth. All of the budget information should Figure 13.1 illustrates three levels of cat- be organized and kept where it is read- egorization of life guards for the aquatic ily available for use. Budget information program described above. may be gathered from previous budgets Anticipating costs associated with used for the same activity or program, equipment can also be challenging. from similar budgets available from oth- Equipment falls into two different cat- er sources, or created by gathering infor- egories for purchasing. Some equipment, mation from previously unused sources. typically below a specific cost (such as For example, salaries may be required, $500) is considered operational (see but how much to pay per hour may not chapter 15) and appears in the operation- be known. The organization may have a al budget. Equipment that is more expen- standardized pay scale for part-time and sive and may have a multiyear life-span full-time salaries along with descriptions is considered to be capital (see Chapter of how the salaries are to be applied. A 16). Money for the operational and capi- budget for purchasing T-shirts could be tal budgets comes from different income based on an existing standing contract sources as suggested in Chapter 8. For with a manufacturer, an outstanding a softball complex, chalk for lining the purchase order, or a list of preferred ven- base paths, bases, pitching rubbers, light dors. There is almost always a source of bulbs for the field lighting, grass for the information for gathering budget data. field, fertilizer, trash cans, trash bags, and Chapter 13 173

Level 1 Category Level 2 Category Level 1 Category Full-time Manager Part-time Life Guard Head Life Guard Seasonal Learn-to-swim Life Guard Support Junior Life Guard

Figure 13.1 Example of Employee Classifi cation for Life Guards concession supplies are expendable (used to reasonably predict fi nancial needs and up in a short time, such as one year) and set defensible expectations in areas where appear in the operating budget. Bleach- not much is known. ers, benches, special soil for the fi eld, and fi eld drying agents are longer lasting and Gathering New Information appear in the capital budget. For the same Gathering and organizing informa- soft ball complex, utilities may include tion into categories is the starting point. electricity, water, sewer, telephone, and Organized information can be put to- cable or satellite television and are part of gether to create new information, such the operating budget. as the total cost of a program. Here’s a simple illustration: Identify the Budget Goal It is important to identify what the Unknown: The cost of Program A end product should include and how it Known: The program is going to meet will be presented. If it is a budget for a for 6 weeks, 3 hours a week, and has 1 program, then the budget may include instructor at a cost of $8.50 per hour. salaries, supplies, equipment, room rent- Calculation: al, marketing, and other items. Most of total cost = 6 weeks x 3 hours x 1 the time the agency will defi ne in advance instructor x $8.50 per hour what the budget should include. By fol- total cost = 6 x 3 x 1 x $8.50 lowing the prescribed format and under- total cost = $153 standing what goes in each category, the budget will be consistent across diff erent Organizing the Data departments. Finally, there should be a Getting the answer is only part of the consistent eff ort to improve the budget- budget process. It must also be organized ing process as experience with it grows. so others can understand it. Th is is typically accomplished using a spreadsheet. Essential Information Th e data labels should be short and de- Invariably, aft er all the information scriptive of the information contained in has been collected, the individual pre- the cells below the labels. Th ese may be paring the budget has more information prescribed by the organization. It is also than immediately seems necessary. It is appropriate to provide detailed footnotes important to then ask, “What informa- to explain the data in the spreadsheet. tion is essential?” Essential information is In Figure 13.2 note how the data labels that which allows the program manager represent the information known. It is 174 Financial Resource Management: Sport, Tourism, and Leisure Services

the same information in the shaded area all of the classes meet once a week above, except it is listed so someone else for 8 weeks; looking at the data sees a snapshot of how each class period is 1 hour long. the total cost was determined. In row 2, 2. The salary (rate of pay) for the in- the data row, the precise information re- structor is $9.00 per hour; quired was placed in the cells. A formula for the dance coordinator, $2.50 was used to arrive at the total cost in cell per class; F2. In the examples in this chapter, all infor the room, $5.00 per hour. formation will be depicted on the spread- 3. There are 15 participants per sheets. class. In the following sections, the budget 4. The program fee is designed to re- examples become increasingly complex. cover costs (it should Each example is based on the guidelines neither lose nor make money). previously discussed. Reference is made to the appropriate guidelines. Determining the Cost of the Program: 1. Total number of hours classes meet. This is determined by Determining Costs taking 3 known items (number of classes, number of The classes in Example 1 (Program weeks, and length of individual B) meet once a week. In Example 2 (Pro- classes) and multiplying them, as gram C), most of the classes meet once a shown below: week, but some meet three times a week. 12 classes x 8 weeks x 1 hour per Example 3 (Program D) provides a more class = 96 hours complex budget for an aquatics center 2. Total cost of instructors, dance co- program. ordinator, and room rental. Multiply the cost of each by the total num- Example 1 (Program B): ber of hours: Simple Class Budget 1 instructor x $9.00 per hour x 96 hours = $864 Known Information: 1 coordinator x $2.50 per hour x 1. There are 12 classes. 96 hours = $240

Figure 13.2 Example Spreadsheet Chapter 13 175

1 room rental x $5.00 per hour x for the dance coordinator, $2.50 96 hours = $480 per class; 3. Total cost of program is determined for the room rental, $5.00 per by adding together the cost ﬁgures hour. above. In each case, new informa- 3. The agency has determined that tion was generated that was used indirect costs (or costs the agen- to answer the next question: cy has that the program needs to total cost = $864 + $240 + $480 help pay for even though they don’t = $1,584 appear as direct program costs) should be charged at a rate of 12.5% and added to the total cost Organizing the Data of the program. The data in Figure 13.3 are organized 4. There are 15 participants per similarly to Figure 13.2. One column was class. added to include the number of classes. 5. The program fee is designed to re- Inclusion of the number of classes was an cover costs (it should neither lose important new variable in this example. nor make money).

Example 2 (Program C): Items 4 and 5 are not essential infor- Expanded Class Budget mation for this budget example. The purpose is only to determine the cost Known information: of the program. If supplies were being 1. There are 12 classes: purchased based on the number of par- 7 of the classes meet 1 time a ticipants, then item 4 would be essen- week for 8 weeks; tial information. In item 3, above, the 5 classes meet 3 times a week for only information that is essential is the 8 weeks; indirect costs at 12.5%. all class periods are one hour in duration. Determining the Program Cost 2. The rate of pay for the instructor is Again, the ﬁrst question that the pro- $9.00 per hour; gram manager needs to ask is, “What

Figure 13.3 Data Organized for Example 1 on a Spreadsheet 176 Financial Resource Management: Sport, Tourism, and Leisure Services

information is essential?” There may figures above. In each case, new in- be information related to the program formation was generated that was that is not essential. Essential informa- used to answer the next question: tion allows the program manager to total program cost = $1,584 + determine the answer to each unknown $440 + $880 piece of information. In this case, the total program cost = $2,904 essential and unknown information are 4. The indirect cost of the program is as follows: figured by multiplying the program cost by the indirect fee: 1. Total number of hours classes indirect costs = $2,904 x .125 meet. indirect cost = $363 7 classes meet 1 time a week 5. Total cost of program is arrived at 5 classes meet 3 times a week (for by adding the indirect costs and those meeting 3 times a week, in- program costs: clude the “3” as new variable: total program cost = $2,904 + total hours for 1 meeting per week $363 classes = 7 classes x 8 total program cost = $3,267 weeks x 1 hour per class total hours = 56 hours Organizing the Data total hours for 3 meetings per week The data in Figure 13.4 added a new classes = 5 classes x 8 column to include the number of meet- weeks x 3 times per week x 1 hour ings per week. In addition, the spread- per class sheet was divided into two groups, one total hours = 120 hours identifying the classes meeting one time total program hours (classes in per week and a second for those meet- both formats) = 56 hours ing three times per week. Organizing the + 120 hours = 176 hours spreadsheet to show the two different 2. Total cost of instructors, dance co- class structures (meeting times) allows ordinator, and room rental. Multiply a clearer depiction of the data. The in- the cost of each by the total num- direct costs were determined for each of ber of hours: the class meeting alternatives individu- instructor cost = 1 instructor x ally. Another approach would be to add $9.00 per hour x 176 hours the total costs and then multiply by 12.5 instructor cost = $1,584 percent. The final total was calculated coordinator cost = 1 coordinator x by adding the subtotals and the indirect $2.50 per hour x 176 costs for each program group. hours coordinator cost = $440 Example 3 (Program D): room rental cost = 1 hour room A Program Budget rental x $5.00 per hour x 176 hours Known Information: room rental cost = $880 The public aquatic center is an outdoor 3. Total cost of the program is deter- facility operating five major pro- mined by adding together the cost grams during the summer over a 12 week period (June 5 to August Chapter 13 177

Figure 13.4 Data Organized for Example 2 on a Spreadsheet

27). The program areas and man- at a rate of $8.70 per hour. agement information are provided 4. The Learn-to-Swim program oper- below. ates 4 days a week for 4 hours a 1. The open swim program operates 7 day days a week for 8 hours a day. One lifeguard is on duty at all times Six lifeguards are on duty at all at a rate of $8.70 per hour. times at a rate of $8.70 per hour. Six learn-to-swim instructors are on Two concession staff are on duty duty at all times at a rate of $9.50 at all times at a rate of $6.00 per per hour. hour. 5. The swim team meets 6 times a One cashier is on duty at all times week for 3 hours a day. at a rate of $6.00 per hour. Two coaches are on staff for 4 2. The family swim program operates hours each day (6 days) at a rate 3 days a week for 3 hours a day. of $12.50 per hour. Two lifeguards are on duty at all Two assistant coaches are on duty times at a rate of $8.70 per hour. 3 hours each day (6 days) at a rate Two concession staff are on duty of $9.00 per hour. at all times at a rate of $6.00 per 6. The management team consists of hour. the following: One cashier is on duty at all times an aquatics supervisor who is full- at a rate of $6.00 per hour. time and has a salary of 3. Lane swim operates 6 days a week $35,600 and has beneﬁts charged for 3 hours a day. at a rate of 27 percent One lifeguard is on duty at all times of the base salary; 178 Financial Resource Management: Sport, Tourism, and Leisure Services

a maintenance worker who is full- a) salary = $35,600 + $23,000 time and has a salary b) benefit percentage = 27% of $23,000 and has benefits charged at a rate of 27 resulting in a completed formula that percent of the base salary; looks like: a pool manager position works 5 total cost = $58,600 x days a week, 8 hours a .27($58,600)% day, at a rate of $16.50 per hour; total cost = $74,422 a head lifeguard position works 5 days a week, 8 hours a In example 2 the budget was orga- day, at a rate of $14.50 per hour; nized around class meetings. In this an assistant head lifeguard position example the logical approach is to works 5 days a week, organize around a program area. Fig- 8 hours a day, at a rate of $12.00 ure 13.5, at the end of this section, per hour; depicts such a structure. The benefits benefits for all employees not re- are determined after all other salaries ceiving 27 percent (there are determined. Using the program are only 2) are set at 9 percent. approach, the first area budgeted was open swim. The following formula is Determining Salary Costs: used throughout the example. The first The information above provides detail instance applies to lifeguards: about positions, rate of pay, hours per week, and number of staff. The informa- total cost = number of employees per tion that is still required includes how hour x number of weeks in season x many hours per season each person days per week x hours per day x sal- works, what the total cost is of each ary position for the season, what the cost of benefits is, and what the total cost is a) number of employees per hour = of the salaries for the program. 6 b) number of weeks in the season = The aquatic supervisor has 100 percent 12 of her salary assessed to the pool, plus c) days per week = 7 27 percent of her benefits. The main- d) hours per day = 8 tenance worker has his $23,000 sal- e) salary = $8.70 per hour ary and 27 percent benefits assigned to the aquatics program. Following Placing the known information in the the process discussed previously, the formula, the total cost can be calcu- known information is the annual salary lated: and the annual benefit percentage. The desired information is the cost of ben- total cost = 6 x 12 x 7 x 8 x efits and the total cost of the position. $8.70 The formula for determining cost would total cost = $35,078.40 be as follows: In each case, known information is total cost = (salary x benefit percent = used to generate needed information. benefit cost) + salary Pausing to reflect on how to set up the Chapter 13 179 formula is essential. This would be re- Organizing the Data peated for each position until all costs The data are organized by individual were determined. program area, followed by management staff, and then benefits. The total cost of The formula for computing the cost of the program is $136,720 and is shown in the concession staff during open swim Figure 13.5. would look like: total cost for concession staff = num- Budgeting for Contingencies ber of employees per hour x number of weeks in season x days per Every good budget preparer knows week x hours per day x salary that the budget is an educated guess and that unexpected changes are going to a) number of employees per hour = occur. The budget should include some 2 flexibility to accommodate such contin- b) number of weeks in the season = gencies. Contingency costs should be in- 12 cluded in the budget at five percent or 10 c) days per week = 7 percent of the total of the budget. When, d) hours per day = 8 for example, utility costs go up and the e) salary = $6.00 per hour increase was not expected or provided for in the budget, the needed extra funds will total cost = 2 x 12 x 7 x 8 x $6.00 be available in the contingency account. total cost = $8,064.00 Contingency funds allow for emergen- cies, mistakes in the budget, and cost The same formula applied to the ca- overruns. They should not be used as jus- shier looks like: tification for poor planning, inadequate research, or whimsical spending. total cost = 1 x 12 x 7 x 8 x $6.00 total cost = $4,032.00 Summary

The same processes are applied for Basic skills of budget preparation each program area. The total cost for were discussed in this chapter. The prin- full-time staff is $58,600 and for part- ciples of moving from known informa- time and seasonal staff is $101,928. tion to new information will allow any Benefits are applied below: individual working on a budget process a logical and systematic approach to Full-time benefits = full-time total successfully developing a budget. Some salaries x 27% budgets will be more complex than those Part-time benefits = part-time sala- demonstrated here. Nonetheless, the ries x 9% principles discussed and illustrated here or provide a foundation for all budgeting full-time benefits = $58,600 x 27% processes. = $15,822 part-time benefits = $101,928 x 9% = $9,173.52 180 Financial Resource Management: Sport, Tourism, and Leisure Services

Figure 13.5 Data Organized for Example 3 on a spreadsheet

NOTES C H A P T E R 1 4

Budget Preparation

Introduction allocate limited fiscal resources. Yet, the decision making involving the alloca- Budgeting is a process that focuses tion of human and fiscal resources is that on providing managers with information which affects the organization’s ability to and tools to manage fiscal resources and achieve its vision. operations. Well-constructed and readable budgets ultimately allow managers to make more informed decisions. Bud- Budget Processes geting is linked to organizational goals and objectives. It is a tool to help achieve What is a Budget? them. Furthermore, budgeting allows Budgeting is one of the most impor- sport, tourism, and leisure service orga- tant tasks in which a sport, tourism, and nizations to translate their organizational leisure service manager can be engaged. visions into realities. Budgeting is clear- The budget is a financial plan and fre- ly an essential component of the larger quently translates the operational and management processes of any organiza- strategic plans of the organization into tion. In today’s competitive and changing achievable activities over a period of society, sport, tourism, and leisure service time. A budget is a document depicting organizations cannot function effectively the anticipated revenues and expenditures without a clear understanding of how of an organization (most often over a one- good fiscal management contributes to year period). Budgets anticipate expendi- their day-to-day success. Few decisions tures and revenue and are linked to or- facing sport, tourism, and leisure service ganizational and individual work plans. organization managers are more daunt- Edginton and Williams (1978) originally ing than those made concerning how to described ten benefits resulting from the 182 Financial Resource Management: Sport, Tourism, and Leisure Services

budgeting process. Modified for today’s are funded for more than one year at a fiscal environment, nine are presented time and are adjusted on an annual basis. here: Capital budgeting is discussed in detail in Chapter 16. Almost all managers work 1. Budgeting is a systematic process that with operating budgets. Fewer work with brings structure to the organization. capital budgets, yet they contribute to the 2. Budgeting requires the manager to construction of capital budgets in impor- do advance planning for the orga- tant ways. nization, which reinforces strategic and long-range planning. The Budget Cycle 3. Budgeting provides a starting point Budgets usually span a one-year pe- for building organizational and indi- riod, called a fiscal year. A fiscal year is vidual work plans. not always the same as the calendar year. 4. Budgeting moves the organization The most common fiscal year period is toward measurable and quantifiable from July 1 through June 30 of the en- outcomes in both human and mate- suing year. The U.S. Government’s fiscal rial terms. year is October 1 through September 30. 5. Budgeting encourages standardiza- Many private not-for-profit and commer- tion in fiscal operations, encouraging cial sport, tourism, and leisure service an efficiency that unifies approaches organizations use January 1 through De- to spending and revenue accounting. cember 31 as their fiscal year. It is accept- It allows an organization to be more able and common to refer to a fiscal year efficient. by the year in which it ends. If a fiscal 6. Budgeting, in the absence of other year begins July 1, 2007, and ends June measures, allows managers and 30, 2008, the fiscal year is referred to as subordinates to communicate on a FY2008 (fiscal year 2008). common level. It reinforces other The importance of a fiscal year lies measures of effectiveness in the or- in the spending and accounting process. ganization. Money is allocated, encumbered, and 7. The budget is an essential part of a expended within a given fiscal year. Al- complex decision-making process in located funds are those dollars that the most organizations. legislative/policy body approves for use 8. The budget provides policy-setting by the sport, tourism, and leisure ser- bodies with a measurement tool used vice organization. Encumbered funds are in formal evaluation. those dollars that have been committed 9. The budget serves as a policy body’s for purchases, but have yet to be paid by mechanism for control. the organization to the vendor. As an example, a municipal parks and recreation Budgets are classified as two types: department, which purchased new play- operating budgets and capital budgets. ground equipment for $34,000 in March, Operating budgets deal with current issued a purchase order for the purchase. expenditures for a specified period of The department recorded the money as time, while capital budgets cover longer being committed or encumbered, but periods of time in attempting to address not spent. Sixty days after the purchase major projects requiring significant in- order was issued the vendor installed the vestments of dollars. Capital budgets playground equipment. Shortly thereaf- Chapter 14 183 ter an invoice was received, the depart- closeout period. The length of time re- ment issued a check to the vendor, and quired to construct a budget will vary the money was no longer encumbered, from organization to organization–it is but expended. Expended funds, then, mandated by the organization’s govern- are those funds paid out for services and ing body. Accounting bodies prefer to items purchased, leased, and rented and finalize or close out an organization’s for which invoices have been received end-of-the-year budget within 30 to 90 and checks issued. days. Even when some funds remain en- A fiscal year provides a fixed start- cumbered, budgets can be closed out with ing and stopping point for budget ad- the knowledge that encumbered funds ministration. Policy-setting or legislative remain to be expended. bodies and managers need to be able to establish budgetary guidelines for their Budget Preparation Cycle organizations. The fiscal year is recog- A typical budget preparation cycle nized as an accounting standard. It allows includes four tasks, as depicted in Figure organizations to accomplish fiscal plan- 14.2. In a government agency, the budget ning for a fixed period of time. It allows cycle is usually prescribed by the legis- government organizations to match an- lative authority, such as a city council, a ticipated tax revenues against projected park board, a county council, or a state expenditures. It allows commercial and or provincial government. For not-for- not-for-profit enterprises to plan for rev- profit organizations, a board of directors enues and expenditures. defines the budget process. Not-for-profit Budget cycles can take up to 24 organizations that depend on the United months, and some organizations have Way for part of their operating budget longer planning cycles. Figure 14.1 illus- may be required to follow a United Way trates three fiscal years and includes the budget presentation process in full or in budget preparation time and the budget part. Commercial enterprises may have

Figure 14.1 Three-year budget calendar 184 Financial Resource Management: Sport, Tourism, and Leisure Services

a specified set of instructions and proce- administrative officer. The organization dures to follow, or they may be flexible in is expected to comply with all of the their approach to budget development. guidelines prescribed by the legislative Regardless of the type of sport, tourism, authority. and leisure service organization, there are The budget guidelines include a some commonalities that each type of or- budget calendar, which is an orderly ganization can follow in the development timetable showing the dates when neces- of a budget. sary action must be taken in preparing An example of a municipal budget the budget. A budget calendar frequently cycle (Figure 14.2) includes activities initiates the process 12 months in ad- and deadlines. A budget preparation vance of the start date of the budget. (The document includes such items as specific example in Table 14.1 begins six months directives from the legislative body, any in advance.) The budget guidelines and restrictions on budget growth, identifica- calendar are provided so the legislative, tion of budget deadlines, budget formats, executive, and departmental entities will budget decision guidelines, and specific avoid encroachment on one another, instructions that either may be applicable and give order to the budget prepara- only to this budget period or may be new tion. This development phase is the most to the organization. The guidelines are critical phase of the budgeting process typically transmitted in a letter, with sup- and realistic completion dates should be porting documentation from the head articulated. Completion dates should be of the legislative body or the designated established for the following:

Budget Preparation

Budget Review Budget Submission and Evaluation and Approval

Budget Execution

Figure 14.2 Budget preparation cycle Chapter 14 185

Date Actions to be Completed

2 January (-180) Mayor’s budget policy letter requesting department heads to submit proposed work program and budget estimates for ensuing ﬁscal year. Neces- sary forms and revisions to budget manual are transmitted with the letter.

1 February (-150) City administrative ofﬁcer (CAO) approves staff budget assignments, which are thereafter distributed to the staff.

1 March (-120) Service betterment budget estimates, if any, received from department heads.

10 April (-80) CAO reviews tentative Capital Improvement Expenditure Program (CIP) and, upon approval, transmits it to the Public Works Priority Committee.

10 April (-80) CAO submits annual salary recommendations to City Council.

10–30 April (-80 to -60) Hearings conducted by the Public Works Priority Committee to determine ﬁnal priority of capital projects to be included in CIP for ensuing year.

10–17 April (-80 to -73) Preliminary budget hearing held by CAO and Budget Coordinator with the Assistant Budget Coordinator and staff analyst for each department.

18–28 April (-74 to -92) CAO, assisted by Budget Coordinator, conducts departmental budget hearing with each department head, at which time the staff analysts’ recommendations for that departmental budget are presented and the department head is given an opportunity to express his or her viewpoint.

1 May (-60) Final date for submission by City Controller of the ofﬁcial estimates of revenue from all sources (other than general property taxes).

1 May (-60) CAO submits ofﬁcial estimate of revenue from general property taxes.

1–5 May (-60 to -55) Mayor, assisted by CAO, conducts budget conferences with each department head. Attended by council members, press, and taxpayer groups.

5–12 May (-55 to -48) Final budget decisions made by Mayor, who is assisted by CAO.

12–31 May (-48 to -30) Budget printed under supervision of CAO.

1 June (-29) Mayor submits budget to City Council.

1–20 June (-29 to -10) Council considers Mayor’s budget and makes modiﬁcations as it deems necessary.

20–25 June (-10 to -5) Mayor considers any modiﬁcations made by City Council and may veto such changes.

25–28 June (-5 to -2) Council considers Mayor’s veto of any items and may vote to override Mayor’s veto by a two-thirds’ majority.

1 July (0) Beginning of ﬁscal year—budget takes effect.

Table 14.1 A detailed example of a public budget preparation cycle 186 Financial Resource Management: Sport, Tourism, and Leisure Services

• Distribution of instructions and The calendar should also include the forms. following: • Preparation of revenue estimates. • Return of the completed budget re- • Schedule showing responsibilities of quest forms. the various officials and departments • Completion of review and prelimi- to specific items. nary preparation of work assigned to • Excerpts of legal and administrative the central budget agency. rules that govern budget formulation • Completion of executive review and and execution. executive determination of final budget content. It is recommended that each sport, • Submission of the budget to the ap- tourism, and leisure service organiza- proving body. tion develop its own budget calendar us- • Completion of public or shareholder ing the policy and administrative bodies’ hearings (if required). calendars as a guide. The calendar should • Final action by the approving body provide information similar to that found • Executive approval or veto of the ad- in the policy body’s calendar, although it opted budget and legislative action should be specific to the organization. thereon. • Completion of administrative action, Funds if any, needed to actuate budget ap- propriations. Budgets are constructed around ac- • Beginning of the fiscal year. count-based funds. Funds come from any of the five income sources discussed in

CASE STUDY Portland Area Metro Parks Budget Process

The Portland Area Metro Parks is part of the metro government and follows a budget cycle identified by the government. Figure 14.3 depicts the current budget cycle for creating a budget. The following description of the budget process is abstracted from the 2006-2007 Metro budget: Review of prior year. Each fiscal year begins with a review of the previous year’s budget cycle, determining what was successful and where there were problems. The process is refined for the next year. Budget parameters are developed, setting out basic assumptions for departments to follow, along with policies and priorities. Budget Manual. The budget manual provides departments with detailed instructions for preparing and submitting their budgets. The submitted budgets are initially reviewed by the chief operating officer and staff. The manual covers how to increase/decrease the number of employees, changes in personnel costs, capital budget preparation, and so forth. Parks Requests. The department staff reads the instructions and prepares the budget based on guidelines provided by the chief operating officer. The budget is a forecast of program activities and financial needs for the next fiscal year. The forecasts provide the foundation for the department’s budget requests. Review and Analysis by the Chief Operating Officer. The Finance Department and financial planning division review all budget requests and share the results with the Chapter 14 187

CASE STUDY Portland Area Metro Parks Budget Process (continued) submitting department and the chief operating officer. The chief operating officer and chief financial officer meet with the department to discuss identified issues and program changes. Review and Analysis by the Metro Council. The Metro Council is composed of community members and serves as the policy-setting board for the Metro government. It ultimately approves the budget after review and discussion. Changes to the Budget after Adoption. There are several ways a budget can be modified after adopted and these are prescribed in the Oregon Local Budget Law.

Figure 14.3 Portland Metro budget cycle from: http://www.metro-region.org/article.cfm?ArticleID=19522

Metro Parks - Budget Preparation Calendar

The annual budget cycle includes these primary steps: July-August • Review previous budget process • Develop parameters and policies for upcoming year • Develop budget calendar 188 Financial Resource Management: Sport, Tourism, and Leisure Services

CASE STUDY Portland Area Metro Parks Budget Process (continued)

September-January • Define budget assumptions and priorities • Distribute budget instructions • Budget and five-year capital budget preparation • Council President review of requests February-March • Council President review completed • Proposed budget prepared • Council briefings April-June • Proposed budget submitted to Council • Review and approval of budget by Council • Review and certification by Tax Supervising and Conservation Commission • Council adopts budget prior to June 30

Source: http://www.metro-region.org/article.cfm?ArticleID=9467

Chapter 8. They are segregated from the governmental funds, proprietary funds, regular operating budget for the purpose and fiduciary funds. Each is described of carrying on specific activities. Funds below and depicted in Table 14.2. are unique to government and not-for- profit organizations. Funds are a separate Government Funds group of accounts that are managed inde- Included within the three types of pendently of each other. They have come funds are sub-funds that are common to about because government organizations most public sport, tourism, and leisure have legal restrictions placed on them service organizations. Most government regarding how specific revenue may be fiscal operations are conducted through expended. A local option hotel/motel tax four types of funds: (1) general fund, (2) may be restricted by state or city code for special revenue fund, (3) capital projects use to support greenways, greenbelts, or fund, and (4) debt service fund. convention and meeting facilities. These The general fund is most common to funds can be divided into three categories: all public organizations. It supports all

Table 14.2 Types of government-based funds

Governmental Funds Proprietary Funds Fiduciary Funds General Fund Enterprise Funds Expendable Trust Funds Special Revenue Fund Internal Service Funds Nonexpendable Trust Funds Capital Projects Fund Agency Funds General Obligation Fund Debt Service Funds Special Assessment Funds Chapter 14 189 operations not assigned to other funds. In A capital projects fund focuses on the public park and recreation agencies, this acquisition, design, and construction of fund will vary from less than 30 percent capital facilities or major projects that to more than 90 percent of the operating have an economic life of greater than one budget. Included in it might be personnel year. These projects include aquatic com- services, maintenance operations, sup- plexes, recreation centers, conference plies, contractual services, etc. Sources centers, sport complexes, ice arenas, pub- of revenue for the general fund are most lic parks, and other major buildings and frequently property taxes, but they also structures. It also includes the purchase may include sales taxes, special taxes, in- of large or expensive pieces of equipment. tergovernmental grants, and licenses and Money for a capital projects fund can permits. come from a variety of sources, including The special revenue fund is used for special taxes, intergovernmental grants, speciﬁc services and is usually legally re- and proceeds from the sale of revenue or stricted for that purpose. User fees and general obligation bonds. charges are the primary source of revenue A debt service fund is used to pay the for special revenue funds. Fees collected organization’s long-term debt and, in the from recreation programs and services case of government, the general obliga- are a common source of revenue. These tion debt from the sale of bonds. Any fees are deposited in a special revenue organization involved in capital projects fund and used to pay for recreation proof signiﬁcant size has probably engaged grams and services. The fund can also be in long-term debt. Revenue for the debt used to partially defray or wholly pay for service fund comes primarily from taxes, operating expenses, personnel services, grants, special assessments, and intergov- supplies and materials, etc. ernmental grants.

Public parks and open spaces provide important opportunities for recreation activities. 190 Financial Resource Management: Sport, Tourism, and Leisure Services

A special assessment fund consists of from an investment of the principal. The money targeted for a specific project or income may be spent in the general fund task. Assessments are made to specific in- or assigned to specific programs or other dividuals or organizations for an identi- funds. A nonexpendable trust fund may fied service or benefit to be received. accrue income to the principal from a variety of sources, such as accrued interest, Proprietary Funds donations, grants, and bequests. A proprietary fund has a profit and An expendable trust allows spending loss component and is designed to pro- from the principal. Art endowment and vide for ongoing activities as a self-sus- zoo endowment programs are common taining operation. examples of expendable trusts. Individu- An enterprise fund receives most of als are encouraged to contribute to a spe- its revenue from user charges and typi- cific endowment, and the agency uses the cally supports a major operation or en- money contributed for day-to-day opera- terprise. Examples of enterprise fund tions or for special projects. operations include civic centers, aquatic An agency fund allows an agency complexes, and major parks, zoos, and control over a set of designated funds. Ex- sport complexes. amples might include lottery funds used Internal service funds transfer money to finance parks and recreation, or a hotel between different departments within the and motel tax for a convention center op- same organization for services rendered. eration or sport complex operation. For example, if the YMCA program di- Less common funds include annu- vision needs 8,500 brochures, and their ity funds, endowment funds, loan funds, printing services division provides the and operating funds. brochures, the program division would An annuity fund holds money that be billed internally by the printing divi- remains after an annuity contract has sion for their costs. This fund allows or- expired. These funds can be used in any ganizations to track the cost of services manner that the organization chooses provided internally and serves as a way unless specific restrictions are placed to charge the services of internal support upon them. services and measure their utilization by An endowment fund is most fre- other internal organizations. quently used by not-for-profit organizations, but has the same characteristics as Fiduciary Funds a nonexpendable trust. Fiduciary funds are used to account A loan fund is a separate fund set for assets received and held in trust by aside with the constituent funds available either a government or a not-for-profit for loan for specific functions or services. organization. The organization is per- One example of a loan fund is the provi- ceived as a trustee, custodian, or agent for sion of loans to faculty, students, and staff the funds. Three types of funds are com- at a university. mon to fiduciary funds: nonexpendable An operating fund is made up of all trust fund, expendable trust fund, and an those funds that are available for use by agency fund. the board of a not-for-profit organiza- Thenonexpendable trust fund requires tion. The operating fund fulfills the same that the principal remain unspent, but al- role as the general fund in a government. lows the expenditure of income generated Chapter 14 191

Budget Preparation Format the organization. It should be viewed as a shared process rather than a competitive There are many different ways to for- process. mat and prepare a budget. Table 14.3 pro- Effective budget preparation engages vides a summary of 12 of the more com- all members of the organization. Budget mon budget formats. Each budget format preparation should be taken to the lowest provides decision makers with different levels of the organization, thus fostering kinds of information. Depending on the understanding, input, and commitment goals of the sport, tourism, or leisure ser- from organization members. This process vice organization, one or more appropri- may necessitate training for members of ate budget formats are selected. the organization, as well as an enhanced The object classification budget is the level of trust. Decentralizing budget de- most common format for public, not-for- cision-making to the lowest possible lev- profit, and commercial organizations. It els results in an increased commitment is a budget format that allows managers to the budget and to the organization’s to use the budget as a tool to accomplish purpose and direction. Ultimately, the goals and objectives. Expenditures are CEO defines each member’s role in the classified into a specific category (called budget’s preparation and sets the tone a code). However, as government and for budget operations. A single individ- not-for-profit organizations become ual should be designated as the budget more entrepreneurial and develop rev- preparation officer (BPO). The BPO en- enue-generating operations, the object sures conformity in the budget prepara- classification budget format cannot meet tion, collects and collates all of the data all of their information requirements and submitted by different budget managers, is frequently paired with another budget identifies discrepancies, and resolves dis- type, such as the program budget. (Chap- putes. The BPO also ensures that the bud- ter 15 discusses selected budget formats get conforms to the guidelines proposed in detail.) by both the CEO and the policy body and is linked to the department’s strategic or long-range plans. The department Budget Preparation Activities BPO briefs each member of the organization who has contributed to the budget, Budget preparation is the responsi- coordinates closely with the department bility of the chief executive officer (CEO) executive officer, and prepares the final of the sport, tourism, or leisure service budget document for submission to the organization. This person may be the legislative or policy body. director, the executive director, the superintendent, the manager, or the owner. The Relationship of Strategic The CEO sets the agenda and the tone for Planning to Budget Preparation budget preparation for all members of the The budgeting process is linked to organization. Budget preparation should strategic planning. An organization, dur- be a co-operative endeavor among the ing the process of development of the organization’s members and the external strategic plan, should engage in aligning budget agency, if one is present. Coop- the budget with the strategic plan. Bud- eration among participants in the budget get preparation decisions should help to process is a key element in the success of achieve key tasks identified in the stra- 192 Financial Resource Management: Sport, Tourism, and Leisure Services oach eporting accuracy ovide flexibility to meet oach to management and es detailed cost estimates at the es reporting sophistication es reporting oss entire organization oss entire program level program budget detail to provide collapsed into because expenditures categories or lines broader similar disadvantages and retains decision making easy comparison system measurement need and value acr changing issues tion detailed accounting system situations • Categories sometimes too generalized Disadvantages • Does not pr • Budgets may not lend themselves to • Uses object classification appr establishment of an equitable • Requires • Difficult to determine importance of • Comparisons not always possible • Requir detailed planning and prepara- • Requires • Some loss of r • Can be difficult to set up and requires • Some activities don’t fit easily • Reduces some levels of flexibility • Requir • Fixed appr • Not particularly useful in non-repetitive • Not particularly useful in non-repetitive dized units of mea- ficulty esults most important oves knowledge of where oves knowledge of where ement and cost ocess is uniform and follows ovides a clear picture of where of where ovides a clear picture fectively integrates with comput- ties activities sur tion minimal dif funds are allocated funds are and services of programs standardized procedures standardized mined detailed accuracy budget funds are allocated budget funds are er-based operations management • Relatively easy to establish • Pr • Clearly defines services as activi- • Allows for comparisons between • Pr • Focuses on service goals • End r Advantages • Highly standar • Allows some flexibility • Allows for multiple system utiliza- • Allows for budget adjustments with • Comparison of functional costs • Impr for comparative analysis • Provides • Category development is predeter- • Provides for high control and for high control • Provides • Ef Table 14.3 Table ofits, es rather than the ovides similar ease Comparison of commonly used budget formats er delineation of the costs es, such as maintenance and ouped activity budgets are ouped activity budgets are and corporations. Provides ease and corporations. Provides of budget classification and management. func- associated with different tional activities cost of the program Purpose/When Used Allows agencies to have a clear budget Similar to the program used with frequently and more mea- operations with repetitive sur food service of budget classification and management. tracked and administrators are tracked and administrators are able to view their change in expenses over a period of time Most common of budget types in use by government, nonpr Gr the outcome Used to measure on proof budget expenditures grams. Focus is on the impact of expenditur As common as object classification and pr es eplace e end elationship eas are divided eas are oup activities under esults (or outcomes) of tion except items r Used to measur results of activities based results on performance outcome measures Identifies the r between costs and end r Looks at operations as categories (objects) and classifies expenditur and into “activity areas” focus on the cost to perform a specific function into those categories major functions programs specific categories for classification get and allows agencies to gr ogramming, Line item budget Similar to object classifica- Activity budget Budget ar Performance budget Planning, pr Type of BudgetType Description budgeting system Object classification budget Function budget Similar to the activity bud- Chapter 14 193 ocess eativity and flexibility es top down policies eases organizational tension eases organizational analysis and reporting initiating before Disadvantages • Not a stand-alone system • Budget administration pr • Time consuming to administer • Not a stand-alone system • No budget detail available • Requir • Demand and need not addressed • Encourages status quo • Discourages cr • Limited budget/cost detail provided • May not include all actual costs • Increased justification and reporting • Increased internal • May increase competition • Incr sophistication in increased • Requires areas to appropriate • Use restricted detailed knowledge of needs • Requires ocess derly review ticipant costs esent and comprehend eativity and flexibility enhanced ovides narrative justification and services, not just costs and importance of programs focusing on essential services of actual cost growth • Pr • Focuses on values of programs • Cr • Clear description of unit expenses • Simple to pr Advantages • Based on daily accounting • Real-time budget accountability • Revenues tied to income • Encourages regular review of value review • Encourages regular flexibility for increased • Provids • Enhances decision making when • Facilitates an or • Provides a more detailed account a more • Provides • Shows per-par to public • Opens budget process • Provides for hassle-free predictable predictable for hassle-free • Provides • Reduces decision making • Simplifies the budget pr Table 14.3 Table equires a detailed equires , depicts where , depicts where and justify which operations which justify and dingly throughout the fiscal dingly throughout ganizations without stable ograms and costs are identifi- ograms and costs are Comparison of commonly used budget formats (continued) able and linked to outcomes are expenditures Purpose/When Used year are worthy of retention are Used when fuller explanation of pr Or When an agency needs to assess for decision makers operations Useful for viewing costs across does not organization, entire suggest commonality among units; rather income can adjust budget ac- cor accounting of specific areas Makes the budge process Makes the budge process simple by addressing relatively with a fixed issues of increase percentage When budget r egard egard oups costs ferent budgeting ferent equently in large or- in large equently ograms requiring all ograms requiring raditional approach of raditional approach ganizations, gr or decreasing increasing budget by fixed percent- ages, done without r by subunit and allows for use of dif expenditure in the context expenditure goals of organizational T based on income and expenses, driven by income and limiting income Focus on actual costs of pr programs regularly justify regularly programs existence within subunit approaches to levels of importance of service and operations and allocates to specific categories o based Type of BudgetType Description Zer Program budgetProgram Explains and justifies Increment/decre- ment budgeting Running budget Developed and modified budgeting Fee budget Determines actual cost Unit budget Used fr 194 Financial Resource Management: Sport, Tourism, and Leisure Services

tegic plan. Strategic planning is about come, suggesting that either politics or achieving organizational futures. Linking an attitude of sharing proportionately the budget to strategic planning becomes among competing groups is an equitable a visible method of moving from planning approach to budgeting. A fixed ceiling to action. Budget decisions should focus budget remains an acceptable model. on the organization’s values, vision, mis- A budget based on workload mea- sion, and action plan. A strategic plan is surement and unit costing seeks to devise not intended to address all operations of units of work and to determine unit costs. the organization, but rather its emphasis This budget approach attempts to quan- is upon those action items deemed neces- tify work as performance and output. In sary to achieve the organization’s vision. sport, tourism, and leisure service orga- Strategic planning complements, but nizations, workload measurement bud- does not replace, effective evaluation of gets work best for units with repetitive day-to-day operations, special initiatives, types of activities. capital projects, etc. Strategic planning is An increase/decrease analysis is a another budget preparation component form of fixed ceiling budget depicting that the BPO and budget manager must changes from the previous year’s expen- consider. diture lines. An item-by-item control looks at each budget item and asks if it is Budget Preparation Philosophies essential, desirable, or justified. Alterna- How budget needs are estimated de- tive budget proposals ask staff members pends on the type of preparation philoso- to prepare a basic budget supplemented phy the organization adopts. by an outline for alternative budget levels An open-ended budget allows for the (such as a budget that is called base, then optimum program operation for the or- an alternative budget with an increase of ganization. The budget is not hindered 15 percent and another alternative budget by restrictions on spending; rather, it with a decrease of 15 percent). Alterna- requires decision makers to adjust the tive budgets provide rationales for differ- budget to meet the organization’s bud- ent budget proposals and detailed budget get capabilities. This adjustment is typi- information. Almost all budget prepara- cally accomplished through reductions tions go through some form of alterna- in proposed expenditures. Open-ended tive budget preparation, but rarely in a budgeting has fallen into disfavor in an formally requested manner. Such an ap- era of accountability and limited budget proach requires a considerable amount of growth. time and effort on the part of the budget A fixed ceiling budget typically places preparers and usually yields little return a limit on the growth of a budget. A fixed for the additional work. ceiling budget assumes previous budgets Factorial estimating looks at past ex- were adequate and minimal growth will penditures and factors what it believes continue to meet organizational needs. will be future expenditures. More specifi- A fixed ceiling budget fits a mature or- cally, it looks at operating expenses and ganization focusing on minimal change. revenues in a detailed format over a pe- It is also a politically safe budget. How- riod of years and attempts to estimate or ever, such budgets often fail to take into forecast future expenditures. The reliance account changing needs of the organiza- upon historical data is appropriate for tion. The format reacts to available in- most sport, tourism, and leisure service Chapter 14 195 organizations, but those organizations Preparing an annual work plan re- that rely wholly upon the past to predict quires in-depth knowledge of the or- the future will find that they are ill pre- ganization’s work processes and their pared to meet the demands and needs of relationships to the vision and mission. their constituents or legislative body. Delegating budget preparation and man- Historical analysis is an almost iden- agement to the lowest possible level in tical approach to factorial estimating, the organization assumes that those who except that it typically leaves out person- do the work are best prepared to estimate nel-related services. its costs and outputs. The delegation of A variety of philosophies can be budget preparation does not eliminate applied in preparing a budget. Histori- the need for constant oversight and justi- cally based, open-ended, measurement, fication at each step of the process. or work measurement philosophies To facilitate the process of budget- have been the most commonly applied ing for annual work plans, the financial to budgeting processes that determine manager of the sport, tourism, or leisure work program requirements. Personnel service organization should do the fol- need oriented budget preparation has lowing: used work measurement and historical analysis, and a budget focusing on esti- • Conduct an annual review of each mation of the cost of supplies, materials, program or service and assess con- and equipment usually relies upon his- sistency with the organization’s vi- torical analysis. Equipment needs have sion and mission. used a fixed ceiling format as the primary • Annually assess the effectiveness of method, although in some instances, an each program and service in rela- open-ended budget is utilized effectively. tion to the organization’s goals and objectives, the standards established Preparing the Departmental for the program or service, and cus- Work Plan tomer satisfaction. The departmental work plan is an • Initiate a level-of-performance re- integral part of the budget preparation view to determine if the program or process. It involves identifying the work service meets agreed-upon levels of of the sport, tourism, or leisure service service or satisfaction. organization for the planned fiscal year and then matching the proposed budget Estimating Personnel Service with the desired work. It usually requires Requirements a series of trade-offs between what the In most sport, tourism, and leisure organization would like to do and what service organizations, personnel costs it can realistically accomplish within the are the single largest expenditure item. constraints of its budget. The department The costs will range from 50 percent to work plan involves at least three compo- 90 percent of the organization’s operating nents: (1) ongoing functions of the park costs. Given this level of funding, the im- and recreation organization, (2) new or portance of determining personnel costs proposed functions of the organization, cannot be underestimated. In the budget- and (3) special one-time or infrequently ing process, the purpose of the personnel reoccurring functions of the organization. functions is to determine the type, quantity, and quality of personnel needed to 196 Financial Resource Management: Sport, Tourism, and Leisure Services

accomplish the work plan of the organi- code 87456 will receive $27,456 in annual zation during the fiscal period. wages. Each period, usually one year, the Personnel costs are most frequently person can anticipate a salary increase figured on a fixed growth, as opposed to the next range. In addition, there may to a fixed ceiling, budget. An organiza- be annual cost-of-living increases, essen- tion should take several approaches to tially increasing the value of the next step. determining personnel costs. First, it The steps in Table 14.4 are based on a 4.5 should determine the costs for full-time percent increase. If the legislative body personnel. Since the bulk of these indi- determined that a 3.0 percent cost-of- viduals are already on a fixed salary, the living increase was appropriate, then the annual allowable percentage of growth entire step range would increase by three is frequently determined by the policy percent. An individual at step two would body. In government and not-for-profit receive an increase of three percent and organizations, it may be a fixed percent- have a new annual salary of $29,552. At age of a salary base (e.g., cost-of-living step five, the individual has achieved the raises will be 3.5 percent for the next fis- highest pay possible in that position. Fu- cal year). This has been and continues to ture increases would come from cost-of- be the most common approach taken to living adjustments or a redefinition of the salary adjustments. The fixed growth may salary range. The number of steps in a sal- be based on anticipated available funds, ary range will vary from organization to government-determined cost-of-living organization. It could consist of as many increases, inflation, or what the policy as 20 or more steps. body negotiates with the employees or Permanent part-time positions are their representatives. usually determined in the same way. Sea- Most full-time, salaried employees sonal or temporary part-time positions are compensated within a fixed salary are determined in any number of ways. range. Employees are hired at a particu- Most organizations begin with a mini- lar salary within the existing range, and mum wage approach and then value each salary adjustments can occur every year. position on the basis of its contribution Table 14.4 illustrates sample salary ranges to the organization, the prevailing wage for different positions. for a similar position, and the availability The salary ranges, or steps, as shown of qualified individuals. In one commu- in Table 14.4, represent the salary increas- nity, when the indoor pool began its fall es an employee will receive after a speci- and winter season, the parks and recre- fied period of time with the organization. ation department could not hire a suffi- A person starting at step one of position cient number of qualified lifeguards. An

Table 14.4 Example salary ranges

Position Position Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Code Title 87456 Program $27,456.00 $28,691.52 $29,982.64 $31,331.86 $32,741.79 $34,215.17 Supervisor 85543 Assistant $33,663.00 $35,177.84 $36,760.84 $38,415.08 $40,143.75 $41,950.22 Director Chapter 14 197

Budget preparation is often a process of shared decision making.

analysis of the job market showed that ning table. Additionally, the budget prep- the number of available lifeguards was far aration officer needs to look at workload diminished from the summer. The agen- trends in the organization. Organizations cy had erroneously assumed the summer should be involved in some type of work- lifeguard wage would be adequate for load analysis that provides this informa- the indoor season. What it had failed to tion. Included in workload trends are new take into account was the fact that college or amended legal requirements affecting students, who made up the core of the the organization’s programs and services, summer lifeguards, returned to school, newly initiated policies or changes in ex- thus reducing the market availability by isting policy regulations, planned chang- over 60 percent. The parks and recreation es in the organization, changes in systems agency ultimately increased the wage by and/or procedures, and approved work- $2.00 per hour to attract other qualified load consolidations. The CEO attempts lifeguards. to balance workload demands with available personnel and match demands with Staffing Issues existing commitments. At the disposal Determining staffing needs for proof the CEO is his or her experience over grams is a function of budget managers. a period of years with staffing patterns. Information pertaining to the number of This experience quotient, although not personnel, the rate of pay, the length of scientifically quantifiable, is an impor- time to be employed, and the justification tant component of the budgeting pro- for the position are provided to the bud- cess. Finally, the CEO has to make cer- get preparation officer for inclusion in the tain assumptions about the future. These budget. An important tool that is used by assumptions are based on existing facts, budget preparation officers and CEOs to past history, knowledge of the organiza- determine staffing needs and reviewing tion and its members, political implica- staffing patterns is the detailed organizations and realities, and stakeholder ex- tion charts, table of organization, or man- pectations. 198 Financial Resource Management: Sport, Tourism, and Leisure Services

Personnel costs are collected for all termine what is an acceptable level of positions and placed in the department’s overtime and how the organization will operating budget. If the personnel costs fund the overtime. In some cases, orga- are assigned to different funds within nizations have adjusted work hours to the organization, the positions are ap- overcome anticipated overtime costs. In propriately categorized. This process can one community, the recreation main- become complicated, but when properly tenance crew members modified their organized and cross-referenced, it be- hours from mid-December through comes an organized and understandable mid-February to accommodate a six-day document. In most organizations, there week for maintaining outdoor ice rinks. will be some salary savings every year. A salary savings occurs when one or more Contractual Service positions in the organization remain Requirements empty for any period of time. For ex- A growing option in public, private ample, a position paying $2,000 a month not-for-profit, and commercial organiza- that is vacant for three months results in tions is contractual services. The growth a $6,000 salary savings for the organiza- of contractual services is base in part on tion. Over a period of time, these vacan- the belief that some functions can be cies can produce a significant financial done more effectively and efficiently at savings for the organization. In some a lower cost by outside vendors. Whole cases, the BPO may know about these communities have embraced the con- vacancies in advance; in other cases, cept of contracting out services. The they will occur during the fiscal year, and City of Indianapolis, Indiana, leases its adjustments will have to be made in the golf courses to independent contrac- operating budget. Most budget prepara- tors. Every organization has some form tion officers anticipate salary savings and of contractual arrangement, even if it is figure them in as part of the budget. only with the copy machine repair per- For some organizations, overtime is son. The level and extent of contractual a significant issue. The Fair Labor Stan- management is not typically an issue in dards Act (FLSA) prescribes overtime the budget process. At some policy level, rules for most organizations. Employees the decision (and action) to become in- can be identified as exempt from over- volved in contractual management was time, depending on their positions and made. If the organization has not made responsibilities, but most employees the decision about contracting for ser- will more likely be affected by the FLSA vices, then the budget preparation pro- overtime rules. Public organizations are cess provides an opportunity to make a particularly challenged by the overtime determination. Issues needing resolution costs. In a northern states community, include the following: comparative costs for example, the parks and recreation between the sport, tourism, leisure ser- department may be assigned to be part vice organization accomplishing the task of the snow removal process—a respon- versus a commercial contractor; pres- sibility whose cost is almost impossible ence of qualified contractor personnel; to predict, but which will always involve actual cost, impact upon the organiza- overtime. Most organizations set aside tion’s productivity; and quality of work. a certain amount of the personnel costs Some of the common types of services for overtime. The organization must de- privatized or contracted out include park Chapter 14 199

Partnerships Provide Income for Capital Improvements in New York City Parks

New York City has over 27,000 acres of parks, but for 20 years has seen a steady decline in park employees, operating budgets, and capital budgets. A number of support groups are actively engaged in supporting public parks. The parks department has actively sought out partners to alleviate reduced funding levels. In late 2006, the parks department announced a cooperative agreement with a local sports foundation for a near-exclusive use of Randall’s Island park and its ball fields for 20 private schools. The sports foundation, working on behalf of the private schools, is contributing $85.5 million over 30 years to help upgrade and maintain the fields. The sports foundation, organized in 1992, has previously contributed $42 million for a track and field stadium and run free summer and weekend programs for thousands of children in the communities of East Harlem and the South Bronx. The foundation is one of 20 such groups the parks department works with on an annual basis, and it is projected that the department receives $60 to $70 million annually. The New York example, while large, is typical of what public agencies are doing across the Untied States.

maintenance, golf course management, tition. An important part of the competi- landscape maintenance, tree trimming, tive model was to ensure that employees fleet (trucks and vehicles) maintenance, were not threatened by the new process animal and pest control, building main- and that they had the opportunity to bid tenance, janitorial services, refuse collec- on privatized projects. tion, and security services. In San Jose, California, the decision Materials, Supplies, and to become involved in public-private com- Equipment Costs petition began in late 1996. The argument Materials and supplies that are not for public-private competition is that the part of the capital budget comprise the public sector should be competitive with second most costly item in most operat- the private sector in both cost and qual- ing budgets. Budget managers determine ity. It does not necessarily involve the re- the type, quantity, and quality of material placement of public workers with private required to carry out annual work plans. workers. In San Jose, the effort focused Organizations take into account issues on “maximizing the value of services for such as present inventories, cost, annual the public, rather than on deciding which use levels, any patterns in changing use sector ultimately delivers the service” or provision of services, new programs (San Jose, 1997). The process includes and services, etc. The organization usu- contracting in, as well as contracting out. ally begins with an assessment of what In fiscal year 1996, San Jose contracted to was purchased during the previous year external contractors about 25 percent of and whether it was sufficient to accom- its operating budget, or $250 million. In plish the required tasks. Program reports, establishing the public-private competi- year-end reports, and inventories provide tion, the city also established criteria for some of this information. Proposed work each service that it considered for compe- plans are compared with the previous 200 Financial Resource Management: Sport, Tourism, and Leisure Services

year’s work plans to determine changes in the advertised specifications. When the anticipated needs. If standards have been organization must go to bid is typically established for programs or services, or if determined by statute and also by the leg- they exist and are modified, those stan- islative/policy body. dards may affect the need for materials Equipment purchases defined as and supplies. capital equipment include items with a Projected inventories assist in pro- longer life span (greater than one year) viding another picture of material and including fitness equipment, pitching ma- supply needs. Many organizations have chines, computers, lawn mowers, trucks, adopted a just-in-time delivery process sailboats, rental bicycles, and cars. In al- in which the supplier provides stor- most every situation, the equipment has age and delivers on call. For example, a specific life span, after which it requires one park district determined it needed replacement. In preparing the equipment 30,000 pounds of seed for the entire year. portion of the budget, the sport, tourism, In previous years, it had purchased seed or leisure service organization needs to on three separate occasions. Consolidat- ensure there is an inventory of all equip- ing into a single purchase and requiring ment. The inventory should include date the supplier to maintain the inventory of purchase, classification code of the reduced the cost significantly and elimi- equipment, description of the item, pur- nated the need for the park district to chase price, its current location, current provide long-term storage requirements. condition (which may require an annual The purchase was negotiated so payment or more frequent inspection), and life was made only when seed was delivered. expectancy. For some pieces of equip- Thirty thousand pounds was the guaran- ment, the BPO may desire to establish a teed purchase at a guaranteed price. replacement schedule. A re-placement Where purchasing departments are schedule allows the budget preparation nonexistent, it is incumbent upon the officer to look forward and anticipate sport, tourism, or leisure service organi- major equipment costs for the organiza- zation to participate in well-formulated tion. Some organizations set aside money purchasing. The establishment of stand- every year for replacement of equipment ing purchase orders with local vendors into a capital replacement fund. This is a common strategy for maintenance strategy reduces the impact on the annu- operations. Larger purchases are typi- al budgets for major purchases occurring cally bid to a number of potential ven- during one fiscal year. Equally important dors and may or may not be a part of the is the spreading of major purchases over capital budget. A set of specifications is several years, rather than trying to make established for each purchase item and all purchases in a single year. used as a guide for the vendor to make a bid. Careful development of the speci- Reviewing Budget Estimates at the fications is essential, as well as an effort Departmental Level to ensure that bias is removed from the While the CEO must ultimately ac- purchasing process. There is rarely a re- cept responsibility for the final budget quirement that an organization take the document, it is the formal and informal low bid, but when not taking the low bid, processes that contribute to develop- the organization must demonstrate that ment of the final submitted document. the higher bid more closely conforms to Throughout the process, there is a con- Chapter 14 201 tinuous flow of information up and down administrators. A knowledge of funds the organization, exchanges of detailed and how they operate contributes to the data, analyses of decisions regarding ability of managers to allocate appropri- the budget, etc. Each budget manager ate resources. Budget formats are pre- should meet with the BPO and the CEO scribed by the legislative or policy body and brief them on his or her section of and determine how they choose to look the budget document. The CEO should at budgets. Corresponding budget prepa- provide a completed budget presentation ration philosophies suggest an approach for the sport, tourism, or leisure service to budgeting ranging from fixed ceiling organization’s budget managers and then to alternative budget proposals. The 18- answer questions. This final review as- month to two-year planning cycle for any sures that all of the issues associated with budget allows a sport, tourism, or leisure the budget’s preparation have been dis- service organization to plan, approve, im- cussed and the document is ready to be plement, and close a budget. A manager’s submitted to the legislative or policy-set- ability to estimate budget costs increases ting body. with experience, but knowing how to prepare an activity budget is the critical foundation for all budget processes in Summary sport, tourism, and leisure service organizations. Budgeting is an essential management tool in any sport, tourism, and park and recreation organization and requires References an understanding of how budgets work, of basic budgeting processes, and of how Edginton, C., & Williams, J. (1978.) Productive management of leisure service organizations. managers use budgets. The budget cycle, Hoboken, NJ: John Wiley & Sons Inc. budget calendar, and budget guidelines City of San Jose. (1997.) http://www.sanjoseca. drive the budgeting process for sport, gov/quest/sjpolicy.htm tourism, and leisure service organization

NOTES 202 Financial Resource Management: Sport, Tourism, and Leisure Services C H A P T E R 1 5

Budget Formats

Introduction Common Budget Formats

Budget preparation is a two-stage Budgets can be presented in a vari- process. Establishing budget guidelines ety of formats, but the choice is typically and determining the budget format are dependent upon the organization’s CEO’s essential tasks. There are multiple budget view of how a budget is organized. The formats that an organization can select. purpose of budgeting is to secure finan- Each sport, tourism, or leisure service cial control and to achieve the goals, organization must determine the format mission, and vision for the organization. that is appropriate for its needs. A com- Additionally, managerial productivity is mercial or not-for-profit organization seen as an important outcome of budget- may select a format that meets its unique ing. The type of approach adopted by a needs, but the format for public organiza- sport, tourism, or leisure service organi- tions is more likely dictated by legislation. zation is a reflection of how the legislative A board of directors or a legislative/poli- or policy body best feels the organization cy board may establish a different format should achieve its goals. Different types consistent with its own needs, and a large of budget formats reflect an emphasis organization may specify multiple budget upon different goals. For example, an formats, each with a different purpose object classification or line item budget and linked by a unit budget. This chapter focuses on financial control. Program looks at the most common budget for- and performance budgets focus on goal mats that organizations use. attainment. Zero-based budgeting and 204 Financial Resource Management: Sport, Tourism, and Leisure Services

planning-programming budgeting sys- an object classification budget, the orga- tems focus on managerial productivity. nization commonly uses a fixed ceiling The CEO and the budget preparation of- approach to allocation. Preparation items ficer should determine the level of detail include: (1) budget letter with guidelines necessary in any budget format. Six of the from the legislative authority; (2) ap- most common operating budget formats proved budget growth (usually in percent are presented in this chapter. They are of allowed growth of current budget); (3) representative of formats found in most list of classification codes (this can run to sport, tourism, and leisure service orga- many pages); (4) personnel salary ranges nizations. and steps; (5) specific or unusual budget request issues; and (6) budget forms. Object Classification and Items 1, 2, 4, and 5 will be common to Line Item Budgets most budget formats. The object classification and line item budgets are the most common of all bud- Step 1: Collect all budget data. get formats used to by sport, tourism, and Begin by collecting all budget data leisure service organizations. Both styles from the organization’s budget manag- of budgets, for example, rely on a coding ers. The assignment of budget data col- system for all revenue and expenditure lection should be delegated to the lowest items. In this section, primary emphasis possible level. Budget managers should is given to the object classification bud- complete as much of the budget process get, although the same principles can be themselves for familiarity purposes. The used for a line item budget. An object budget preparation officer will ultimately classification or a line item budget orga- check all information provided. nizes budgets into predetermined categories. Each line in the budget reflects either Step 2: Identify appropriate classifica- an expenditure or a class of expenditures. tion codes for each budget item. For example, “personnel costs” becomes The classification codes and budget a class with sub-classifications. Sub-clas- forms will be unique to the object classifications might include types of person- sification budget. The list of lines or clas- nel (program, maintenance, support, full- sification codes is given to the budget time, and part-time). “Benefit costs” is preparation officer and budget managers another class that can be subdivided into who must ensure that each item in the accounts, such as medical, retirement budget conforms to the existing codes. fund, and uniforms. The emphasis in the The list of codes can be many pages long object classification budget is on input and will have definitions to assist the rather than measurement. Conformance budget manager as he or she attempts to and compliance with an established bud- determine which item fits within a par- get is paramount to understanding how ticular code. Examples of expenditure the funds are being used or collected. classification codes and definitions ap- Construction of an object classification pear in Table 15.1. budget involves four steps, but before initiating the budget construction, specific Step 3: Place items in detailed sub- information must be gathered. The data classifications (object codes). to be gathered were addressed in Chap- Assignment of expenditure and rev- ter 14 and are partially repeated here. In enue items to classification object codes, Chapter 15 205 as depicted in Table 15.1, is followed by well as major, shifts in the budget. placing the same items into more detailed The amount of detail desired deter- expenditure and revenue object codes mines how many object codes the orga- (Table 15.2). Recall that the purpose of the nization will utilize. An organization that object classification budget is to provide is not concerned about budget detail may financial control. Placing each expen- have few object codes, while an organi- diture and revenue item into a detailed zation that is trying to gain control of its sub-classification allows the CEO and the expenditures may require very detailed budget preparation officer to have a clear coding. One park and recreation direc- and detailed understanding of the total tor noted that almost 50 percent of the budget and where the money is going to department’s expenditures were coded be spent. It allows multiyear tracking of as “miscellaneous.” Upon investigation, revenues and expenditures for compara- it became obvious that no one had pre- tive and evaluative purposes. The advan- viously shown a concern about tracking tage of this type of a budget format lies in expenditures. When it was explained to the CEO’s ability to be aware of subtle, as the organization’s members that the goal

Table 15.1 Example object classiﬁcation codes and deﬁnitions

100 Personnel Services – Expenditures for direct personnel services including wages, beneﬁts, overtime, special beneﬁts, and the like. Includes full-time, part-time, and seasonal employees.

200 Contractual Services – Services involving work performance by non-organization employees through a contract or agreement. The work may include the contractor to provide equipment and commodities.

230 Printing Services – Expenses related to printing, copying, reproduction, binding, publications, advertising, and the like.

240 Utilities – Charges for heat, water, electricity, telephone, cable or satellite television, network connections, 2-way radio, and so forth.

250 Repairs – All repairs for ﬁxed structures. Includes building repair, but does not include repairs to vehicles, equipment, and expandable items.

300 Commodities

310 Materials – Items more permanent in nature that may be combined or converted for other uses. Includes lumber, concrete, concrete blocks, paint, and other building materials.

320 Supplies – A commodity consumed, impaired, or worn out in an expectedly short period of time. Includes such items as paper, crafts, supplies, food, clothing, fuel, oil, grass seed, fertilizer, and so forth.

400 Encumbered Obligations – Fixed expenses and/or binding contracts created from previous obligations of the legislative authority. Included in this category could be temporary loans, interest on a city’s debt, grants and subsidiaries, court ordered payments, and the like.

500 Existing Charges – Provided at the option of legislative authority. It could include costs of insurance, licenses, rent, leases, and the like.

600 Debt Payment – Includes the amount of annual payment for reduction on debt incurred by the legislative authority. 206 Financial Resource Management: Sport, Tourism, and Leisure Services

Table 15.2 Example classiﬁcation codes by object (partial listing)

100 - Personnel 252 - Repairs to Buildings/Structures 110 - Salaries, Regular 253 - Repairs to Playgrounds, Equipment and 120 - Salaries, Temporary Services 130 - Salaries, Seasonal 300 - Commodities 140 - Salaries, Permanent Part Time 310 - Materials 200 - Services, Contractual 311 - Masonry 210 - Communications 312 - Road Materials 211 - Postage 313 - Lumber 212 - Telephone 314 - Paint 213 - FedEx, UPS, Freight 315 - Sand 214 - Internet Communications 316 - Other Materials 215 - In State Travel 320 - Supplies 216 - Out of State Travel 321 - Ofﬁce Supplies 220 - Subsistence, Care & Support 322 - Program Supplies 221 - Storage & Care of Vehicles 323 - Sport Supplies 222 - Per Diem - In State 324 - Craft Supplies 230 - Printing Services 325 - Aquatic Supplies 231 - Printing 326 - Food Supplies 232 - Photocopying 327 - Clothing & Dry Goods 233 - Wordprocessing 328 - Chemicals, All Kinds 234 - Photography 400 - Encumbered Obligations 236 - Marketing/Advertising 410 - Rent 237 - Publication of Notices 411 - Buildings & Spaces 238 - Blueprints/Plans/RFPs 412 - Equipment & Vehicles 240 - Utilities 420 - Insurance 241 - Natural Gas Utilities 500 - Existing Charges 242 - Propane 510 - Interest of Debt 243 - Electrical Utilities, Outdoor 520 - Pensions & Retirement 244 - Electrical Utilities, Indoor 530 - Grants & Subsidies 245 - Water Utilities 540 - Taxes 246 - Sewer Service 600 - Debt Payment 247 - Telephone Service 610 - Serial Bonds 248 - Network Connections 620 - General Obligation Bonds 250 - Repairs 630 - Revenue Bonds 251 - Repairs to Equipment 640 - Sinking Fund Installments 650 - Other Debt Payment

was to gain a better understanding of ex- classification code (Table 15.2), which penditures, the director refused to accept describes where the money was spent. miscellaneous classifications, and expen- This can also be a revenue object code. diture control and knowledge of expen- The last four digits represent the pro- ditures increased significantly. The object gram area (e.g., sports, recreation cen- classification codes shown in Tables 15.1 ters, office administration) and specific and 15.2 are illustrative extracts from programs. This might include the sport much larger documents. program area and its programs of soft- Figure 15.1 illustrates how an object ball, volleyball, and flag football. Codes classification code is used. In this case, the can allow highly detailed analyses of first two numbers represent the depart- budgets. ment, such as the parks and recreation The code in Figure 15.1 could be in- or the convention center. The middle terpreted to represent the Parks and Rec- four numbers represent the expenditure reation Department [24] purchasing art Chapter 15 207

24 - 5135 - 13 - 32

Program Detail Code Program Area Code Expenditure Object Code Departmental Code

Figure 15.1 Object classiﬁcation code

supplies [5135] for the arts program [13] the proposed fiscal year request (Tables pottery classes [32]. Expenditures identi- 15.3 and 15.4). The terms used to present fied down to the program detail provide each fiscal year are important. In the case budget managers with a clear picture of of Tables 15.3 and 15.4, the “last year ac- costs of programs and allow managers to tual” represents the expenditures for that make fiscal decisions based on relevant fiscal year. The fiscal year is complete, information. The object classification and all of the expenditures have been re- budget can function simultaneously with ported and recorded. The current fiscal other budget formats. year approved indicates the budget that is in process and is called “this year pro- Step 4: Organize the budget informa- jected.” The legislative body has approved tion. the budget, but because the fiscal year is Work at this stage involves collating not complete, there is only an estimate of the collected budget information, check- what the actual budget will look like at ing and verifying budget requests, orga- the conclusion of the fiscal year. This pic- nizing data for a budget review, making ture of the budget is incomplete, but has recommendations regarding budget allo- been reported on the basis of anticipated cations, and presenting the budget to the revenues and expenditures. The proposed legislative body for approval. fiscal year is called “next year requested.” Table 15.3 illustrates a traditional ob- At this point, the legislative body has not ject classification budget for an aquatics approved the proposed budget. Until it is program. The budget is combined with approved, it remains a requested budget. all other activity budgets in the agency to The object classification budget is the provide a total budget picture for the leg- most common of all budget types. It is islative body. The budget provided to the malleable enough to be used with other legislative body would provide the level budget formats. This flexibility allows of detail seen in Table 15.3, and a sum- the sport, tourism, or leisure service or- mary table representing all of the budget ganization to maintain fiscal control and areas as depicted in Table 15.4. simultaneously administer the budget The budget request is presented show- in other formats in order to accomplish ing: (1) the previous fiscal year actual; (2) other objectives. the current fiscal year approved,; and (3) 208 Financial Resource Management: Sport, Tourism, and Leisure Services

Table 15.3 Partial object classiﬁcation/line item budget

Object Last Year This Year Next Year Code Description Actual Projected Requested

100 Personnel 110 Salaries, Permanent Full-Time $35,242 $37,568 $38,556 120 Salaries, Temporary $2,500 $1,850 $3,240 130 Salaries, Part-time $67,561 $72,558 $75,042 200 Services: Contractual 220 Subsistence & Support 221 Storage & Care of Vehicles $250 $325 $380 328 Chemicals, Pool $2,785 $3,200 $3,540 322 Program Supplies $986 $1,100 $1,250 Concession Supplies 326 Snack Bar Supplies $2,250 $2,685 $2,100 328 Cleaning Supplies (Chemicals) $250 $250 $285 252 Repair Concession Counter $0 $0 $2,500 Other Supplies 322 First Aid Kits $250 $310 $365 323 Sports Awards - Patches $185 $200 $225 235 Flotation Devices $450 $250 $520 240 Utilities 241 Natural Gas $1,100 $1,250 $1,400 244 Electricity $1,150 $1,500 $1,850 247 Telephone $1,200 $1,300 $1,400 248 Internet Connection $75 $100 $115 420 Insurance 421 Fire & Comprehensive $850 $1,000 $1,200 422 Liability $4,500 $6,500 $7,200 230 Printing Services 236 Marketing $35,000 $42,000 $51,000 235 Web Site Design $2,500 $1,500 $3,200 231 Printing, Brochures $12,000 $15,000 $18,000 Total $171,084 $190,446 $214,368

Program Budget than eﬃciency or spending. This empha- Program budgeting is also called sis represents a major shift in the way the program planning budgeting system budgets have historically been construct- (PPBS). Traditional budgeting formats ed. The major advantage of the program focus on input (personnel, program, and budget is its ability to cross departmental capital costs), but program budgeting fo- or divisional boundaries when budgeting cuses on outputs (end results, goals, and for a program with expenditures from objectives). The emphasis of program more than one department. Program budgeting is upon eﬀectiveness rather budgeting has fallen into disfavor at the Chapter 15 209

Table 15.4 Summary budget data

Object Last Year This Year Next Year Code Description Actual Projected Requested 100 Personnel $102,893 $110,126 $114,314 200 Servcies, Contractual $1,072 $4,100 $4,500 Utilities $1,072 $1,164 $1,425 Insurance $3,625 $3,871 $4,125 Marketing $14,343 $16,250 $17,500 300 Supplies & Equipment $8,747 $9,954 $12,336 Total $131,752 $145,465 $154,200

federal level, but has flourished at the gram manager, the administrators, and state, municipal, not-for-profit, and com- the legislative/policy body. mercial levels. The emphasis on outcomes The department represents the level and measurement has been received posi- of budget authority and responsibility. tively by administrators and the consum- At this level, the department or division ing public alike. Recent initiatives and refines the organization’s vision, mis- trends in output measurement through sion, and major goals to fit programs. goals and objectives, public surveys, sat- The program areas are aimed at specific isfaction determination, and benchmark- goals, or in the example of many sport, ing have all contributed to the acceptance tourism, and leisure service organiza- of program budgeting. tions, program-specific areas (or popu- A program budget takes expenditures lations). Programs are designed to meet and breaks them down into viewable units more specific population needs; they are according to the service provided. For also referred to as support activities. They example, the object classification bud- emphasize the importance of focusing on get looks at the entire budget, but not at who is to benefit from the service or pro- programs. It provides no understanding gram. Program elements represent the of how or why funds are to be expend- basis that budget units use to achieve the ed. The program budget provides more goals and objectives of the organization. information to the budget manager and Consistent with the budgeting process is others who have a desire to know how the development of goals and objectives the allocated funds will be expended. The at each level of the structure. Examples budget is subdivided into program areas, of goals and objectives developed for the and each program area is reported as a adult sports tennis program in Figure separate part of the budget. For program 15.2 are represented in Figure 15.3. managers, this separation provides great- The development of program bud- er authority and accountability. Their de- geting has necessitated the rethinking of cisions are reflected in their management how budgets are administered. Moving of their portion of the budget. Figure 15.2 decision making and budget administra- depicts how a program budget format tion down to the lowest levels of the or- might be organized. A program budget is ganization fostered a new set of concepts organized to provide details to the pro- and terms, such as cost centers. Cost cen- 210 Financial Resource Management: Sport, Tourism, and Leisure Services

City Manager Administration Program area services Pool preparation Pool cleaning Aquatic operations Chemicals Pool Winterization City Engineer Maintenance Building maintenance Building cleaning Custodial Services Preventative Trafﬁc Control Aquatics maintenance Building renovation

Parks & Recreation Adult Programs Softball Spring softball Summer softball Volleyball Fall softball Police Youth Programs Preseason Basketball

Fire & Rescue Adult Sports Ice Hockey Lessons - Individual Tennis Lessons - group Leagues Administration Youth Sports Golf Tournaments

Figure 15.2 Example program budget

Department of Parks and Recreation Goal: To provide recreational services and opportunities for leisure experiences for all members of the community.

Program Area: Adult Sports Goal: To provide opportunities for adults to participate in life-time sport, promoting physical and mental well-being.

Program: Tennis Goal: To increase the opportunity for members of the community to be exposed to and to participate in tennis programs Objective: Provide opportunities for individual lessons. Provide opportunities for group lessons. Provide leagues for individual and team participation. Provide tournaments for local, regional, and state level participation.

Program Element: Individual Lessons Goal: To provide opportunities for individuals to improve their tennis game through individualized instruction. Output Measures: Number of individuals participating in lessons. Number of individuals returning from previous sessions/years. Effectiveness of lessons as measured by participant satisfaction survey. Cost-effectiveness of program.

Figure 15.3 Program budget goals and objectives for Figure 15.2 Chapter 15 211 ters comprise an independent entity em- creased substantially, he or she cannot bracing all of the costs of activities and arbitrarily make that decision. Rather, the items necessary to achieve a distinct and cost center budget manager must discuss measurable outcome. Operating funds the issue with the functional area budget for the cost center may come from several manager. In this case, the adult sports divisions or departments. When expendi- supervisor will discuss the issue with the tures are made, they are charged back to maintenance superintendent. the parent budget authority, but the cost center identification remains consistent. Step 1: Goals and objectives. Assuming softball is a cost center, the Step 1 assumes the organization is maintenance division will fund softball already organized around program ar- field maintenance and preparation and eas of functions, as illustrated in Figure charge it back to adult sports. In an object 15.3. This suggests that program manag- classification budget, field maintenance ers and functional area budget managers and preparation would only appear as an are already talking to one another. The expenditure that’s not necessarily tied to a sport, tourism, or leisure service organi- program area. In a program budget, with zation develops goals and objectives for softball as a cost center, the cost of main- the fiscal year that can be a continuation tenance and preparation is linked to both from previous years, updated, modified, the program area and the maintenance or completely new for each fiscal year. division. Maintenance knows how much Program managers develop goals and it is spending overall and how much it is objectives for each level of the program budget, down to program detail. Desired spending just for softball. outcomes are determined in advance, as For the budget manager who may well as decisions about methods of mea- have previously budgeted only for staff surement. and program supplies, he or she now has a clear picture of the total cost of Step 2: Provide detailed narrative for the program, including salaries, sup- each program. plies, maintenance, marketing, and Program areas were identified in step administration. 1. In step 2, the program manager will The new concept ofresponsibility cen- identify those features of the program ters (also called budget decision points) that meet specific goals and objectives. has also been introduced. The term in- The program manager further explains dicates a focus on budget analysis and how and why each is important. The nar- decision making. A responsibility center rative relates to the program’s goals and manager knows each program budget’s objectives. cross-functional boundaries within and between divisions and departments. Step 3: Determine expenditures and Program managers with cost center re- revenue for the program. sponsibilities make decisions regarding Using the processes discussed re- budget allocations within the context of garding the preparation of a simple activ- their authority and negotiate with other ity budget (see Chapter 13), the budget responsibility center managers for ad- is adjusted to a program budget format. ditional resources. For example, if the In those areas where measurements are budget manager for softball determines defined, the expenditures will be tied to that maintenance costs need to be in- specific objectives. 212 Financial Resource Management: Sport, Tourism, and Leisure Services

Table 15.5 illustrates a completed determine which of the organization’s aquatics program budget. Presenting rev- operations are most conducive to a per- enue plans is accomplished in the same formance budget format. These opera- way; however, revenues are not necessar- tions should meet the following criteria: ily tied to objectives. The budget present- (1) It should be possible for the work to ed in Table 15.5 depicts a program budget be quantiﬁed into measurable work units; with objectives, a narrative, measurement (2) it should be possible for the quality of criteria, and income and expenditure ex- the provided service or activity to be mea- pectations. Although each sport, tourism, sured; and (3) the performance should and leisure service organization will have be able to hold constant. Examples of its own format for developing a program work that can be easily quantiﬁed include budget, each will follow a similar pattern. mowing, tree planting, fertilizing, ball The components remain remarkably sim- diamond preparation, and most grounds ilar, with an emphasis on outcomes rather maintenance activities, construction ac- than inputs. tivities, and some custodial work.

Step 2: Establish work units. Performance Budget For each activity that will be mea- A performance budget is frequently sured, work units must be established. referred to as a measurement of effi- This is accomplished by measuring cur- ciency. It is most frequently used with rent work levels, benchmarking work recurring tasks, where measurements activities against the same work accom- can be readily developed and applied. plished by similar organizations, and Performance budgeting became popular looking at standards established by vari- with municipal governments in the early ous measurement organizations. In the 1950s and remains in use today. It fits early stages of establishing standards, well into operations where repetition and flexibility is important until an achievable measurement can be made easily, such as and acceptable standard is determined. certain repetitive maintenance functions Work units are normally measured in (e.g., mowing, grounds maintenance, and performance per hour, although they can custodial work). One of the benefits of a be established in other ways. Examples performance budget is its ability to proof measurements include square feet per vide managers with performance-cost item, cubic yards, acres, sales per adver- data. Although the development of mea- tising campaign, revenue per available surement data is beyond the scope of this room (RevPAR), etc. A grass-mowing book, it requires an assessment of what crew using hand mowers may have a work work needs to be accomplished, what unit established as .75 acres per hour. The equipment is available to do the work, and same crew using gang mowers may have capabilities of employees to accomplish a standard of 4.5 acres per hour. the task. It requires a constant assessment and monitoring of the measurement per- Step 3: Determine the cost per work formance standards by managers. unit to be measured. The cost per work unit is based on a Step 1: Identify those components of number of variables, which include the the budget that fit a performance format. task to be completed, the capabilities of The budget preparation officer must the employees, the cost of expendable Chapter 15 213

Table 15.5 Example program budget

Program: Aquatics Program Description: The aquatics program is designed to provide recreational opportunities, competitive opportunities, and learn-to-swim lessons to residents. Performance Objectives: 1. Provide open swim opportunities for all members of the community. 2. Increase the number of program offerings by 5% over the previous year. 3. Achieve a 90% positive satisfaction rating from participants in all programs. 2007 2008 2009 Measurement Program Objective Actual Projected Proposed Demand Estimated Participants Open Swim 1 38,146 45,000 47,600 Other Swim 1 9,877 10,000 10,500 Learn-to-Swim 1 2,300 2,600 2,800 Estimated Programs 2 30 45 47 Workload Actual Registrations Open Swim 1 38,166 45,000 47,600 Other Swim 1 9,877 10,000 10,500 Learn-to-Swim 1 2,300 2,600 2,800 Actual Programs 2 30 45 47 Actual Participation 2 50,353 57,645 60,947 Total Community Population 110,000 110,000 110,000 Productivity Average cost per participant $2.67 $2.51 $2.52 Average cost per participation $2.67 $2.51 $2.52 Effectiveness Program participation increase/decrease over previous year 0.00% 14.48% 5.73% Program offerings increase/decrease over previous year 0.00% 50.0% 4.44% Participant percentage positive rating 88.00% 88.00% 90.00% Percent Total Population Served 45.78% 52.40% 55.41% Narrative The aquatics program serves a variety of populations in the community, including people with disabilities, adults, seniors, and pre-school and school-age youth. Resources Expenditure categories Personnel $102,893 $110,126 $115,200 Operations/Maintenance and Supplies $13,590 $15,038 $16,800 Insurance $3,488 $3,600 $3,800 Marketing $14,354 $16,200 $18,000 SUBTOTAL $134,325 $144,964 $153,800 Revenues General $15,600 $15,000 $16,000 Fees & Charges $105,314 $109,964 $115,000 Donations & Grants $13,368 $20,000 $25,000 SUBTOTAL $134,282 $144,964 $156,000

214 Financial Resource Management: Sport, Tourism, and Leisure Services

supplies and special equipment, the de- on need and the level of quality assigned preciation of equipment, and travel time to a particular task. Using the mowing and distance. The budget preparation of- example, the standard for cutting is that ficer looks at all of the variables that af- the grass will be cut when it reaches six fect the work unit and establishes a cost inches in height. In a normal year, that standard. For a mowing crew that travels would be every ten days from late April throughout the city, the cost standard through mid-October. If, however, it would include travel time between sites, rains more than normal, the grass will salaries of the mowing crew, cost of gaso- grow more quickly, and mowing may oc- line for travel and mowing equipment, cur every eight days instead of every ten. maintenance costs of equipment, actual This alteration will require a budget ad- time spent on site mowing, and other justment. It will also require a workload associated costs of the task. Assume an adjustment, as the mowing crew will not 18-acre park has 10 acres of open area be able to accomplish other tasks that suitable for a gang mower; four acres may have been assigned to them. Just the that require hand mowing with a 42- opposite would occur in a low-rain year, inch mower; and two acres that call for when mowing might only occur on de- 22-inch hand mowers. Two acres are not mand, maybe as infrequently as every mowed. The mowing crew takes an aver- three weeks. More than likely, the mow- age of 2.5 hours to accomplish the task. ing crew’s responsibilities would change, The cost of personnel is $26.00 an hour and they might have to water new trees and other costs are figured at $10.00 per and turf areas to preserve them through hour, with an additional 30 minutes as- a drought. At best, the budget manager signed for travel. Three people work on must work on what he or she believes the mowing crew. After a period of as- will occur. In those activities not affected sessment and evaluation, the following by weather, the budget planning can be standards are established: more accurate, but nonetheless, the budget manager must recognize that things • Gang mowing at 8 acres per hour. will not always go as planned. • 42-inch hand mowing at 2.2 acres per hour. Step 5: Organize budget. • 22-inch hand mowing at .75 acres per When all of the performance budget hour. steps are completed, the budget manager or budget preparation officer compiles Sufficient time is available to accom- the budget. Table 15.6 depicts a sample plish all of the tasks, except the 22-inch format for a performance budget. hand mowing. Either the standard, the time available for the work, or the equip- New Directions in Performance ment must be modified. Budgets In recent years, public agencies have Step 4: Determine the frequency with made major advances in quantifying out- which work must be completed. comes. While performance budgeting Determining costs is, in part, a deci- follows the same process previously de- sion on how frequently particular work scribed, it is also linked to strategic plan- needs to be completed. Frequency of re- ning. One of the key elements of a perfor- curring tasks and of annual tasks is based mance budget is its collection of adequate Chapter 15 215

Table 15.6 Performance budget format Cost per Number of Number Total Activity Work Unit Work Unit Work Units Frequency of Times Cost Softball diamond per preparation diamond $9.45 18 daily 98 $16,669.90 Gang mowing per acre $4.45 800 10 days 12 $42,720.00 Hand mowing per acre $7.25 120 10 days 12 $10,440.00 Tree planting per tree $12.85 1200 once a year 1 $15,420.00 Pool cleaning per pool $32.50 3 7 days 18 $1,755.00 Trash pickup per day $26.50 2 daily 275 $14,575.00 Sign installation per sign $21.50 40 as required 1 $860.00 Total $102,439.80

performance data, and while this collec- new ways to emphasize performance, al- tion is routinely done in the private sec- though agencies usually did not provide tor, it is an approach that is relatively new outcome-based rationales when making to the public sector. Results have been less proposals for new spending initiatives. It than convincing to many budget manag- was expected that “It will likely take time ers, but processes continue to be refined. for agencies to develop a consensus on ap- The key difference in performance-based propriate measures of performance and budgeting is the asking of a different set collect reliable supporting data” (Minne- of questions. In traditional object classi- sota Report on Performance Budgeting). fication budgeting, budget managers ask Most public administrators agree that per- what it will take to complete a particular formance budgeting is a growing trend in task. In performance budgeting, the first public and private agencies and that mea- question asked is, “What is the outcome surement techniques will be refined. to be achieved?” The outcomes become the basis for performance measures. For Running Budget example, the question might be, “How A running budget has become more many softball teams will play in the sum- common among not-for-profit organi- mer?” The outcomes are defined through zations and businesses, as they attempt a modified strategic planning process to adjust budgets to changing revenue that considers the critical issues facing streams. The running budget reflects the agency, along with the organization’s more of a way of managing expenditures capabilities and input from stakeholders. than it does constructing a budget. The Minnesota’s state government re- budget can be constructed in any for- ported that it had been involved in per- mat, but decisions about expenditures formance budgets off and on for 25 years, are made on a scheduled basis through- but only recently has the system been re- out the fiscal year. If revenues exceed introduced and begun to show success. expectations, the budget can be adjusted Even with the performance mandate for to reflect the increased revenue. If rev- recent budgets, the state determined that enues decline, the budget can be reduced many agencies reported existing data in to accommodate the decreased income. 216 Financial Resource Management: Sport, Tourism, and Leisure Services

There are some distinct disadvantages to ditures at multiple times during the fiscal this type of budget. First, budget manag- year allows the organization to adjust its ers never know from day to day exactly budget when revenues are uncertain. Ad- what their budget will be. Second, good justments can occur on a daily, weekly, bi- decision making is hampered when the weekly, monthly, or quarterly basis. The focus of decisions appears to be on rev- decision of frequency will be determined enue rather than on needs. Third, budget in great part by the anticipated variance managers may be encouraged to make in revenues and how often revenues are big purchases early to ensure that their received. A historical analysis provides major items are secured. This can lead to a great deal of information for making a mind-set in the organization that is not this decision. If it is a membership-based conducive to stability or growth. organization, and membership dues are On the positive side, a running bud- received on a scheduled basis, antici- get allows an organization that experi- pated revenues might be predetermined. ences negative financial growth to be If, for example, dues statements are sent responsive to that situation by appro- out quarterly, then the organization can priately reducing costs. In addition, the project on a quarterly basis its progress organization does not extend itself be- toward achieving its revenue goals. Un- yond its capabilities and also recognizes der these circumstances, it may only be a responsibility to its legislative body and necessary to do a budget adjustment on a to its constituents by not incurring debt. quarterly basis. This type of budget is most often seen in organizations experiencing or anticipat- Step 3: Establish spending limits. ing significant declines in funds available Establishing spending limits is a for the operating budget. common practice of budget preparation officers as they attempt to lighten the Step 1: Construct the operating budget. impact of concentrated spending by the Any budget format can be used, organization. In a running budget, it is whether it is an object classification, line particularly important. Each part of the item, program, or performance budget. organization will need to negotiate lev- The principles for construction are simi- els of spending in any given time period. lar to those for any of the other budget For example, arbitrarily allowing the dif- formats. As just noted, the change comes ferent parts of the organization to spend in the administration of the budget. When only one-fourth of their budget per quar- the budget preparation is complete, it is ter does not take into account the special submitted to the legislative body for re- needs of the different parts of the organi- view, modification, and ultimate adop- zation. The administrative branch might tion. easily spend one-fourth of its budget each quarter, but the convention division Step 2: Determine frequency of budget might spend 60 percent of its budget in reporting. the second quarter and the other 40 per- The essence of the running budget cent over the next three quarters due to is that it helps the organization to always normal seasonal fluctuations. Creating know the status of its expenditures and an acceptable balance of spending across revenues and to make adjustments in au- the different parts of the organization thorized expenditures. Adjusting expen- requires a thorough understanding of Chapter 15 217 the budget process. Of necessity, it must Zero-Based Budgeting be negotiated with the budget managers A zero-based budget is so named throughout the organization. because it assumes that the organization starts each fiscal year as if it doesn’t have Step 4: Determine how often the bud- an existing budget. While this isn’t entire- get will be adjusted. ly true, its purpose is to allow the sport, Making budget adjustments based tourism, or leisure service organization to on actual revenue and expenditures is look at everything it does and value each the heart of the running budget process. activity’s importance to the organization Applying the same criteria discussed in and its stakeholders. It allows the organi- step 2, the legislative/policy body must zation to look at all of its operations, ac- determine how often the budget will be tivities, and functions and to justify each adjusted. Typically, budget adjustments one. In doing so, it promotes the re-allo- will be made in both the revenue and ex- cation of funds from lower priorities to penditure portions of the operating bud- higher priorities. The zero-based budget get. A fiscal quarter (three months) is the is an effort to be responsive to changing most frequently accepted adjustment pe- needs of the organization and of those it riod; however, in a highly volatile budget serves. This budget format is designed to situation, adjustments can be made more facilitate competition among units and often. Historical and current information functions. must be provided to the legislative body, along with recommendations for adjust- Assumptions of Zero-Based Budgeting ment. A clear rationale should be made Several assumptions are made about for the adjustment, along with a discus- an organization’s capability to implement sion of how the adjustments will affect zero-based budgeting. First, it is assumed programs, services, and outcomes. that the organization can clearly define

Boards and commissions deliberate over budget recommendations made by the professional staff. 218 Financial Resource Management: Sport, Tourism, and Leisure Services

goals and objectives for the entire orga- be based on these goals. At each descend- nization. This is a sometimes daunting ing level, goals are developed to provide task that requires considerable attention direction and to ensure consistency. at each level of the organization. Second, A decision unit is a point at which it is assumed there is adequate budget budget and programming decisions are preparation time. Zero-based budgeting made—ideally, at the lowest reasonable is a time-consuming task. If the organiza- level in the organization. In aquatics, for tion’s members do not have time to con- instance, the decision unit may not be tribute, then it should not be used. Third, the whole aquatics program, but rather, it is assumed there is a healthy relation- could be divided into learn-to-swim, ship between units of the organization. swim club, adult lessons, and youth les- There will be an impact upon the morale sons. At a later analysis level, these could of the organization, due mostly to in- be combined or remain separate. Budget creased competition for available budget requests should be based on previously funds. Fourth, it is assumed that the bud- experienced levels of expenditures. To do get can appropriately be based on internal so reduces the effectiveness and purpose needs. Zero-based budgeting is internally of zero-based budgeting. focused and does not always take into Table 15.7 depicts an example deci- account external needs or requirements. sion unit worksheet without the fiscal Fifth, zero-based budgeting assumes a information. The decision units do not significant cost in terms of time, money, need to be consistent with the organiza- and effort as the initial transition is made. tional structure, but frequently are. In a There will be ongoing costs for time and YMCA, the initial decision unit would effort as the process progresses. likely be at the program manager level. If a program manager has responsibility Step 1: Defining goals and objectives for multiple program areas, however, the and decision units. decision unit could be modified. It would Program and budget goals and ob- seem logical that, wherever possible, the jectives are established and decision units decision unit and organizational struc- are defined at the program/service level. ture would be consistent. The development of measurable goals and objectives is based on outcomes Step 2: Decision assessment and and user/customer-defined expectations. analysis. Great care must be taken in developing Step 2 involves analyzing and assess- these goals so that effective measurement ing each decision unit within the frame- can occur. Goals are developed at multi- work as a decision package. The decision ple levels and assumed to be part of a top- package becomes the building block down process. The organization’s goals of zero-based budgeting. The decision are developed at the CEO level jointly package is a cluster of decision units re- with the legislative or policy body. These lated to the accomplishment of the unit’s goals become the guiding or overarching goals and objectives. As the budget pro- goals of the organization. All other goals cess moves up the organization, decision and objectives developed need to be con- packages can be grouped according to sistent with these goals. Ultimate mea- commonality of objectives. This grouping surement of the effectiveness and appro- could result in decision units not remain- priateness of programs and services will ing within the structure of the organiza- Chapter 15 219

Table 15.7 Decision unit worksheet example

Program Area: Learn-to-Swim Division: Aquatics Fiscal Year 2009

Level of services currently provided Justiﬁcation for current/ex- Funding Recommendations panded level of service

• Lessons offered throughout the The learn-to-swim program It is recommended funding be year with an emphasis on summer has been offered for over retained at the current levels. months 40 years by the depart- Any reduction in funding would • Lessons offered for beginners ment. Each year more than result in a degradation of the through advanced swimmers 5,000 youth and adults are program and it has high com- • Lessons offered to pre-school served by the program. It munity support and visibility. through seniors and people with represents the only commu- It has consistently received disabilities nity-wide program provided. high marks from those • Summer services offered at 11 The school district does not who participate. In some community pools 3 times a week provide a program and the cases families are in their 3rd and 4 times each day YMCA caters to a smaller generation of participation • Other seasons offered at 3 indoor number of individuals, all in swim programs. Revenue pools after school for youth, during members. The program has levels could be increased if the day for seniors and people with consistently been revenue fees are increased. A study to disabilities, and evening for adults positive (paid for itself and determine the impact of a fee • Currently meet Red Cross learn-to- generated a proﬁt) in the increase is recommended. swim guidelines aquatics division.

tion. Managers at the program delivery decision makers are afforded alternatives level must look at alternative means of to accomplish each decision unit. The achieving objectives, as well as determin- alternatives allow decision makers to de- ing appropriate levels of service and use of termine the most appropriate approaches resources. The notion of zero-based bud- for the delivery and level of services. geting is meant to encourage managers to focus their energies on those activities Step 3: Ranking decision packages. that are perceived as most critical to the Once all of the data have been gen- organization’s mission and vision. Activi- erated, the ranking of decision packages ties that do not directly contribute to the occurs at predetermined levels. Deci- vision and mission are either eliminated sions are based on consistency with the or receive reduced levels of funding. Such organization’s goals and objectives, deter- decisions encourage managers to set up mined cost-effectiveness, how well each levels of service and to seek alternative decision package meets the needs of the funding. users, availability of funds, and any pre- Included in the decision process are determined policy guidelines. Rankings variables such as workload, performance of decision units are made and funds measures, cost-benefit associated with are allocated to the decision units. Once each level of service, revenue, and ex- funds are allocated to decision units, they penditures. Each decision package can are returned to the appropriate organi- receive one of four actions: (1) increased zational level for budget action. If a de- resources, (2) maintenance of current cision unit does not receive the level of resources, (3) reduced resources, or (4) funding necessary for sustaining it, the elimination of resources. Additionally, program manager will already have cre- 220 Financial Resource Management: Sport, Tourism, and Leisure Services

ated alternatives for funding at reduced of the organization or its clientele. or increased levels, either for different A number of disadvantages have delivery approaches, or for no funding at been suggested for zero-based budgeting. all. The decision process will put such al- Most significant among the reported dis- ternative approaches into action. advantages is that it has not lived up to its promises. In instance after instance, there Step 4: Budget request formulated. were high levels of budget pre-activity as The budget format may be any of the individuals and groups attempted to in- budget formats previously discussed. It fluence the decision making (sometimes is submitted through normal processes with high levels of influence in the out- to the budget preparation officer and the comes). The results provided outcomes CEO for final submission to the policy or similar to the pre-zero-based budgeting legislative body. format and also what appeared to be no perceptible change in the decision mak- Advantages and Disadvantages of ing. The second major disadvantage of Zero-Based Budgeting zero-based budgeting concerns infor- There are several advantages to using mation overload. Decision making is a zero-based budgeting format. First, in ultimately top-down in zero-based bud- zero-based budgeting, all programs start geting, and everything generated at the out on equal footing at the beginning of lower levels is designed to aid the deci- the process—no single program is fa- sion maker. One governor found himself vored over another. Programs, services, with 11,000 decision packages, far more and functions all have the same oppor- than any management expert would rec- tunity to receive funding. Second, bud- ommend and more than can be effective- get decision makers will find that more ly dealt with by any one individual. detailed information is generated than it is with other budget formats. When im- Modified Zero-Based Budgeting plemented properly, there is a systematic While zero-based budgeting as a and well-conceived allocation process. single budget format for an organization Third, the goals of the organization and has fallen out of favor, it remains in use its individual and collective activities are in a modified form as a supplemental for- under constant review and prioritization. mat in many organizations. For example, As such, individuals who work in this in Phoenix, Arizona, city departments format are more actively engaged in goal submit an estimate (called the base) of setting, goal attainment, and goal nego- the costs associated with providing their tiation. Fourth, this budget format pro- current levels of service for the following vides service level options where none year. City budget and research staff re- may have existed before. It requires that view the base budget submissions to en- program managers look at alternative sure that only that funding necessary for program and service delivery methods current service levels is included in the and at what level each program or ser- department’s base. The review is called vice should be delivered. Finally, it has a “technical review” because of its non- been suggested that zero-based budget- programmatic line-item-by-item review ing eliminates waste in the organization of a department’s budget. A department’s by eliminating or reducing funding for base funding may differ from its current- programs that are not meeting the needs year funding for a variety of reasons. For Chapter 15 221 example, an increase or a decrease in util- also indicates which supplemental pro- ities would be reflected in the base. grams and base reductions are most criti- In addition to base budget submis- cal to the department. sions, departments submit five percent to 10 percent of their following year’s base budget for potential elimination. These Summary submissions are called “base reductions,” and they represent the department’s low- Budget formats allow sport, tourism, est-priority activities. At the same time, and leisure service organization manag- departments are also asked to submit any ers and administrators to view a budget requests for new, restored, or expanded from a particular perspective. These for- programs, which are called “supplemen- mats may be combined for differing pur- tal budget requests.” The base reductions poses. The object classification budget is and supplemental requests include all the most common of all budget formats costs associated with a specific program for sport, tourism, and leisure service or- or service, such as the cost of operating ganizations. Other common and effective a new swimming pool. Costs for pool budget formats include the program bud- operation would include those associ- get, the performance budget, the running ated with personnel, chemicals, building budget, and the zero-based budget. maintenance, supplies, and utilities. When the base reductions and supplemental requests are submitted, they References are ranked together according to the department’s priorities. The department’s Minnesota Report on Performance Budgeting. ranking indicates whether it would be (1995.) In Money Matters, Volume 10, Number 1. Minnesota House Ways and possible to make a base reduction in or- Means on Government Finance Staff. der to add a new program. The ranking

NOTES 222 Financial Resource Management: Sport, Tourism, and Leisure Services C H A P T E R 1 6

Capital Budgeting

Introduction updated annually. Capital budgeting is conducted in similar ways in the public, Capital budgeting addresses a sport, private not-for-profit, and commercial tourism, and leisure service organiza- sectors. In the public and commercial tion’s major expenditures for equipment, sectors, sport, tourism, and leisure ser- buildings, and land. For the most part, vice organizations may issue bonds for sport, tourism, and leisure service orga- short- or long-term debt, while not-for- nizations manage two budgets—one for profit sport, tourism, and leisure service operations and another for capital ex- organizations would more likely use a penditures. Capital budgeting is not di- capital campaign, which is an extension rectly concerned with the costs of daily of the fundraising processes discussed in activities and functions. It concerns the Chapter 11. management of debt and investments in capital resources. Capital budgets are generally approved annually at the same Benefits of Capital Budgeting time as the operating budget, but annual capital budgets are just a part of a larger The use of capital improvement pro- Capital Improvement Program (CIP) that grams and budgets provides some impor- may represent a five- to ten-year period tant advantages to organizations. Several of time. The CIP pulls together all of the of the most important reasons for adopt- identified major asset desires and needs ing a capital budget are described below. of the organization over a predetermined High-cost items could have a nega- period of time. Although the CIP extends tive effect on operating budgets if they over a period of years, it is reviewed and are included in an operating budget. 224 Financial Resource Management: Sport, Tourism, and Leisure Services

Organizations desire a level of stabil- see how money is being used for opera- ity in their operating budgets that shows tions and for capital development. Capi- minimal fluctuation from year to year tal projects are normally funded from and responsiveness to public demand. separate capital improvement funds Removing capital items eliminates ma- rather than from the operating budget. jor fluctuations in the operating budget Some funds and sources may be similar, and presents a more accurate projection but other funds, such as general obliga- of actual operating costs. For example, tion bonds, revenue bonds, and special a public parks and recreation depart- assessments, are specifically designed ment has an annual operating budget of for capital projects. $2 million, and it constructs a new band Capital budgeting allows for planned shell in a city park at a cost of $450,000. growth and spending. It strives to an- The construction of the band shell is fi- ticipate specific needs of the organiza- nanced through a five-year loan. If this tion and to budget for those in advance. capital expenditure was included in the If land is to be purchased in the future, operating budget, it would increase that current planning can anticipate that and annual budget significantly and give a set the stage for securing funds and plan- false picture of the organization’s finan- ning for short- and long-term debt. cial health. Placing the same $450,000 Capital budgeting provides focus. It in a separate capital budget allows the allows the organization to put its energy observer and budget manager to readily into a few well-conceived capital proj-

Sport, tourism, and recreation facilities are capital projects that require special funding. Chapter 16 225 ects and purchases rather than be dis- would be a part of the process of deter- tracted through an inefficient “shotgun” mining the type and size of the expansion. approach. A needs analysis also looks at replacement needs. Most organizations assume a certain life span for the equipment that The Capital Budgeting Process they purchase and use that consideration as they plan for the eventual replacement Capital budgeting allows for plan- of that equipment. ning of expenditures that may have a The strategic plan should be a key el- significant impact on the sport, tourism, ement in the needs-assessment process. and leisure service organization’s budget. The strategic plan looks three to five years Capital budgeting is a four-step planning into the future, providing vision, pur- process that involves inventory of capital pose, goals, and objectives. It provides di- assets, needs analysis, cost analysis, and rection to the capital budgeting process. financing. There are a number of factors that influ- An inventory of capital assets is an es- ence the outcome of the needs-analysis sential first step in any capital improve- process. They include: demographics; ment program. An inventory should cultural changes; the local, regional, and include, at least, the following: (1) a de- national economy; legislation that has an scription of the type of facility, land, or impact (such as the Americans with Dis- equipment; (2) the purchase price; (3) abilities Act); community growth or lack any improvements that were made; (4) thereof; technological obsolescence; di- its current condition; (5) the projected saster planning; and replacement sched- replacement cost for equipment; (6) the ules. Each must be taken into account in depreciated value; and (7) the projected the needs assessment. end of the useful life. Cost analysis is a decision-making The inventory allows the sport, tour- process that helps to pinpoint where to ism, and leisure service organization to spend available funds for capital improve- know, at any given point, the status of its ments. It is not very different from most capital assets. For example, if vehicles are decision-making processes. The crux of purchased on a five-year cycle, the inven- the cost analysis is the determination of tory can show what year each vehicle was where to allocate limited resources in re- purchased, how many will have to be pur- sponse to seemingly unlimited demands. chased in the next five years, and any un- The inventory and needs analysis set the anticipated need to purchase in advance stage for cost analysis. of the five-year cycle. For a building, the Cost analysis provides key informa- inventory can show the date it was built, tion for the prioritization of projects. the dates and types of renovations made, There is no single method for establish- its current condition, and its current use. ing priorities. Organizations must take A needs analysis looks at the future into account a number of variables and needs of the organization and attempts to weigh each of them accordingly. Some of identify how those needs will be met and the variables to consider in the prioritiza- what capital investments will be required. tion process include the following: For example, if a fitness club owner determined she needed to expand her facilities • relationship of the project to future in the next five years, the needs analysis needs; 226 Financial Resource Management: Sport, Tourism, and Leisure Services

• legal mandates; a proposed water playground. The budget • capital costs versus operating costs; includes all of the expected costs of the • costs relative to the benefits of com- project. peting costs; Part 2 involves estimating the annual • political costs and benefits; operating costs of the project. Operation- • external funding potential; al costs occur after the purchase or after • impact on improved effectiveness the project is completed and are typically and/or efficiency; funded from the operating budget. They • spin-off benefits; include the cost of utilities, staffing, insur- • costs relative to competing costs; ance, maintenance, equipment repairs, • financial impact on defined stake- etc. While construction is a major cost holders; and to the organization, operating the facility • relationship of the proposed asset to requires a long-term commitment. The defined beneficiaries. operating budget can begin as a “rough estimate” and then be formalized into a A four-part approach to cost analysis more detailed analysis later. Table 16.2 is suggested. Part 1 involves determining presents sample data collected from four the turnkey cost of the project. For a new comparable facilities/sites that can be facility, such as a family aquatic center, used in estimating operational costs and the turnkey costs would include costs for revenues for a new family aquatic center. services, construction, and fees as identi- Always remember that after building fied in Figure 16.1. a facility, there will be an ongoing addi- While those represented activities tional cost of operating it. Failure to take may not account for all of the costs, they the added operational requirements into represent a major share of the anticipated account could result in serious budget costs. Table 16.1 depicts the projected problems. One midwestern community costs, as presented in a capital budget, for constructed a 50-meter indoor aquatic

The proposed Family Aquatic Center will have a capacity of 4,200 people (4% of the population) and be open from Memorial Day through Labor Day (99 days). The facility will include a wave action pool, zero-depth leisure pool, activity/water play pool, lazy river with zero-depth entry, ﬂume slide, water-play apparatus, and a ﬂo rider. In addition, the 16-acre facility will have parking for 1,000 cars, internal and external landscaping, support facilities, concession operations, a bath house, wet sand play, sand volleyball, and other amenities. The projected cost of the facility, less administration costs, utility hookups, and access is $14,700,000.

Land acquisition Platting fees Furniture and equipment

Architectural fees Bringing utilities Attorney’s fees to the site

Engineering fees Cleaning Interim construction interest

Debt ﬁnancing Construction costs Landscaping

Contingency fees Project management fees Insurance

Figure 16.1 Cost items associated with a capital development project Chapter 16 227

Table 16.1 Projected capital budget costs for a water playground

Item Size Estimated Total Amount Pre-construction work 3,500 1. Topographic survey Allowance 2,000 2. Soils Investigation Allowance 1,500 Demolition 40,000 1. Demolition of existing bath house and pool L.S. 40,000 Earthwork 4,500 1. Cut and ﬁll on site (approx.) 350 cu. yd. 4,500 Water playground 40,000 Water play equipment 40,000 Tea cup (1) Tumble buckets (1) Rain drop (1) Pool Construction 50,000 1. Concrete zero-edge pool 50,000 Water depth 0-18” Gals., 28,500 Bathers, 250-300 Support Elements 231,635 1. Perimeter decks 2,804 sq. ft. 16,824 2. Admission/Mech./Restrooms 1,296 sq. ft. 142,560 3. Landscape and restoration 8,360 sq. ft. 25,080 4. Perimeter fence 6’ high, vinyl 356 lin. ft. 7,170 5. Pool mechanical L.S. 40,000 Utilities and Infrastructure 75,000 Construction Subtotal 444,635 Contingency and Fees 102,265 Estimated Project Budget $546,900

complex. When it was completed, the lei- one of several considerations. As part of sure service organization discovered that this step, a cash-flow analysis should be it had not adequately prepared itself to conducted (see sample depicted in Table meet the new operating costs. In order to 16.3). Because the proposed project has cover those operating costs, two full-time not incurred costs or received income, positions were eliminated. the cash-flow analysis uses projections Part 3 of the cost analysis is a re- that are based on communities or facili- view of the qualitative and quantitative ties of comparable size and with similar benefits to be derived from the project. services (such as in Table 16.2). In some cases, projects offer a monetary Public organizations also consider the return that may be estimated and com- social benefits derived from projects. This pared with their cost. In commercial is less a concern for commercial sports, enterprises, the cost of capital projects is tourism, and leisure service enterprises. frequently compared to their payback pe- That is why, for example, there are no riod. In public projects, this may be only commercial fire stations in most commu- 228 Financial Resource Management: Sport, Tourism, and Leisure Services

Table 16.2 Comparative data to help in estimating costs of and revenue from a family aquatic center

Comp. Capacity Avg. Daily Total Cost Total Revenue Total Site Attendance Season Per Operational Per User Revenue Attendance User Costs

A 4,200 2,115 209,385 9.80 2,051,973 10.50 2,198,542 (50%) B 3,800 2,020 198,990 2.30 457,677 4.00 795,960 (52.9%) C 4,400 1,985 196,515 7.40 1,454,211 8.50 1,670,378 (45.1%) D 4,000 2,300 227,700 8.00 1,821,600 10.00 2,277,000 (57.5%) Mean 4,100 2,103 208,148 6,88 1,430,997 8.25 1,717,221 (51.3%)

nities. They simply are not profitable, but Part 4 of the cost analysis requires an their social benefit warrants their public evaluation of the project and should be cost. Assessment of the qualitative ben- conducted when both the project’s costs efits of a capital project should include and the detailed operational and revenue consideration of the following: budgets are available. There are two analyses that can be conducted that will help • Congruence with the vision and mis- in evaluating the project. The first analy- sion of the organization. sis addresses the need to earn back, in a • Long-range impact on the organiza- reasonable amount of time, the original tion’s strategic plan. money invested in the capital project. • Effect on the organization’s image. This method of evaluation tells the or- • Influence on stakeholders, including ganization how long it will take for the primary customers. project’s newly generated cash flow to pay • Compliance with mandatory require- for the cost of the capital development ments or policy.

Table 16.3 Basic cash ﬂow analysis

Month Jan Feb Mar Apr … Dec Projected 280,000 300,000 370,000 350,000 … 200,000 Revenue Projected 360,000 320,000 250,000 240,000 … 235,000 Expenses Cash Flow (80,000) (20,000) 120,000 110,000 … (35,000) Net Cash Flow (80,000) (100,000) 20,000 130,000 … 266,000 Chapter 16 229

that generates the increased cash flows. If $1,600,000 = $200,000 TC a new indoor tennis complex adds a fit- TC = 8.00 ness center at a cost of $1.6 million, and it generates revenue of $200,000 per year From Table C, when n=10 years (after paying operating expenses), then and the tabulated value is 8.00, the payback period is eight years. The i=approximately .04 (or 4%). payback period is calculated by dividing Once the calculations of the two the capital cost by the annual net operat- methods are made, projects can be ing revenue. Note that the payback peri- ranked. The payback method is the more od assumes a constant value of the dollar common approach in this early judgment throughout the payback period. Is a pay- phase. If the IRR is calculated, then that back period of eight years good or bad? figure should be compared to the orga- That is for the investor to decide. Wheth- nization’s cost of borrowing. If the IRR er it is good or bad depends on how long is lower than the cost of borrowing, then the organization wants to wait to recover the project may not be advisable. If, for its capital development investment. example, the cost of borrowing the $1.6 Evaluation of the project can also be million was 7%, then the tennis complex facilitated by calculation of the internal in the above example would not be built rate of return (IRR). This provides an- (they are paying 7% to borrow money other way of describing the investment that pays back 4%). However, a 3.0% in- opportunity cost of the project. The IRR terest rate for borrowing capital funds is calculated by equating the initial in- would greatly improve the chances of vestment with the present value of the the tennis center project being approved returns and solving for interest rate that (they are paying 3% to borrow money validates the equation. that earns 4%). There are two major approaches Initial Investment = Annual returns x ((1- to financing any capital project in the (1+i)-n)/i) public sector. They are referred to as pay-as-you-go and pay-as-you-use. The Where: i = the interest rate (IRR), pay-as-you-go approach is the most and n = the number of years of receiv- conservative. It requires all the money ing the return. needed for the project to be available before it is started. The advantage of Table C at the end of the book pro- this method is the avoidance of debt vides values for ((1-(1+i)-n)/i). Therefore, (and the costs of debt servicing). With the formula can be rewritten as: the entire cost of the project being paid for in advance, there is no concern for

Initial Investment = Annual returns x TC the payback period. A disadvantage to pay-as-you-go is, however, that many of A $1.6 million fitness center addition those in a mobile and aging population with a projected life of 10 years that gen- who contributed to building up the cash erates a net revenue of $200,000 per year fund for the project may not ever benefit would have an IRR of approximately 4%. from its use. Additionally, the time that This is calculated as shown below: it takes to save up the needed cash may, because of inflation, erode its purchasing power (see Chapter 7). 230 Financial Resource Management: Sport, Tourism, and Leisure Services

The pay-as-you-use approach re- most of the commonly accepted ways of quires getting into debt for the capital financing debt, it is not all-inclusive. project. Pay-as-you-use allows for the cost of the project to be paid while it is being used. Payments are made from revenues Bonds generated by the project or from funds generated through taxes, special levies, The traditional source of capital im- fees and charges for services, fund raisers, provement revenue for governments is investors, etc. The argument in support of bonding. In 1997 there were $1.3 trillion the pay-as-you-use approach is that those in municipal bonds outstanding and, at who benefit from the capital asset will be the same time, $2.5 billion in bonds had the ones who pay for it. The contrary ar- been issued for state parks across the gument focuses on the increased cost of United States. Bonding allows organi- the project due to debt servicing. zations to borrow large sums of money without a significant impact upon the community’s taxing ability. Bonding pro- Capital Improvement Revenue vides immediate funding to a state, coun- Sources ty, or community at a level it could not achieve in any other way. A bond comes Capital improvements usually rein many forms, but there are two ways of quire different sources of income than classifying bonds. The first is according what is used for general operations. Ta- to the sources of revenue for repayment ble 15.3 illustrates some of the sources of by the government, and the second is ac- income used for public capital improve- cording to the method of retirement of ment funding. While some public agen- the bond. They are named, respectively, cies may use the general fund to provide serial bonds and term bonds. the necessary revenue for capital im- Serial bonds allow public sport, tour- provements, the nature and size of many ism, and leisure service organizations to capital improvements frequently make make regular payments, usually annually, it inadvisable to rely on this fund. Most on both principal and interest for the life capital improvements involve taking of the bond. A serial bond is similar to in- on short-term debt and, in some cases, stallment buying; however, governments long-term debt. One of the reasons for typically pay a much smaller interest rate taking on debt is that taxpayers and oth- because their bonds are guaranteed by ers who will contribute to the cost will the taxing power of the legislative body. not have to suffer a significant financial Straight serial bonds make annual equal burden over a short period of time. A payments of principal until the bond $10 million recreation center paid for maturity is paid. Since the principal pay- over 15 years places considerably less ments are made equal, the interest paid is annual burden on taxpayers than does much higher at the beginning of the peri- the same recreation center paid for in od and much lower toward the end. This three years. It places the debt into a lon- approach to bond payment suggests that ger payback period, allowing the agency the highest payments are made when the to structure the debt so it has minimal facility is new and has the greatest oppor- impact on those who will assist in retir- tunity for revenue generation. The overall ing it. While Table 16.4 demonstrates value of the payments by the government Chapter 16 231

Table 16.4 Revenue sources used by public agencies (adapted from the Urban Park Institute and Trust for Public Land)

Financing Provides Re-payment Advantages Disadvantages Source Funds

General Immedi- All taxpayers • Funds available • Increased property taxes Obligation ately over a 5-30 immediately • Competes with local ser- Bond (GOB) year term • Payments tied to vices for limited resources benefits received • Separates payment from • Potentially lowers benefit interest costs Revenue Immedi- By users over • Funds available • Increases rates or fees Bonds ately 5-30 years immediately • Interest costs potentially • Payment linked to higher than GOB benefits • Payment may be linked to users Tax Incre- Immedi- By all • Ties benefit to specific • Revenues dependent upon ment Financ- ately taxpayers geographic area willingness and ability of ing Bonds within defined • Reduces impact on individuals in area to make boundaries overall capital budget payments • Reduces competition • Revenues dependent upon for limited resources growth in assessed values Bond Banks Varies By all taxpay- • Particularly helpful for • Bond issuance may be ers over 5-30 small communities delayed until enough com- year period • Lowers cost of munities apply insurance Certificates Immediate By all taxpay- • Allows land purchase • Hides debt of community of Participa- use of land ers over a over a period of time from bond appraisers tion area defined period • Payments made an- • Less public control, no of time nually vote required • Not recommended as formal debt • Does not impact community’s debt limit Lease Pur- Immedi- By all taxpay- • Provides a way to • High interest rates chase and ate use of ers over a purchase without • Payments may not be Certificates facility or 5-10 year issuing debt related to benefits equipment period Real Estate Immedi- By individuals • Provides income every • Unfairly taxes purchasing Transfer Tax ately transferring time property is sold and selling home-owners or purchasing • Places burden for for benefits received by real property development and reno- entire community vation on real estate purchases Impact or Immedi- By those • Allows for new • One time tax only—does Dedication ately purchasing residents in fast grow- not provide for ongoing Fees property ing areas to pay for maintenance sold for first improvements, rather • Unfairly taxes devel- time, or by than the whole com- oper and new owner for developer munity benefits received by entire • Easy to administer and community collect • Promotes growth management 232 Financial Resource Management: Sport, Tourism, and Leisure Services

Table 16.4 Revenue sources used by public agencies - continued (adapted from the Urban Park Institute and Trust for Public Land)

Financing Provides Re-payment Advantages Disadvantages Source Funds

Mitigation Immedi- By those • Places burden on • Places unfair burden on Financing ately developing developer to provide developer property open space in new • Allows developer to pro- development vide land within develop- • Takes burden off tax- ment or another location payer for infrastructure development • Provides local government with ﬂexibility in land acquisition Revolving Immedi- By ratepayers • Makes funds available • Increased rates or fees Loans ately over 12-20 immediately and charges years • Ties payment to beneﬁt • Reporting and administra- received tion may be cumbersome • Could lower interest • May not be consistent costs with agency priorities

gradually diminishes over the life of the bond has fallen into disfavor because of bond, even though the principal payment the difficulty of managing the fund and remains the same. Tables 16.5 and 16.6 attempting to project interest payments. depict the difference between payments Most state governments have legisla- on a serial and straight serial bond when tively abandoned the use of sinking fund interest is set at 4% and the amount re- bonds. ceived from the bond is $8 million. The second major method of clas- Serial annuity bonds provide for an sifying bonds is by the sources of rev- equal payment each year until the debt enue that will be used to repay the debt. is paid. In the early years of a bond, the Public sport, tourism, and leisure service bulk of the payment is to cover interest agencies have undertaken a variety of ap- charges. In the later years, the bulk of the proaches to bonding. payment is to reduce the principal. The most common bonding method A term bond is paid off with a single used by public agencies is the General payment at the end of the loan period. Obligation Bond (GOB). GOBs are issued The public agency must establish a sink- by a public agency with the expectation ing fund where funds are deposited over of providing benefits to the entire com- the life of the bond. The interest gener- munity. Almost every community, has is- ated from the funds received from the sued some type of GOB. Because the ben- bond and the annual deposits guarantees efits of GOBs are to the entire community payment at the end of the borrowing pe- the retirement of the debt is also spread riod. This is a situation where the future across the entire community. Retirement value of a sum must be calculated in or- of debt is most frequently accomplished der to determine how much to allocate through increases in real property taxes. to the sinking fund each year. The term General obligation bonds are particularly Chapter 16 233

Table 16.5 Cost of an $8 million serial bond on interest rate of 4.0% (numbers in $)

Year Principal Paid Interest Paid Total Paid Principal Balance 1 666,328 320,000 986,328 7,333,672 2 692,981 293,347 986,328 6,640,692 3 720,700 265,628 986,328 5,919,992 4 749,528 236,800 986,328 5,170,464 5 779,509 206,819 986,328 4,390,955 6 810,689 175, 638 986,328 3,580,266 7 843,117 143,211 986,328 2,737,149 8 876,842 109,486 986,328 1,860,307 9 911,915 74,412 986,328 948,392 10 948,392 37,936 986,328 0 Total 8,000,000 1,863,280 9,863,280

attractive to investors because they are the increase of property taxes. In pub- exempt from federal income tax. In some lic parks and recreation, this has been a instances they may be exempt from state particular challenge over the years. How- and local taxes. Furthermore, GOBs are ever, more recently the level of bonding insured by the full faith and credit of the has increased signiﬁcantly, as well as a city, county, or state. This makes them a general public acceptance of the value of very secure source of income for an in- parks and recreation. The National Trust vestor, even if the interest rates are not for Public Land reported that between high. The major opposition to GOBs is 1987 and 1997, bond sales increased

Table 16.6 Cost of an $8 million straight serial bond on interest rate of 4.0% (numbers in $)

Year Principal Paid Interest Paid Total Paid Principal Balance

1 800,000 320,000 1,120,000 7,200,000 2 800,000 288,000 1,088,000 6,400,000 3 800,000 256,000 1,056,000 5,600,000 4 800,000 224,000 1,024,000 4,800,000 5 800,000 192,000 992,000 4,000,000 6 800,000 160,000 960,000 3,200,000 7 800,000 128,000 928,000 2,400,000 8 800,000 96,000 896,000 1,600,000 9 800,000 64,000 864,000 800,000 10 800,000 32,000 832,000 0 Total 8,000,000 176,000 9,760,000 234 Financial Resource Management: Sport, Tourism, and Leisure Services

Figure 16.2 Parks and recreation bonds, 1987-1997

from $270 million to $1.37 billion. Fig- Certificates of participation are au- ure 16.2 depicts the growth over that 10- thorized in about 25 states and allow year period. public entities to purchase land and pay Revenue bonds have received infor it over a period of time. When a will- creased attention and emphasis over the ing seller and a public agency enter into last 25 years. Revenue bonds are used to a certificate of participation, the public finance a revenue-producing facility with agency agrees to pay a specific price for the anticipation that revenues from the fa- the land and to make annual payments cility will wholly retire the bond. Increas- for a designated period. A certificate of ingly, facilities such as aquatic parks, golf participation does not require a public courses, artificial ice arenas, and recre- referendum and, most importantly, is not ation centers have been financed through counted against the organization’s debt this method. A major challenge of the limit. use of revenue bonds is to ensure that Tax increment financing bonds (TIFs) there is sufficient revenue to both retire allow public organizations to secure fi- the debt and also to operate and main- nancing for projects that are enclosed tain the facility. In some cases, subsidiza- within a political boundary. Commonly tion has been used to finance operations used to finance public improvements in and capital improvements. In most cases, development areas (sometimes called re- however, the emphasis has been upon the development districts), TIFs have been facility generating sufficient revenue to used to support sport, tourism, and rec- cover both operating and debt retirement reation developments. They are most expenses. common in urban areas, but have been used in some rural areas. Implementa- Chapter 16 235 tion of a TIF plan freezes the assessed cies submit an application to the bond valuation of real property within the des- bank, and it is evaluated on the purpose ignated area. It does not freeze the tax of the bond, estimated cost, construc- rate. Taxes are collected on the property tion schedule, state and local valuation, at the base level while investments are tax levy or user charges, demographic made by public agencies, and new busi- trends, recent financial and debt history, nesses are attracted and property values and economic stability. The local agency thereby increase. Project costs or bond is able to sell bonds to the bond banks at costs are paid for from additional sales their lower interest rates. tax revenues, personal income tax revenues, and the increased assessed value of the property. Bonds issued from TIF Other Capital Improvement districts are paid for only on the project- Revenue Sources ed increase of the value of the property, not on the full faith and credit of the city. Lease purchases and certificates are TIF districts are common throughout the becoming more common among pub- United States and may provide opportu- lic sport, tourism, and leisure service nities for the purchase and development organizations as a method of financing of new park land, as well as renovation of projects. This alternative allows a pub- existing parks. lic agency to join with private sources Bond banks are usually organized at to finance major projects. In most cases, the state level for the purpose of allowing a not-for-profit holding corporation is government entities that might not have created. This not-for-profit holding cor- sufficient borrowing power or debt rating poration can purchase, develop, and op- to secure an acceptable interest rate. Bond erate the property. Usually, however, the banks allow multiple governmental enti- not-for-profit organization will purchase ties to pool their bond requests into a sin- and develop the property and lease it gle bond sale. By pooling their resources, to the public entity that will operate it. smaller governmental agencies can issue The lease is an annual or multiyear lease a larger bond and secure a more advanta- with an automatic renewal and an op- geous interest rate. The public entities de- tion for the public agency to purchase siring the bonds are not purchasing them the developed land at any time. The leas- directly from the bond market, but from ing organization makes the lease pay- a bond bank typically established by a ments from revenue generated from use state. The Maine Bond Bank, for example, of the property. Then the not-for-profit was established by the legislature in 1972 holding corporation uses the lease pay- to provide a unique financing program ment to retire the principal and interest. allowing Maine towns, cities, counties, When the debt for the property is paid, school systems, water districts, sewer dis- it can then be given to the public agency, tricts, or other governmental entities ac- and the not-for-profit holding corpora- cess to national money markets for their tion can be dissolved. The not-for-profit public-purpose borrowing needs. The corporation has no taxing power, but Maine Bond Bank retains a high invest- it can help the public agency to avoid a ment rating and is able to secure bonds risky and expensive requirement to hold at a low interest rate and then purchase a public referendum on the capital proj- bonds from public agencies. Local agen- ect. In many ways, a lease purchase and 236 Financial Resource Management: Sport, Tourism, and Leisure Services

certificate program is similar to issuing minished state and federal transfers of revenue bonds. funds. Local governments have also used Real estate transfer tax is levied on the impact fees to delay or serve as a substi- sale of certain classes of property, such as tute for general property tax increases. residential, commercial, and industrial. Impact fees, when based on a compre- The tax generally increases with the size hensive plan and used in conjunction and value of the property being trans- with a sound capital improvement plan, ferred (sold). Tax rates are controlled by can be an effective tool for ensuring ad- state legislatures, but the revenues from equate infrastructure to accommodate this source of income are generally col- growth where and when it is anticipated. lected at the county level. It has become In Noblesville, Indiana, for example, the a particularly acceptable form of income Parks and Recreation Department re- for public agencies to accommodate the ceives an average of $100 for every new needs that urban growth places upon home built. During the late 1990s, this community services. The allocation of contributed about $100,000 annually to these taxes for natural resources develop- the department’s budget. ment has become more commonplace. Revolving loans allow an organization Florida and Maryland were pioneers in to secure a specified amount of money requiring that a portion of these taxes be for a specified period of time. A line of used for park and recreation acquisition credit is authorized, and the sport, tour- and development. Real estate transfer ism, and leisure service organization can taxes are a fairly reliable source of in- then draw off of the line of credit to fi- come, since they are imposed each time nance specific projects or equipment property is transferred. purchases. Revolving loans usually carry Impact or dedication fees are assessed a higher interest rate than other financial by local governments in connection with resources. Their value lies in the ability of new housing and commercial develop- the organization to have immediate ac- ments. Their purpose is to defray the cost cess to a level of funds without requiring of providing new or expanded public fa- an extensive approval process. Revolving cilities that are necessary to serve the de- funds have been successfully used with velopment. The fees typically require cash smaller, short-term projects, where debt payments in advance of the completion of retirement payments will be made from development, are based on a methodol- a secure source. It is not generally con- ogy and calculation derived from the cost sidered an effective method for financing of the facility and the nature and size of major projects. the development, and are used to finance The mitigation land bank has long improvements away from, but of benefit been a source of development resources to, the development. Local governments for public leisure service organizations. throughout the country are increasingly The bank allows developers to either using impact fees to shift more of the dedicate land in a development for open costs of financing public facilities from space preservation or to identify off-site the general taxpayer to the beneficiaries locations they will dedicate. The admin- of those new facilities. istering public agency and the developer The impact or dedication fees supple- work together to identify suitable land. ment local government resources that The governmental entity may have the otherwise have decreased because of di- authority to create a land bank where de- Chapter 16 237 velopers can substitute money or land in and/or environmental regulations. another area of the community for land • Expansion projects. The expansion of they are developing. In one Iowa commu- existing services and resources. nity, the parks and recreation department worked with local developers to acquire a All sport, tourism, and leisure service greenbelt along a stream in the commu- organizations should have a long-range nity, preserving it for future generations. plan or a capital project that corresponds The use of the land bank is particularly with their corporate vision. Essential useful when the developer has failed to components of a capital project proposal meet the requirements of land dedica- include market forecasts, revenue projection during the development phase of the tions, acquisition and construction cost project. estimates, anticipated operating expens- Special taxes, such as the transient es, and expected profit. The information occupancy tax (also called a bed tax or collected for the capital project proposal lodging tax) and the meal tax, can also be helps the organization to have a better used as revenue sources for tourism capi- understanding of the long-term financial tal projects. While these funds are typical- implications of the proposed capital ex- ly used to operate destination marketing penditure. Although public and not-for- organizations, they can be and are used to profit sport, tourism, and leisure service endow grant programs that support local organizations may emphasize the merit capital projects designed to create a well approach to a capital project, a commer- balanced tourist destination. cial sport, tourism, and leisure service organization must emphasize the profit approach. The capital budgeting process Capital Budgeting in the involves project evaluation and decision Commercial Sector making. These are typically approached from an accounting perspective, with Capital budgeting in the commercial emphasis on the net present value, cash sector is a little different from that in the flow, and payback period. public or private not-for-profit sectors. There are some key differences that need Decision Processes to be highlighted here. Commercial sport Several different decision tools are and leisure service organizations bond used by commercial sport and leisure for one of four reasons: service organizations to determine the potential contribution of a capital project • Replacement projects. Investments in to the financial health of the organization. new equipment to replace old, worn One common method is to determine the out, or damaged equipment. present value of the returns generated by • Cost reduction projects. Replacing the project and compare that value to existing equipment with new equip- the investment amount. The net present ment that may operate more effi- value (NPV) is the difference between ciently, be more state of the art, or be the present value of returns and the ini- required to keep up with customer tial investment. In the decision-making expectations. process for a capital project, the inves- • Safety/environmental projects. Invest- tor wants to know if additional value is ments required to comply with safety created by undertaking the project. If the 238 Financial Resource Management: Sport, Tourism, and Leisure Services

NPV is positive, it means that the present value found in Table C at the end of this value of the investment, and therefore, chapter. the project, will add value to the ﬁrm and In this example, also increase the wealth of the owners.

Therefore, the Net Present Value Deci- NPV = $22,000 TC – $100,000 sion Rule is: = $22,000 (3.993) – $100,000 = – $12,154 If NPV > 0, then the project meets the standard for approval. The NPV is negative; therefore, the investment is not advisable. To determine NPV, the organiza- If the annual returns are unequal tion must anticipate the future cash (which is a more likely scenario), a differ- flow. Cash flow represents earnings ent way of calculating NPV must be used. before depreciation, amortization, and If, for example, the $100,000 five-year non-cash charges. For example, a fitness investment in a market where eight per- center invests $100,000 in new fitness cent interest is expected yields cash flows equipment, supplementing what it al- of $30,000 in year 1, $29,000 in year 2, ready has. It is estimated that, as a result $26,000 in year 3, $25,000 in year 4, and of the investment, an additional cash $18,000 in year 5, then the present val- flow of $22,000 will be realized each ues can be calculated by multiplying each year for the next five years. The expect- year’s returns by an appropriate interest ed market interest rate (i.e., the interest factor to determine the present values. rate that could be reasonably expected The present values are then summed, and by any other investment carrying the the initial investment is subtracted from same degree of risk) during those five the total present value of the returns. This years is eight percent. If returns are results in a calculated NPV. The interest equal (i.e., the same amount each year), factor to be used is found in Table B at the the NPV can be calculated by applying end of this book. Table 16.7 shows pres- the formula: ent values for the preceding example. The cash flows described above and

NPV = RTC – C shown in Table 16.7 have a combined Where: R = annual returns present value that is greater than the ini-

C = the initial investment, and TC tial investment. According to the NPV = (1 –(1 + i)-n/i) or the corresponding decision rule, this is a good investment.

Table 16.7 Sample data for NPV decision using unequal returns (8% interest)

Year Cash Flow TB Present Value 1 30,000 .926 27,780 2 29,000 .857 24,853 3 26,000 .794 20,644 4 25,000 .735 18,375 5 18,000 .681 12,258 Total 103,910 Chapter 16 239

Figure 16.3 illustrates how NPV is Another approach to decision mak- calculated using a timeline. The time- ing is to determine the payback period line illustrates the increased revenue at (discussed earlier). The payback period is the end of each year, beginning with the the length of time it takes to recover the $100,000 investment and a market inter- initial cost of a project. Payback is usually est rate of 10 percent. In this example, measured in years. The shorter the pay- returns during each of the ﬁve years are back period, the better the investment. $38,000, $47,000, $58,000, $70,000, and The formula for determining the payback $79,000. period is illustrated below. This formula is NPV takes into account the time used when the return on the project is ex- value of money. The time value of money pected to be consistent from year to year. suggests that a dollar invested today is If a project cost $100,000, and it expected worth more than a dollar in the future, a $22,000 return each year, it would take because the dollar received today can 4.5 years to pay for the project. earn interest up until the time the future dollar is received. To account for the time Cost of Project/Annual Cash Flow = value of money, the interest factor from Payback Period Table B is used to determine the present value. $100,000/$22,000 = 4.5 years

(100,000) 38,000 47,000 58,000 70,000 79,000

0 1 2 3 4 5 34,542 38,000 Year 1 38,000 x .909 = PV 38,822 47,000 Year 2 47,000 x .826 = PV 43,558 58,000 Year 3 58,000 x .751 = PV 47,810 70,000 Year 4 70,000 x .683 = PV

49,059 79,000 Year 5 79,000 x .621 = PV

Net Present Value = (Year 0) + (PV Year 1) + (PV Year 2) + (PV Year 3) + (PV Year 4) + (PV Year 5) Net Present Value = (100,000) + 34,542 + 38,822 + 43,558 + 47,810 + 49,059 Net Present Value = 113,791

Figure 16.3 Net present value timeline 240 Financial Resource Management: Sport, Tourism, and Leisure Services

ture in one to two years; medium-term When the return varies each year, as bonds, which mature in five to 12 years; in Table 16.7, simply add up the expected and long-term bonds, which extend be- returns for each succeeding year, until yond 12 years before maturing. the total cost of the project is equaled. There are three types of corporate In this case, the payback period would bonds. Mortgage bonds issue bonds be achieved early in the fifth year. There backed by real estate and/or other physi- are some disadvantages to the payback cal assets. Just as with a home that is period approach to evaluating capital mortgaged, if the corporation defaults on projects. A payback period approach as- the bond, the real estate and/or physical sumes that cash inflows (or revenue) will assets are sold to pay the mortgage bond. exceed cash outflows (or expenses). Sec- Equipment trust certificates are similar to ond, a payback calculation does not usu- automobile loans. Traditionally, the cor- ally consider the time value of money. In poration provides 20 percent of the cost a payback model, the interest the money of the capital project. The balance is then could achieve is not considered. paid off over the next 15 years. When it is paid off, the trustee provides the cor- Income Sources of Commercial poration with a clear title. The final type Capital Projects of corporate bond is an income bond. In- The same two approaches to financ- come bonds only pay interest if earned, ing capital projects in the public sector and to the extent it was earned. There are also used in the commercial and is no set time when the bonds must be nonprofit sectors. They are referred to paid off. Usually, such bonds are issued as pay-as-you-go and pay-as-you-use. by firms in bankruptcy. Additionally, the It was noted earlier in this chapter that bond holders are frequently the credi- the pay-as-you-go approach assumes the tors of the bankrupt firm. availability of all the money needed for the project before it is started. The pay- as-you-use approach incurs debt for the Summary capital investment that is paid off during the use of the asset. Capital budgeting is an essential Corporate bonds are another com- process for most organizations; it stands mon method of securing funds for capi- alone, in planning purposes, from the op- tal projects. A corporate bond involves erating budget. Its focus is on long-term lending money to a public corporation. purchases of equipment, land, or facilities. In return, the lender is promised a fixed Capital budgeting allows an organization rate of return on the investment, with the to systematically address long-term needs loan to be repaid in full at a future date. and to plan financially for those needs. Corporate bonds are usually issued in multiples of $1,000 or $5,000. Bonds are sold with different maturity dates. Matu- References rity tells the investors when they can expect to get their principal back and how Aronson, J. R., & Schwartz, E. (1996.) Management policies in local government finance. long they will receive interest payments. Washington, D.C.: International City/County Corporate bonds are divided into three Management Association. 221 Managing groups: short-term notes, which ma- Financial Resources in Sport and Leisure Service Organizations Chapter 16 241

Kelsey, C. W., Gray, H. R., & McLean, D. D. (1993.) Rabin, Jack (Ed.). (1992.) Handbook of public The budget process in parks and recreation: budgeting. New York: Marcel Dekker, Inc. A case study manual. Reston, VA: American Reed, B. J., & Swain, J. W. (1997). Public ﬁnance Alliance for Health, Physical Education, administration. Thousand Oaks, CA: SAGE Recreation and Dance. Publications. Listro, J. P., (1991). Nonproﬁt organizations account and reporting (2nd ed.). Dubuque, IA: Kendall/ Hunt Publishing Company.

NOTES 242 Financial Resource Management: Sport, Tourism, and Leisure Services C H A P T E R 1 7

Budget Presentations

Introduction of the presentation is to inform decision makers and facilitate a discussion and Budget preparation essentially ends decision for the proposed operating and with required presentations to key deci- capital budgets. Beyond an informative sion makers. Decision makers are policy role, budget presentations serve several or legislative bodies that may include additional purposes. A budget presen- board members, city council members, tation is the culmination of the budget the owner of the company, key stake- preparation period and suggests to those holders, or members of the organization. receiving it a completion. Secondly, the All agencies must, at some point, make presentation provides an overview of the budget presentations. There is no stan- proposed budget with sufficient detail to dardized format for creating a budget determine sources and amounts of reve- presentation and each organization may nue and projected expenditures. It allows approach budget presentations different- for a historical perspective when the bud- ly. It could include a simple overview of get presentation includes comparisons proposed revenues and expenditures or a with previous years’ budgets. more complex description of program ar- The budget presentation is seen as an eas, projected revenues and expenditures, introduction to the detailed budget. In and a linkage with the organizational public and not-for-profit organizations, as goals and vision. well as in commercial business enterprises, the budget presentation is frequently made in conjunction with the delivery Purposes of Budget of the budget document. Most organiza- Presentations tions operate with goals and objectives, and effective budget presentations link Budget presentations have many pur- financial plans to organizational goals poses, but ultimately, the primary purpose and objectives. Budgets are a reflection 244 Financial Resource Management: Sport, Tourism, and Leisure Services

of trends that impact an organization’s Improvement Fund for capital proj- need to deliver products and services in a ects ($151,712). (Elmhurst Park Dis- speciﬁc area. Elmhurst (IL) Park District trict, 2007, Long Range Capital Plan. states in their budget document, http://www.epd.org/budget)

“The District’s vision for the In the preceding example, the seven future of park and recreation ser- emphasis areas involved capital improve- vices in Elmhurst is articulated ment funds (Chapter 16). Elmhurst Park in the Strategic Plan. This vision District’s use of a strategic plan is typical provides a direction for the Board of many organizations. Reference to stra- and staff to ensure that the needs tegic plans, master plans, and long-range of the Elmhurst community are budget plans are all part of the budget pre- met. Staff has followed that di- sentation and strengthen decision mak- rection by including specific ers’ understanding of relationships be- funding for objectives within the tween the operating and capital budgets, strategic priorities approved by as well as intended agency outcomes. the Board and articulated in the 2007 Strategic Plan Action Plan. The total investment included The Written Budget Document in the 2007 proposed budget is $4,962,152.” The core of a budget presentation is the budget document. It contains the Budgets are tools used by organiza- complete operating and capital budget tions to create new or expanded resourc- for the organization. The two documents es in communities and organizations. In can be separated and are sometimes dis- the Elmhurst Park District budget, seven cussed during separate presentations. areas were identified in the strategic ac- Budget documents, for mid-size and large tion plan for capital investment: communities, may be hundreds of pages in length. For a separate agency, such as • Redevelopment of the 1860s Wilder a park district, professional sports team, Mansion ($1,750,000) or an event management agency, their • Continued redevelopment of budget document may be considerably East End Pool and Bathhouse smaller. The larger and more complex the ($1,500,000) organization, the larger the budget docu- • Installation of two synthetic turf ath- ment. Almost all organizations utilize letic fields ($950,000) a standardized budget format, and this • Construction of the Salt Creek Gre- standardization allows for consistency in enway Trail ($397,940) reporting processes and for comparison • Installation of the Wagner Com- between budgets. munity Center Sprinkler System The budget document is organized ($175,000) around the operating and capital bud- • Completion of the Sugar Creek get, including front matter that provides Golf Course driving range lighting direction for document preparers. Typi- ($37,500). cally the document has an introductory • Transfer of funds from the Enter- letter from the chief executive officer prise Services Fund to the Capital (CEO) presenting the budget and pro- Chapter 17 245 viding a transmittal letter or an executive projects, shifting funding from one summary style letter. It is written to the project or program to another, elimi- governing body, such as a city council, nation of programs, and the like are park board, board of trustees, or owner. included in this area. The changes are The next items in the budget document presented separately for the operat- are included at the discretion of the CEO. ing and capital budget. These can include, but are not limited to: • Future issues and concerns and trend analysis—demonstrate an aware- • Vision, mission, and goals—provide ness of potential new funding com- the core direction setting documents mitments or reduction in funding and measures for the organization. sources. Trend analysis allows the Most agencies link their budgets to organization to identify future issues these documents. Stakeholders are and concerns that will positively or demanding increased budget ac- negatively impact the organization. countability, and so alignment with Budget presentations focus on these the vision, mission, and goals are es- issues and alert decision makers to sential. potential changes. • Budget philosophy—provides the • Organizational chart—provides the decision maker with the fundamen- decision maker with an overview tal commitments associated with of the organization of the agency. It the budgeting process. For example, allows decision makers to view the the Arlington Heights, IL Park Dis- organization and understand where trict identified among their budget funding is being allocated. Knowl- philosophies the commitment to (1) edge of organizational structure al- maintain high-quality programs and lows decision makers to make better facilities, (2) provide excellent cus- judgments. tomer service, (3) maintain a stable • Revenue summary - provides a writ- tax rate, (4) reward good staff, and ten description of the revenue sourc- (5) “take care of what we have.” es, the level of revenue anticipated • Current challenges—represent issues from each, shifts in the revenue, or concerns with which the organiza- historical presentation of revenue tion is presently dealing. In most in- services, and projections for the next stances these are major issues, areas fiscal year. The revenue summary of focus, or new initiatives that were provides an overview for decision introduced with the previous year’s makers and helps the CEO focus dis- budget. cussion on key issues. • Significant or proposed changes— • Expenditure summary—does the identify shifts in the organization’s same thing as the revenue summary, funding priorities. The section alerts except for expenditures. readers to changes that impact the • Budget detail—is usually the last item overall budget. In some instances in the budget document and includes the changes may signal a major re- the entire budget. It is the largest sec- alignment of expenditure or income tion of the budget. The budget detail priorities. More often new projects, gives the particulars of each com- expansion or contraction of existing ponent in the organization. For example, a sport facility might have its 246 Financial Resource Management: Sport, Tourism, and Leisure Services

operating budget divided into per- and funding sources. Orange County sonnel, multiple program operations Parks and Recreation is a division of (such as special events, sport specific the county government organized un- events, rentals), maintenance opera- der the Department of Community and tions to include specific and general, Environmental Services and their bud- and so forth. get presentation was a component of a larger budget presentation comprising many divisions and departments. Presenting the Budget Arlington Heights, Illinois Park District is an independent governmen- The budget presentation will be tal agency with separate taxing power. crafted by the CEO or chief finance offi- Its $21 million budget took 29 slides to cer (CFO). It follows the structure of the present and included budget philosophy, written budget document but emphasiz- major goals, focus points, budget capa- es more global elements. A budget pre- bility, a five-year financial forecast, the sentation can take 10 minutes or several proposed budget, fund balances, and de- hours, based on organizational tradi- partment presentations. The parks and tions, complexity and size of the budget, planning department’s budget presenta- expectations of the board, or the desire tion provided detail on capital projects of the CEO. In more complex organiza- such as playground replacements, pav- tions the CEO may require each division ing and parking lots, athletic field es- or department to provide a budget pre- tablishment and renovation, and vehicle sentation. The presentation is designed and equipment replacement. The recre- for delivery to the governing body. ation and facilities department focused There are no standardized formats on the delivery of programs and services for budget presentations. Orange Coun- and divided the budget presentation ty, Florida’s Parks and Recreation Divi- into delivery areas including recreation sion budget presentation focused on programs, indoor swim center, museum, three areas: overview, accomplishments, racquet and fitness club, tennis club, and and budget summary. Their proposed golf operations for three golf courses. operating budget of $27.7 million was For each area the presentation included, presented using 18 visual aids (Pow- at a minimum, user statistics, program erPoint slides). The overview included participation, revenues, evaluations, and statistical facts about the parks and rec- expenditures. reation system, progress toward meeting performance measures, programs, and planned and completed capital projects. Principles of Effective The overview section focused on orient- Presentations ing decision makers to the organization The budget presentation is typically and to what the CEO perceived to be accomplished with standard presenta- consistent with the vision and mission. tion software, such as Microsoft’s popular The second section, accomplishments, PowerPoint application. Below are some included data about youth initiatives guidelines to assist CEOs and program and senior programs and included only managers when utilizing such visual aids one slide. The budget summary included in presenting budget information. the operating budget, capital budgeting, First, know the audience. Most indi- Chapter 17 247 viduals, including board members and serif fonts used for presentations include stakeholders, will not readily understand arial, trebuchet, tahoma, gill sans, and some of the terminology used by the staff. verdana. When making assumptions about what It is effective and useful to utilize listeners know, it is better to provide more graphics and photographs. Research sug- rather than less explanation. For example gests retention is improved by 50 percent the term CIP, meaning capital improve- when graphics are used and only 10 per- ment program, can also mean catalog in cent when bullet points are exclusively production, classification of instructional used. The principle of keeping it simple programs, center for international policy, should be maintained in the use of graph- center for instructional performance, ics. The graphic should support the text. center for institutional planning, and so A good rule of thumb is to see if the forth. It is not necessary to provide a de- graphic can stand without the text. If so, scription of the terminology on the pre- then consider either eliminating the text sentation screen, but it is always safest to or reducing it considerably. Too many avoid the use of acronyms. presentations include whole paragraphs Second, ask “What do I want the fi- of information with the presenter read- nal product to look like?” Begin with the ing the information to the listener. Figure end in mind and look at the presentation 17.2 provides an example of a slide that as a set of blocks that, when organized, focuses on simplicity. Presenters should create a broad level of understanding. In avoid using busy backgrounds. The use of other words, the whole is more powerful photos as a background to the text is dif- than the parts, but the whole cannot exist ficult to achieve and too often the back- without the parts. Presentations should be ground overrides the text (Figure 17.3). outlined in advance of putting them into If the text is difficult for the listeners to a presentation software. Too often budget read, then they won’t read it. They may presentations are organized in sections even disengage from the presentation. that are independent of one another and Avoid putting too much information the final product looks disjointed and fails on a single slide. Information overload to flow. When a presentation is poorly or- reduces the attentiveness of the listener. ganized, the decision makers are left at a It is better to spend two or three slides on disadvantage, trying to determine what is more important and what is less important. Smoothly guiding the viewers to suggested alternatives or solutions allows for better decision making. The font size and type should be easy to read from a distance. As a general rule, the font size should not be smaller than 30 point. There are two primary styles of typography. Serif fonts are considered to be more readable on the printed page while sans-serif fonts are considered to be more legible on monitors or projection screens. A sans-serif typography is Figure 17.1 depicted in Figure 17.1. Common sans- Illustration of a well-organized slide using minimal text and supporting graphics 248 Financial Resource Management: Sport, Tourism, and Leisure Services

Using background sounds and audio clips to highlight slides, a variety of different slide transitions, and multiple builds of text is tempting, but it is distracting to your audience. The slide transition and text builds should remain consistent and simple throughout the presentation. In- dividual letters flying all over the screen only confuse the viewer. Remember the focus of any presentation is the delivery and understanding of a budget, not a Figure 17.2 demonstration of the presentation soft- Principles of simplicity focusing on the background, text, and graphic all in ware’s flexibility. support of each other The presentation of graphs and tables should be done carefully with the viewer in mind. Most individuals cannot process a topic than to cram it into a single slide. multiple sources of conflicting data. For Figure 17.4 shows a slide that is guilty example, a chart that shows many cross- of information overload. The text is in- ing lines is much more difficult to fol- formative and deemed important by the low than a bar chart depicting data more organization, but the viewer is drawn to simply. It is difficult for the brain to con- conflicting important points. The result is ceptualize more than three or four data disassociation with the slide and loss of points simultaneously. Figure 17.5 shows communication. a slide with seven data points. The scale

Figure 17.3 Use of a background with large or small text detracts from the readability and understandability of the presentation. Chapter 17 249

Figure 17.4 Information overload makes it difﬁcult for viewers to comprehend content.

is too small to show differences between simple, the title is reflective of the con- the data. It leaves the viewer confused tent, and the reader can visually track the about the data because they cannot make decline in the city’s share of property tax. sense of them. The presenter would need The graph is both descriptive and expres- to spend considerable time explaining sive. The only problem with this repre- the data and likely they would still not be sentation is the size of the font. The text is understood. so small that it would be difficult to read Figure 17.6 is a historical treatment from a distance. of the city’s share of property tax over a The use of tables and pie charts is 23-year period. The line graph depicts a very common, as is the use of colors and data point for each year supplemented legends that show what the colors depict. by a corresponding value label that re- Resist the use of colors (some readers are ports the actual percentage. The graph is colorblind and most photocopiers do not

Figure 17.5 An example of a poorly designed data set, resulting in confusion for the viewer. 250 Financial Resource Management: Sport, Tourism, and Leisure Services

adequately differentiate between convert- Presentation Tips ed grayscales). Label tables and charts Here are some final tips for presen- and, where appropriate, elements within tations. The first is practice, practice, the graphs. Creativity is generally a valued practice. Rehearse the presentation in the attribute, but it is best to stay away from presence of individuals who will chal- 3-D charts and tables. They are like hav- lenge the presentation. Rehearse it in ing too many transitions in presentation front of a mirror and look at the perfor- slides and can distract the viewer. Keep mance. Record it and critique the record- the tables and charts simple, as demon- ing. Be critical and watch for personal id- strated in Figures 17.6 and 17.7. Figure iosyncrasies that might detract from the 17.7 shows two effective ways that the presentation. same data can be displayed; a bar chart During a presentation it may be im- and a pie chart. Pie charts are graphically portant to have the audience focus on the pleasing, but individuals have more diffi- speaker rather than on the screen. Punc- culty determining value differences in pie tuate the visual presentation with dark charts than in bar charts. screens, then return to the graphic or text Note the use of within-graphic text slide when appropriate. In some software rather than a legend, and the actual per- packages, the dark screen feature is re- centages are presented on the pie chart so ferred to as the “B” key. that viewers do not need to guess. Do not present in the dark. Keep the

Figure 17.6 Property Tax History represented by a line chart showing two data points: percentage and year. Chapter 17 251

Figure 17.7 The same data represented two different ways: a bar chart and a pie chart.

lights on. Today’s projectors have suﬃ- Summary cient power to project in a well-lit room. Don’t use a podium unless mandated. The budget document may be a sim- Most individuals do not perform their ple overview of proposed revenues and best when trapped behind a podium. expenditures or a more complex descrip- Know the material well enough to walk tion of program areas, projected revenues away from the podium and remove the and expenditures, and a linkage with the barrier between the speaker and the au- organizational goals and vision. Budget dience. Make eye contact. Listeners want presentations may have many purposes, to know that the speaker is interested in but ultimately, the primary purpose of them. Eye contact gives the speaker hints the presentation is to inform decision about audience attention, questions, makers and facilitate a discussion and concerns, and acknowledgment. Finally, decision for the proposed operating and don’t be afraid to show passion for the capital budgets. The use of best practices cause that is being promoted. in presentations will enhance the delivery and reception of a budget presentation.

NOTES 252 Financial Resource Management: Sport, Tourism, and Leisure Services C H A P T E R 1 8

Accounting and Reporting

Introduction meet the very specific needs of financial managers and decision makers, as well One of the most important factors that as help to keep confidential information from a financial management perspective as cryptic as possible, but therein lies separates successful sport, tourism, and their weakness. If a highly customized leisure service enterprises from those that accounting system is so unique that it is fail is the system of keeping records and understood only by the user, others who reporting financial activity. The system may need specific financial information of keeping financial records is called ac- in order to regulate or cooperate with the counting, and its purpose is to allow the organization may find it difficult or im- sport, tourism, and leisure service man- possible to do so. This may result in pen- ager to find and easily understand infor- alties and/or loss of opportunity. For ex- mation about the history of transactions ample, imagine a taxpayer tossing out the and about the current financial condition tax department’s forms and submitting of the organization. This chapter presents her annual tax return using a different the basic principles of accounting and method of reporting that she developed explores its use in reporting important to match her shoebox filing system. Not findings to the financial manager. There a good idea! Imagine asking the bank for could be as many ways in which financial a business loan and providing a financial information is recorded and organized, report that uses budget classifications, records are managed, and reports are record systems, and report formats that summarized and interpreted as there are are completely incompatible with those people who need the information. Highly of the potential lending institution. Also customized accounting systems might not a good idea! 254 Financial Resource Management: Sport, Tourism, and Leisure Services

There is a need for order in business, sports analogy, stock information is the and that need is probably nowhere great- score at a particular point in an athletic er than in the area of financial manage- contest. At the beginning of the game, ment. The established order for recording both teams have 0 points of stock. At and reporting financial information in the end of the game, the home team may sport and leisure service organizations have 45 points and the triumphant visit- is referred to as Generally Accepted Ac- ing team may have 52 points. Obviously, counting Principles (GAAP). These prin- coaches’ decisions made when the stock ciples are described in publications by (score) is 0-0 at the start of the contest such recognized organizations as the Fi- will be very different from those made nancial Accounting Standards Board or when the clock is about to run out and are derived from familiarity with the pro- the stock (score) is 50-43. fessional body of knowledge and preva- Flow refers to the movement (increase lent practices. It is important to note that or decrease) of financial resources during the principles and practices discussed in a certain period of time. Reports of flow this chapter are “generally accepted,” not focus on the net change (loss or gain) in “universally applied.” resources, but also provide information about the nature and extent of financial activity that brought about the eventual Stock and Flow loss or gain. In the sports analogy, flow is the activity between the start of the game In developing an understanding of and the final buzzer. The official score and appreciation for accounting, it is sheet, coaches’ comments, and newspaper important to differentiate between the articles describing the game are forms of concepts of stock and flow. Stock refers flow reports. They describe how the game to the financial resources available to the moved from a score of 0-0 to a score of sport and leisure service organization at 45-52. Measuring and reporting flow a given point in time. It is a measure of helps managers to know how the organi- what the organization owns and what it zation moved from one stock position to owes. Stock information is used by finan- another. Financial managers use balance cial managers to report on and to make sheets to report point-in-time (stock) decisions based on the current financial conditions, while the income statement condition of the organization. To use a (also called a profit and loss statement or

Balance Sheet Income Statement Balance Sheet (Sept. 1) (Sept. 1 - 30) (Sept. 30)

SEPTEMBER What is owned and What was received and what was What is owned and owed on this date spent during this month owed on this date STOCK FLOW STOCK

Figure 18.1 The relationship of balance sheets and the income statement in detailing stock and flow Chapter 18 255 an operating statement) is used to report The current value of investment made by on financial activity (flow) between two the owner(s) is also a liability in the sense points in time. that it is a financial resource that is owed to the owner(s). The value of the owners’ The Balance Sheet investment in the organization is more What the organization owns and commonly termed equity. Both liabilities what it owes at a given point in time are and equity appear on the right side of the recorded on the balance sheet (see Figure balance sheet and are equal in combined 18.2). Things that are owned are referred value to that of the assets. Remember, the to as assets and are detailed on the left left side of the balance sheet is equal to side of the balance sheet. Assets may be (i.e., balances) the right side. tangible items or properties, such as cash, The simple equation that describes equipment, inventories, buildings, land, the balance sheet is: etc., or they may be valuable intangible items, such as trademarks, names, or Assets = Liabilities + Equity. patents. Furthermore, assets may be classified as “current” (i.e., something that Figures 18.3 and 18.5 are sample bal- is or can be converted into cash within ance sheets for Natalie’s Quilting Center. one year) or “fixed” (i.e., something that One describes the financial condition of cannot readily be converted into cash). the quilting center on February 1, and the Assets are economic resources that are other describes the conditions on Febru- owned or controlled by the organization ary 29. and which may benefit future operations. Figure 18.4 is a sample income state- What the organization owes are called ment covering operation of the quilting liabilities and are recorded on the right center between February 1 and February side of the balance sheet. Liabilities in- 29. Notice in Figure 18.3 the current as- clude short-term (current) and long-term set item called “accounts receivable.” This financial obligations or commitments to item includes all amounts that the orga- staff, contractors, lenders, suppliers, etc. nization expects to receive in the near future due to services actually rendered or goods actually sold to customers. For example, the quilting center may have issued an invoice to a customer and is waiting for a $250 check as compensation for tutoring services recently provided. The accounts receivable category differs from cash in that the former represents money due but not yet received; and it differs from inventory in that the latter is the value of goods or service-related goods that the organization holds but has not yet exchanged for currency. On the right side of the balance sheet shown in Figure 18.3 there is a liability Figure 18.2 category identified as “accounts payable.” Placement of information on the balance sheet This short-term liability item presents the 256 Financial Resource Management: Sport, Tourism, and Leisure Services

Natalie’s Quilting Center

Balance Sheet As of February 1, 2008

Assets Liabilities Current Assets Current Liabilities

Cash $4,000 Accts. Payable $8,550 Accts. Receivable 250 Inventory/Supplies 7,000 Long-Term Debt Fixed Assets Mortgage 48,000 Building 90,000 Equity 44,700

Total Assets $101,250 Total Liability and Equity $101,250

Figure 18.3 Sample balance sheet (February 1, 2007)

value of all goods or services received by nization’s formal budget document. the organization and for which payment It is natural to expect that the net is imminently due. For example, the pile revenue or net loss shown on the income of utility bills on the director’s desk repre- statement would be evident in the differ- sents some of the ongoing or regular pay- ence between the balance statements pre- able accounts. pared for the first and last days of the period of financial activity. That is, it seems The Income Statement (a.k.a. that the $44,700 equity shown on Feb- Profit/Loss Statement) ruary 1 (Figure 18.3) should increase by Financial transactions that occur the $1,320 profit realized in the following during a specified period of time (a fiscal 29 days (Figure 18.4). While it may oc- period) are summarized in a document casionally be so, such a clear relationship called the income statement. A typical is rarely this discernable. The reason it income statement (illustrated in Figure is not is that the balance sheet contains 18.4) reports all expenditures and all some information that reflects future fi- income during the business period and nancial activity. Note that the balance identifies the difference between the two sheet in Figure 18.3 lists accounts receiv- totals as either a profit or a loss. Revenue able and accounts payable. Each of these and expenditure categories used in the items, respectively, indicates expected income statement mirror the income and in-flows and out-flows of cash during the expenditure categories used in the orga- period covered by the next income state- Chapter 18 257

Natalie’s Quilting Center

Income Statement As of February 1 - 29, 2008

Revenue Expenditures Tuition $5,378 Wages $6,500 Consulting 3,075 Fabric Supplies 1,200 Sale of Materials 1,450 Utilities 375 Royalties 1,367 Advertising 125 Mortgage 1,400 Auto Lease 350

Total Revenue $11,270 Total Expenditures $9,950

Net Revenue (Loss) $1,320

Figure 18.4 Sample income statement (February 1–29, 2008)

ment (Figure 18.4). The balance sheet for and reporting. These people will record the end of the reporting period, however, transactions, pay bills, deposit funds, and may have different asset, liability, and maintain accounts. They will also help equity amounts, simply because those the sport, tourism, or leisure service ad- amounts will include expected receivables ministrator to establish a petty cash fund and payables for the period immediately and thereby reduce some potential orga- after (see Figure 18.5). The February 28 nizational barriers to efficient program balance sheet is based on the stock de- management. scribed on the February 1 balance sheet, the flow described in the February 1–28 Petty Cash income statement, and additional eco- Most expenses of the sport, tourism, nomic activity for which there are new and leisure service organization are paid accounts receivable and payable. by check, but sometimes it is impossible or inefficient to draw a check to make a payment. For example, on-street parking Internal Control or postage stamps may cost so little that the expense of writing the check would Most large sport, tourism, or leisure exceed the cost of the item. Furthermore, service organizations employ trained it would be very difficult to find a park- accountants and bookkeepers to con- ing meter that accepts checks! To help the trol financial operations, accounting, organization deal with small expenses, a 258 Financial Resource Management: Sport, Tourism, and Leisure Services

Natalie’s Quilting Center

Balance Sheet As of February 29, 2008

Assets Liabilities Current Assets Current Liabilities

Cash $4,220 Accts. Payable $8,000 Accts. Receivable 100 Inventory/Supplies 6,900 Long-Term Debt Fixed Assets Mortgage 44,200 Building 90,000 Equity 46,020

Total Assets $101,220 Total Liability and Equity $101,220

Figure 18.5 Sample balance sheet (February 29, 2008)

petty cash fund may be established. small amount of money, usually $50– In establishing the petty cash fund, $100. The check is recorded. The fund clear guidelines or rules regarding its use manager cashes the check and places the must be articulated. One guideline might cash in a petty cash secured envelope or be a limit on the amount of expenses to be cash box. Authorized persons within the paid from this fund. Expenses in excess organization may then claim funds in of $20 are usually paid by check. Another advance or as reimbursement for minor guideline might describe the types of ex- (petty) expenditures. Petty cash funds are penses that may be paid with petty cash issued after the claimant submits a petty funds. Petty cash funds are not typically cash voucher (with attached receipts used to pay recurring expenses, such as where possible). Pads of blank petty cash utilities or subscriptions, regardless of the vouchers like the one shown in Figure size of the expense. Yet another guideline 18.6 can be purchased at most stationery or rule concerning the petty cash fund or oﬃce supply stores. After the claimant might concern management of the fund, has been paid, the petty cash voucher is someone should be appointed as custo- kept in the petty cash box. The money dian of the fund and held responsible for in the box and the face value of all the its proper management. vouchers in the box should always add The petty cash fund is created by the up to the original amount of cash issued treasurer upon writing a check to the cus- to establish the fund. When the money todian or manager of the fund for a fairly in the petty cash box is almost spent, the Chapter 18 259

PETTY CASH VOUCHER

Date: ______Amount: $ ______For: ______

Account #: ______Received by: ______

Attach receipts immediately following purchase.

Figure 18.6 Example of a petty cash voucher vouchers and receipts are submitted like petty cash is charged to the appropriate any other invoice, and a check for the to- budget account. Periodically, the fund tal value of the vouchers is issued to the manager should prepare a petty cash rec- fund manager. The check is cashed and onciliation statement. This simple form the money returned to the petty cash box (shown in Figure 18.7) helps the man- in order to bring its total back to the level ager to monitor the fund and anticipate of funds originally established. cash replenishment needs. The petty cash It is important to note that petty cash fund oﬀers convenience, but because of is not a budget line. It is a means of pay- that convenience, it also has the potential ment only. Any expense that is paid using to be abused. Great care should be taken

Petty Cash Reconciliation Statement Date:

Opening cash on hand $ ______

ADD Payments to petty cash fund $ ______

SUBTRACT Total amount of vouchers paid $ ______

Cash on Hand (this should be the same as the $ ______amount of cash in the cash box)

Figure 18.7 Sample petty cash reconciliation statement 260 Financial Resource Management: Sport, Tourism, and Leisure Services

to manage the petty cash fund according usually a year. The goal of the financial to established principles and practices of manager is to ensure that revenues reach accounting. the expected level and that expenses do not exceed the projected amounts. This two-pronged goal is referred to as “stay- Reporting ing within the budget,” and the realization of this goal must be a priority for the There are many kinds of reports that financial manager. The budget statement can be generated by accountants and is a useful tool that allows the manager to bookkeepers. Three of the most useful review the financial activity of the orga- for financial managers in sport, tour- nization with respect to the budget. The ism, and leisure service organizations are sample budget statement shown in Fig- described below. They are budget state- ure 18.8 lists key budget classes and the ments, the project report, and the RevPAR amount of money projected as revenue or report. expenditure for that class. As of the date listed at the top of the budget statement, The Budget Statement the actual receipts and expenditures are The sport, tourism, or leisure ser- reported, along with any commitments vice organization budget is a revenue for revenue or expenditure that have been and spending plan for a period of time, made. The budget statement also shows

PINE CREEK RESORT Recreation Services Department Budget Statement

June 30, 2007 (50% of budget period)

Budget Actual Committed % Balance REVENUE Guest Service Assessment 120,000 60,000 0 50.0 60,000 Bike Rentals 18,000 5,920 0 32.9 12,080 Supply Fees 2,000 831 0 41.6 1,169 Total Revenue 140,000 66,751 0 47.7 73,249

EXPENSES

Personnel 108,000 42,000 2,000 40.7 64,000 Equipment Maintenance 9,000 6,850 0 76.1 2,150 Program Supplies 1,500 988 0 65.9 512 Transportation 4,500 2,123 1,200 73.8 1,177 Promotion 2,000 1,112 400 75.6 488 Administration 12,000 5857 0 48.8 6,143 Contingency/Enterprise 3,000 800 500 43.3 1,700

Total Expenses 140,000 59,730 4,100 45.6 76,170

Figure 18.8 Sample budget statement Chapter 18 261 the portion (percentage) of each budget RevPAR item that has been received or spent and (Revenue Per Available Room) reports the remaining balance. Managers in the tourism industry, In the preceding example, 50 percent particularly those with hotel or resort of the budget period has elapsed, but less management responsibilities, rely on the than 50 percent of the revenues have been RevPAR report an important measure of received and less than 50 percent of the performance. The RevPAR report pro- expenditures have been made. Notice- vides a single metric, which is a func- ably, several expenditure items are at or tion of both room rates and occupancy. near 75 percent, and a major revenue cat- RevPAR is calculated by multiplying the egory is at 33 percent. Is this disparity an average daily room rate times the occu- early warning of budget problems? Not pancy rate. necessarily. The budget statement only For example, if the Cummorah Re- tells the manager how much of the bud- sort and Lodge has 300 rooms that sell for get has been received or spent at a partic- an average of $210 per night, and an aver- ular point in the fiscal period. It does not age occupancy rate of 74%, then RevPAR indicate how much of the revenue should is calculated as follows: be received or how much of the expenses should have been paid at that time. The RevPAR = Average Daily Rate x manager must use his or her knowledge Occupancy Rate of seasonal and other fluctuations in demand and cost in interpreting the budget RevPAR = $210 x .74 = $155.40 statement and making judgments about how well the organization’s finances are RevPAR is usually expressed and dis- being managed. cussed as an annual average, but it can also be calculated and used to measure Project/Event Report performance over a shorter period of In addition to the budget statement, time, such as a season, a month, or even many sport, tourism, and leisure service a week. The period to which the RevPAR managers find the project report to be value pertains should be clearly stated on particularly useful. This report compares the report. projected and actual revenues and expen- Financial managers look for changes ditures for specific programs or events in RevPAR. A rising RevPAR indicates and includes commentary that helps fu- that either occupancy is increasing, or ture organizers of the program/event to average room rates are up (or a combi- understand what contributed to the fi- nation of both). RevPAR is also used as a nancial success or failure of the project. A ratio for comparisons with other proper- sample project report is shown in Figure ties. Finally, it is important to remember 18.9. The project report is a document that RevPAR is not the only measure of that helps organizers of future events. It is financial health in the hospitality sector. rarely used in financial audit situations or It evaluates the strength of only one rev- for legal or highly technical documenta- enue stream, and should be used in con- tion. For these reasons, the project report junction with other budget statements should be accurate and, more important- and activity reports for profit centers ly, easily read and understood. such as restaurants, golf courses, casinos, spas, meeting services, etc. 262 Financial Resource Management: Sport, Tourism, and Leisure Services

Project Report

Project/Event: Snow-Pitch Softball Tournament Date: Feb. 11 - 13, 2007

Project Budget Actual

REVENUE Community grant 1,000 1,000 Corporate sponsorships 500 600 Registration fees 800 800 Concession sales 1,100 1,400

Total Revenue 3,400 3,800

EXPENSES Publicity/Administration 400 380 Referee honoraria 900 900 Equipment purchase 400 450 Awards 150 150 Facility fees 50 60 Kick-off reception 850 980 Insurance 610 670

Total expenses 3,360 3,590

Net Income (Loss) 40 210

Submitted by: Zo Bell

Comments: Reception overage due to requirement use caterer. Colder weather necessitated charge in menu.

Figure 18.9 Sample project report

Daily Operations Report manager and by other department heads In hospitality settings such as ho- as they review revenues, receivables, dis- tels or resorts, a frequently used report bursements, operating statistics, and cash is the Daily Operations Report. Similar exchanges at the front desk. reports may also be used in other sport, tourism, and leisure service enterprises. This report is usually prepared at the end Summary of the business day by the hotel’s night auditor and includes a summary of the In order to effectively and efficient- business conducted that day. The Daily ly manage the financial resources of a Operations Report is used by the general sport, tourism, or leisure service orga- Chapter 18 263 nization, the manager must have a basic sible for maintaining and being account- understanding of accounting principles able for a petty cash fund. Rules governing and practices. By following generally the use of the petty cash fund should be accepted accounting principles, reports understood and followed by all users. A that are meaningful, timely, and accu- particularly useful report that helps the rate can be prepared for use in executive sport, tourism, or leisure service manager decision making. The report or financial to be aware of the state of the budget is the statement that indicates the single-point- budget statement. This report shows how in-time condition of the organization is much of each budget category has been the balance sheet. The income statement received or spent at a particular point in (also called the profit and loss statement, the fiscal period. For specific programs, statement of receipts and disbursement, projects, or events, the project report is or operating statement) details financial a common form of reporting on the fi- activity between two dates for which bal- nancial outcomes of the project. RevPAR ance sheets are prepared. Where avail- is the important efficiency monitoring able, trained accountants and bookkeep- report used by the tourism industry for ers help to prepare financial reports. measuring the success of crucial hotel and Sport, tourism, and leisure service ad- resort operations. ministrators may, however, be respon-

NOTES 264 Financial Resource Management: Sport, Tourism, and Leisure Services S E C T I O N F

Planning

The final section of this book on financial management for sport, tourism, and leisure service organizations addresses the need for financial managers to be able to plan for new enterprises and/or expand existing activities. The business plan is an important long-term planning document that can be instrumental in generating sufficient funds to implement its design. Chapter 19 describes each element of the business plan and explains how the information contained therein is used by the plan developer, suppliers, investors, and creditors. The business plan provides essential support for and documentation of claims and analyses that are used in generating resources needed for capital development.

C H A P T E R 1 9

Business Planning

Introduction leisure service organizations. Failure to develop and follow business plans at a The oft-repeated advice to sport, variety of levels of operation is a serious tourism, and leisure service managers to management flaw, which this chapter is develop and follow business plans is too designed to help overcome. commonly relegated to the “nice concept, A business plan is a written docu- but not for me” file. For some manag- ment that describes all aspects of an ers, this ignorance (the act of ignoring enterprise. An enterprise could be a the advice) is based on ignorance (a lack program, service, event, or activity. The of understanding or knowledge). Busi- business plan differs from a program plan ness plans, it is erroneously believed, are in its inclusion of detailed analyses of re- for high-risk, high-volume production source opportunities, requirements, and companies that depend on major invest- management functions. It is especially ments and have a high degree of account- concerned with (but not limited to) the fi- ability to investors. Just as erroneously, nancial elements of the sport, tourism, or some sport, tourism, and leisure service leisure enterprise. It is, in effect, the man- managers believe that business plans are agement “game plan.” The business plan master planning documents that estab- is a proven and effective tool for facilitat- lish general directions only for the en- ing an internal evaluation of existing or tire organization and are of little direct proposed programs or services. It helps relevance to specific programs or events. those who have dreams and aspirations The business plan is an effective tool for to objectively determine the desirability the management of sport, tourism, and and feasibility of their ideas. It helps to 268 Financial Resource Management: Sport, Tourism, and Leisure Services

identify and consider all conditions that the management and product/service relate to the potential success of an enter- elements of the business plan of a not- prise. Business planning, like other types for-profit youth-serving agency to learn of planning, forces a manager to seriously about how their philanthropic support consider everything that is necessary for would be used. In the tourism industry, the success of the enterprise. It identi- investors will look carefully at the finan- fies foreseeable problems and expresses cial projections in the business plan be- specific commitments to the resolution fore deciding about investing in a resort of those problems. It also identifies avail- or attraction. able resources and articulates the intended application of those resources to the achievement of stated objectives. Format of the Business Plan Beyond serving this internal evaluation function, the business plan also The following paragraphs describe helps to meet the information and docu- the essential elements of and a commonly mentation requirements of external pro- used format for effective business plans. viders of required operational resources. Note that such documents do provide for The plan states the objectives to be met by the demonstration of creativity in presen- the enterprise and then outlines the cho- tation, and there is a wide variety of styles sen approach to meeting those objectives. used in business plans for sport, tourism, In so doing, it allows investors, lenders, and leisure enterprises. donors, regulators, suppliers, employees, and customers to develop confidence in Title Page the enterprise and, thereby, justify ex- The title page or cover page is used tending credit, permission, patronage, or to identify the plan at a glance. Obvi- other support that is needed for success. ously, the name of the enterprise should Readers of the business plan will view it be boldly displayed. Also, the name, ad- from different perspectives and focus on dress, and telephone number of the plan’s those elements that are relevant to their author (or corporate agent for whom the interests. Bankers, for example, will read plan was prepared) should be included business plans and pay particular atten- on the title page. The aesthetic aspects of tion to descriptions of fixed assets and the cover page do deserve attention, but available collateral. This information inordinate energy and resources should helps to determine how well their loans not be dedicated to this part of what is re- are protected and how ably the borrower ally a rather technical document. The en- can repay loans on schedule and at the tire business plan should be professional agreed-upon rate of interest. Suppliers, in its presentation, both visually and sub- such as the owner of a sports stadium, stantively, and the cover page is a good will focus on market and competitive place to demonstrate this standard. analyses and expect the business plan to Inasmuch as business plans articulate demonstrate a reasonable expectation of ideas that may provide a competitive ad- corporate viability and longevity before vantage or should more appropriately be entering into a long-term lease agree- unveiled in a controlled setting, the title ment with, for example, a minor league page should, where applicable, include baseball team. Furthermore, prospec- a clear notice of the confidential nature tive major charitable donors will study of the document. If the business plan is Chapter 19 269

a table of tables or a table of ﬁgures to further assist the reader in ﬁnding key information within the body of the business plan.

Executive Summary The executive summary is a concise review of plan highlights that enables the reader to quickly get a sense of the nature of the sport, tourism, or leisure enterprise and the resource needs of its management team. It must be brief enough (two to three pages) that even the busiest person could find time to read it, and it should be crafted in such a way as to capture the reader’s interest and motivate further exploration and consideration of the plan. Although the executive summary is po- Figure 19.1 sitioned at the beginning of the business- Sample business plan cover page plan document, its writing should be done after the main body of the plan has been completed. Some business managers have also appended to the Executive a confidential or restricted-distribution Summary a “Fact Sheet,” which states, in document, then the restrictions should number form, the following: be clearly stated either on the cover or very early on in the document. 1. The name of the sport, tourism, or leisure organization and the program Front Matter or enterprise covered by the plan. Included in the front matter are all 2. The address and telephone number those parts of the plan that are organized of the organization representative re- for ease of reading. Following the title sponsible for the program or enter- page, a transmittal letter or preface offi- prise. cially introduces the plan to the reader. 3. The type of industry (Standard In- This brief section (usually less than one dustrial Classification) in which the page of text) can also be used to “hook” organization operates. the reader by highlighting some major 4. The form of agency organization points of the plan that would be of par- (government agency, proprietorship, ticular interest. The preface is followed by partnership, or corporation). a table of contents, which offers the read- 5. The principal product(s) or service er an outline of the plan by listing all the line(s) included in the plan. headings and subheadings. In addition to 6. Any registered patents, trademarks, its value as an overview of the contents or service marks affected by the of the plan, this table provides references plan. to the locations of various sections in the 7. The number and names of founders, plan. The front matter might also include partners, corporate commissioners, 270 Financial Resource Management: Sport, Tourism, and Leisure Services

and shareholders. The Industry 8. The length of time the enterprise and The preparation of this second sec- the organization have been operating tion of the body of the document pro- as such. vides an opportunity for careful exami- 9. The current and/or projected market nation and description of the nature and share. scope of the industry in which the enter- 10. The funds invested in the enterprise prise will operate. Since it is likely that at to date and their source. least one of the readers of the business 11. Any additional financing required. plan has little familiarity with the indus- 12. Proposed terms and payback period try or field, this part of the business plan for required financing. is important because it brings all readers 13. The total value or net worth of the or- up to the same high level of understand- ganization. ing and awareness that the plan’s author 14. The names of business advisors (legal has of the environment in which the plan counsel, accountant, others). will be implemented. Other readers who are in the industry may already have The Enterprise that understanding, but nonetheless will The first section of the body of the welcome the author’s demonstration of business plan is designed to provide the environmental consciousness. The prin- reader with a context in which to con- cipal characteristics of the industry to be sider all the information that follows. described in the business plan include its This important part of the business plan size, sales/participation levels, and per- effectively familiarizes the reader with formance standards. For example, the the history of the enterprise and the business plan of a public learn-to-swim organization, provides insight into the program would include a description of current situation, and speculates about the number of such programs offered in the future of the enterprise. Historical the community, region, state, and coun- information is presented in the form of a try. In addition, the total number of pro- narrative about how, when, and why the gram participants, the time of year that enterprise was or will be started, as well courses are typically offered, and the as an identification of the key individuals number of badges awarded at each level directing the activity and a description of instruction would be useful informa- of the principal products or services to tion to offer. be offered. If the business plan has been This analysis of the industry will also developed for an existing activity, a dis- identify the major participants in the in- cussion of the success experienced thus dustry and describe their market niches, far should be included. The description market shares, strengths and advantages, of current conditions is limited to rel- and weaknesses or disadvantages. The evant circumstances, such as market op- manager of the public swimming pro- portunities, production capabilities, and gram might, for example, explain that competition, while speculation about aquatic instructional programs in the the future takes the form of vision state- area are offered by several agencies, in- ments and articulated goals, objectives, cluding the YMCA, the Boys and Girls and strategies. Club, and the Community School Cor- poration. She would then point out that the Boys and Girls Club and the schools Chapter 19 271 do not offer summer programs, and the sculpting competition and winter festival YMCA has a recreational orientation for would warrant extensive explanation of its family-based membership. The public the purpose of the event, nature of the agency is targeting young adolescents in activity, schedule of events, qualifications the summer season for a highly struc- for participation, warm weather alterna- tured program of aquatic safety training. tives, theme guidelines, site selection, se- It will compete with the YMCA to some curity measures, etc. This is the section of degree, but it has a competitive advantage the business plan that is used to ensure through pricing and location. that its readers know exactly what the Further understanding of the indus- program, service, good, or event is that try is promoted by a discussion of indus- they are to consider while examining the try trends. This requires a careful study of other important information presented past performances in light of past condi- later in the plan. tions, as well as speculation about future If the sport, tourism, or leisure successes based on an educated guess as product is not in the public domain and to how the relevant operating environ- is protected by copyright, patent, or oth- ment will be. Fortunately, many elements er proprietary rights, the nature of that of the sport, tourism, and leisure service protection should be described in this industry are closely monitored, and trend section. Any contract releases received analyses are readily available. For exam- or awarded should also be identified. ple, the trends in aquatic programming It is important for sport, tourism, and are discussed in a variety of publications, leisure service managers to assure the readers of their business plan that the such as the regular Parks and Recreation products they “sell” are rightfully theirs magazine special issues on aquatics. The to produce or distribute. For example, business plan for the learn-to-swim pro- a sports merchandiser’s business plan gram might emphasize and detail an in- should state that his invention, the por- dustry-wide observation that interest in table heat-generating arena cushion, is such programs is increasing. patented. If the cushion is to be adorned with the logo of a professional hockey Product/Service Offering team, the merchandiser will also need In describing the product or service to articulate the rights he has to use the that will be delivered to consumers, the logo, as stated in the copyright permis- business plan should focus on its unique sion or license agreement. features and emphasize its particular advantages. If a novel concept is being in- This part of the business plan also troduced, more detail will be required provides an opportunity to discuss the in its description than would be in the ways in which the product or service description of a product or service with under consideration contributes to the which the reader is already very familiar. realization of organizational objectives. In this section of the business plan docu- It should include an estimate of the po- ment, it may be sufficient to describe a tential for this enterprise to grow, or, proposed three-on-three basketball tour- if it is a program within a larger set of nament with just a scant reference to the programs and services, its contribution rules of play and play-down structure and to the effectiveness, stability, profitabil- a slightly more descriptive account of the ity, and growth of the sport, tourism, scheduling, setting, and game format to and leisure organization should be de- be applied. Conversely, a proposed ice- scribed. 272 Financial Resource Management: Sport, Tourism, and Leisure Services

Market Analysis able to the target market. In the previous section of the busi- • Market inertia. ness plan, the product was described. Of course, a well-defined product is of The market analysis includes an as- little value to the sport, tourism, and sessment of the strengths, weaknesses, leisure service organization if there are advantages, and disadvantages of all no consumers of that product. Potential major competitors, along with a state- consumers constitute the market, and ment of how the sport, tourism, and understanding the market is vital to the leisure service organization plans to ad- success of the sport, tourism, or leisure dress the competitive challenge. Based enterprise. on the organization’s understanding of The business plan describes the rela- the market’s needs, constraints, and op- tively homogenous group(s) of individu- portunities, as well as an awareness of the als that might be customers, clients, pro- competition it faces in the marketplace, gram participants, or service recipients. it is also expected that this section of the This description should clearly establish business plan will include a realistic and that the target market is (1) large enough defensible estimate of the share of the to warrant the offering of a program or market that can be attracted at different service; (2) sufficiently distinct to guide stages of the enterprise’s development. It product development, distribution, pric- is understood that estimates are nothing ing, and promotion decisions; and (3) more than educated guesses based on rel- accessible to the sport, tourism, or lei- evant information and certain assump- sure service organization. It may be that tions. The assumptions, therefore, should the target market is made up of several also be stated. meaningful market segments; if so, each segment should be described separately. Marketing Plan Readers of the business plan will be in- Marketing plans are usually separate, terested in knowing who and where the extensive documents that relate market market is, what makes individuals in the conditions to strategic decisions about target market good customer/client can- product development, sales and distribu- didates, and how successful the organization, pricing, and promotion. The busi- tion has been in the past in serving their ness plan incorporates a synopsis of the needs. marketing plan and provides the reader It is likely that there will be some with a clear sense of how the organization form of competition for the attention and will manage the marketing of its sport, resources of the target market. Significant tourism, or leisure product throughout forms of competition include the follow- that product’s lifetime. Since some ele- ing: ments of a full marketing plan are addressed in the preceding sections of the • Other sport, tourism, and leisure ser- business plan, this section will focus on vices offered by the organization. pricing, distribution, and promotion • Services and products offered by matters: other sport, tourism, and leisure organizations with access to the same Pricing. The business plan should market(s). discuss the price that will be set for the • Other discretionary activities avail- sport, tourism, and leisure service prod- Chapter 19 273 ucts of the organization. In addition, conversion ratio for a $2,500 advertising the following questions (among others) campaign that increased sales of karate should be answered: lessons by $12,500 is a respectable 5:1.

• How are these prices determined? Development Plan • What cost-recovery ratio(s) do these If the product around which the prices reflect? enterprise is being established is not • How do they compare to those fully developed at the time of the busi- charged by competitors? ness plan’s preparation, then this section • How will these prices contribute to may be used to report on the status of achievement of the organization’s fi- the product’s development. All costs as- nancial goals? sociated with getting the product into a • What will be the impact of price marketable form should be identified, changes on consumer responsive- along with development schedules. The ness? improvement, refinement, or expansion of existing or market-ready products may Distribution. How, when, and where also be considered in this section. Again, the sports, tourism, or leisure service will development schedules and associated be delivered to the consumer is also of costs should be identified. great interest to the reader of the business plan. This section would normally Production/Operations Plan include descriptions of the service area, In the production of sport, tour- season(s) of operation, schedule of mar- ism, and leisure services, there are cer- ketable events, sales force, and locations tain aspects of operation that contribute of service delivery. significantly to the success of the enterprise. They include location, facilities and Promotion. The promotions mix equipment, and labor. For most busi- (which might include advertising, pub- nesses, including sport, tourism, and lei- licity, personal selling, public relations, sure service enterprises, the three most and/or sales promotions) should be de- important details are said to be “location, scribed in order for the reader to judge location, location.” Consider, for example, the likelihood of the sport, tourism, or the obvious folly of establishing an alpine leisure service organization reaching its ski shop in the plains of west Texas, or a target market and effectively facilitating a mountaineering school in Saskatchewan. desired exchange. The promotions budget A less obvious but equally disastrous mis- should be outlined, along with a process take might occur in offering a public rec- for assessing the impact of the various reation program at a neighborhood park strategies employed in the promotional which, unbeknownst to the recreation plan. Financially oriented readers would agency, has become a place of clandes- be interested in seeing an estimate of the tine drug distribution. Such mistakes do conversion ratio. The conversion ratio is sometimes occur quite innocently, but simply an estimate of the consumption the opportunity exists in this section of (sales revenue or participation) directly the business plan to show that every rea- resulting from promotion activities in re- sonable care was exercised in selecting a lation to the costs of implementing those location that will contribute to the real- promotional activities. For example, the ization of business goals. 274 Financial Resource Management: Sport, Tourism, and Leisure Services

Any facilities and/or major equip- will make sure that the product is good ment that is required to operate the and the financial aspects of the activity sport, tourism, or leisure service should are sound. be described in the business plan. Some- An organizational chart focusing on times sample floor plans or photographs the management structure could be used of buildings and rooms are included to to illustrate hierarchies and functional help the reader visualize those physical responsibilities. Whether in chart form needs. Recognizing that not all buildings or as a narrative, the names of each mem- or equipment must be owned by the or- ber of the management team or program ganization in order for them to be used leadership staff should be listed, along in production or service delivery, a list- with brief résumés and annotated job ing of leased and purchased items should descriptions for each person. More com- be presented, along with the costs of such plete résumés and job descriptions can be properties. appended to the business plan if neces- In general terms, the labor require- sary or desirable. The purpose of provid- ments should be described. Especially in ing this information is to help readers de- the delivery of sport, tourism, and leisure velop confidence in the management and services, personnel are key to the success operation of the enterprise. of the enterprise, and the labor needs of It is also customary to discuss the the organization deserve careful scrutiny. compensation package (salaries, ben- In this section of the business plan, the efits, other contract terms, etc.) that each number of employees and their general manager will receive, although such dis- job duties should be discussed. Some- closure is often unnecessary when the times, business plans also describe the business plan is used as a planning and qualification requirements of employ- evaluation tool for programs and services ees, their availability (i.e., the number of that are just one part of a larger set of ac- qualified people in the area that could be tivities conducted by the sport, tourism, hired), compensation and benefits pro- or leisure service organization. It should grams, and union affiliations. be noted that, if the manager is already on staff and is compensated in a manner Management Team consistent with his previous position, de- Even with a good product and a claring the manager’s compensation for meaningful, identifiable, and accessible this enterprise may be a contractual viola- target market, a sport, tourism, or leisure tion, or in some other respect, considered service or program can experience limited to be inappropriate. If the manager is also success because of managers who are not the owner, a partner, or a shareholder in well suited to the enterprise. The business the organization, the level of ownership plan provides an opportunity to identify needs to be reported, as do any incentive the management team and expound on stock options that may be offered. that team’s qualifications for directing In concluding this section, it is ap- the program or service. For many read- propriate and desirable to list other indi- ers of the business plan, this information viduals who are not a direct part of the is as important, or even more important, management team, but may influence it than the details of the program, market, significantly. This list includes consul- or financial structure. They believe that tants, professional mentors, advisors, the right person managing the enterprise accountants, bankers, and lawyers. This Chapter 19 275 listing should also indicate the amount such are subject to the limitations of cur- of compensation (retainers, consulting rent knowledge and optimistic expecta- fees, stipends, honoraria, etc.) received tions of future conditions, effort should by these influential advisors for their pro- be exercised in protecting decision mak- fessional service to the sport, tourism, or ers from the enthusiasm of the enterprise leisure service organization. proponent. It is generally considered wise to be as realistic as possible in making fi- Financial Plan nancial projections and then temper that One of the main reasons for going realism with conservatism when estimat- through all the work to develop a business ing income. Conversely, realistic expen- plan is to demonstrate the advisability of diture projections should be tempered investment in the particular sport, tour- with liberalism. In other words, estimate ism, or leisure service enterprise. There- low for revenue and high for expenses. fore, it is essential that the plan clearly indicates the level of financial investment 3. Ratio Analysis that is required. Not only must the busi- Ratios are quantitative indicators ness plan state how much money or credit of financial strength and operating suc- is needed, but it should also describe the cess. The figures used in calculating ra- type of funding that is needed. For exam- tios come from financial statements (or ple, the proponent of a new guide fishing projections) like the balance sheet and enterprise may need $450,000 to acquire income statement. Different readers of equipment, licenses, advertising, etc., but the business plan will focus on the ratios would like to have only $150,000 as debt that interest them most. For example, (i.e., borrowed money) and the remain- lenders will be most concerned with ra- ing $300,000 as equity (i.e., shared own- tios that indicate the degree of risk asso- ership). In order to justify the confidence ciated with extending credit to the sports, of a lender or an equity investor, the au- tourism, or leisure service organization, thor of the business plan should discuss and potential equity investors will be and include (either in this section or as more concerned with return-on-invest- an appendix) the following financial doc- ment indicators. Not surprisingly, there uments (see Chapter 17 for examples): are many ratios that could be calculated and reported in this section of the busi- 1. Current Financial Statements (if the ness plan. Those that are of greatest utility enterprise is already in operation) in the development of a business plan for Profit and loss statements and bal- a sports, tourism, and leisure service en- ance sheets for the current and preceding terprise are briefly described here. Ratios two years should be provided. of four general types are discussed. Li- quidity ratios (also called solvency ratios) 2. Financial Projections (for new indicate the ability of a sports, tourism, enterprises) or leisure business to meet its short-term Profit and loss forecasts, pro forma obligations. Activity ratios (also called ef- balance sheets, projected cash flow state- ficiency ratios) are quantitative indicators ments, and a break-even analysis for the of the ability of the business to expedi- sport or leisure event (or first three years ently and efficiently exchange its prod- of an ongoing operation) should be pro- ucts for financial resources. Profitability vided. Since these are projections and, as ratios show how successful the business 276 Financial Resource Management: Sport, Tourism, and Leisure Services

has been during a certain period of time (usually a year) in terms of investment Current Liability to Inventory = Current returns. Debt/Coverage/Leverage ratios Liability/Inventory measure the long-term solvency of the business. Examples of the commonly b. Activity Ratios used ratios are as follows: Average Collection Period: This is not a ratio, but is often included in the ratio a. Liquidity Ratios analysis. It shows the average time (in Quick Ratio: Used to estimate the days) to receive payment for products de- ability of a business to meet its short- livered. term financial obligations without selling off its inventory. Avg. Coll. Period = (Accounts Receiv- ables/Sales) x 365 days Quick = (Current Assets-Inventories)/ Current Liabilities Sales-to-Inventory Ratio: Used to indicate the inventory turnover rate. Low Current Ratio: Used to estimate the numbers may indicate an overstock situ- ability of a business to meet its short-term ation. financial obligations (assuming ability to dispose of inventory at full value). It is Sales-to-Inventory = Cost of Goods sometimes called the banker’s ratio. Sold/Average Inventory

Current = Current Assets/Current Li- Assets-to-Sales Ratio: This ratio is abilities used in determinations of how well the assets are being utilized. Debt-to-Net Worth Ratio: Used to compare the total financial obligations of Assets-to-Sales = Total Assets/Total the business to the investment of its own- Sales ers. This is used by lenders as a measure of risk involved in extending credit to the c. Profitability Ratios business. Return on Sales: This ratio is used only when comparing with similar busi- Debt-to-Net Worth = Current and Long- nesses or with performance over a period Term Liabilities/Net Worth of time. It indicates ability to generate profits from sales. Current Liability-to-Net Worth Ratio: Another measure of the short-term risk Return on Sales = Net Income/Net associated with lending to the business. Sales

Current Liability-to-Net Worth = Current Return on Assets: Sometimes called Liabilities/Net Worth the productive ratio, this index is useful for comparisons with other enterprises Current Liability to Inventory Ratio: and with gauging the effectiveness of as- Used to estimate the ability of a business set utilization. to meet its short-term financial obliga- Return on Assets = Net Profit after Tax- tions without disposing of its assets (oth- es/Total Assets er than inventory). Chapter 19 277

Return on Net Worth: This ratio In reviewing the list presented in Ta- measures the ultimate profitability of ble 19.1, the difficulty in classifying an the enterprise from the perspective of enterprise such as a resort-based recre- stockholders/owners. It indicates ability ation program becomes readily appar- to earn adequate profits and should be ent. Should it be included in SIC#7011 higher than conservative (safe) invest- (Hotels and Motels), where lodging and ment rates. other major business activities strongly influence ratios, or might it more appro- Return on Net Worth = Net Profits after priately be included in SIC#7997 (Mem- Taxes/Equity bership Clubs) because being a guest at the resort is, in fact, like having member- d. Debt/Coverage/Leverage Ratios ship privileges in the exclusive resort rec- Equity Ratio: This ratio indicates the reation club setting? Perhaps the fitness extent of the owner’s investment in the orientation of the program makes it best enterprise. suited to SIC#7991 (Fitness Facilities), or SIC#7999 (Miscellaneous Amusement Equity Ratio = Equity/Total Assets and Recreation). This system of classification has Debt-to-Total Asset Ratio: This ratio been used in the United States, Canada, indicates the extent of the enterprise’s and Mexico since 1997, and is called the borrowing. North American Industrial Classification System (NAICS). Debt-to-Total Asset Ratio = Total Liabili- Once the appropriate comparative ties/Total Assets industrial classification has been selected, a variety of publications can be referred The ratios that are calculated are in- to in order to find the industry standard structive in themselves, but they also for each ratio. The most popular publica- provide very specific information that al- tions of this type are the following: lows the readers of the business plan to compare the current or expected finan- • Robert Morris and Associates’ An- cial condition of the enterprise with oth- nual Statement Studies. ers in a similar class of ventures. In ratio • Dun and Bradstreet’s Industry Norms analysis, comparisons are made between and Key Business Ratios. the enterprise in question and the class of • Leo Troy’s Almanac of Business and businesses represented by an appropriate Industrial Financial Ratios. Standard Industrial Code (SIC). Unfortu- • The Financial Survey of Canadian nately, but understandably, not all sport, Business Performance. tourism, and leisure enterprises fit neatly into existing SICs. This means that ratio Ratios reported in these publications analysis can only provide a comparison are often given for businesses that differ in between the proposed enterprise and sales output, asset value, or place within others in an industrial classification that the range of reported ratio values. These is judged to most closely resemble it. reports recognize that, although they Table 19.1 lists most of the sport, may reside in the same industrial classi- tourism, and leisure service–related SICs fication, businesses vary greatly in their used in the United States since 1997. productivity, efficiency, and profitability. 278 Financial Resource Management: Sport, Tourism, and Leisure Services

Table 19.1 Sample enterprises from selected North American Industrial Classiﬁcations (U.S. Census Bureau, 1998)

4511 Sporting Goods, 5615 Travel Arrange. 7131 Amusement Parks and Hobby and Music Instr Travel agencies, tour opera- Arcades sport goods stores, hobby, toy, tors, convention and visitor theme parks and amusement game stores, music instruction, bureaus arcades sewing and needlework stores 7111 Performing Arts 7132 Gambling 4512 Book, Periodical, and dance companies, musical casinos Music Stores groups, theater companies 7139 Other Amusement and book stores, recorded music 7112 Spectator Sports Recreation stores sports teams and clubs, golf/country clubs, skiing 4811 Sched. Air Transport. racetracks facilities, marinas, ﬁtness/ rec. Passenger transport by air 7113 Arts, Sports Promot- sports, bowling centers, other 4821 Rail Transport. ers recreation 4871-9 Scenic and Sight- with facilities and without 7211 Traveler Accommoda- seeing Transport 7114 Agents and Manag- tion land, water, and other transport ers hotels, motels, and casino hotels 5121 Motion Picture and for artists and for athletes 7212 RV Parks/Camps Video Industries 7115 Independent Artists RV campgrounds and RV production, distribution, and writers and performers camps exhibition 7121 Museums, Historical 7213 Rooming and Boarding 5141 Information Services Sites, and Similar Inst. Houses libraries Museums, historical sites, 7221 Full Service Restau- 5322 Consumer Goods zoos, nature parks, etc. rants - Rental 7222 Limited Service Res- video tape and discs taurants 7223 Special Food Services 7224 Drinking Places (alcoholic beverages)

Fortunately, some publications list ratios that most closely matches the one being and other important financial data for proposed in the business plan. similar enterprises across a wide range of Reporting the results of the ratio sizes (as measured by sales volume or by analysis is simply a matter of tabulating value of assets). For example, Troy (2006) the calculated ratios for the enterprise identifies operating costs (including sala- and for the comparative industrial class, ries, advertising, interest, taxes, etc.) and as well as providing commentary to ex- income (including sales, interest, rent, plain major differences between those and royalties) SIC#7131 - Amusement, ratio figures. For example, consider the Gambling and Recreation Industries, as following: In reviewing the industry well as ratios for businesses with less than standards, it may seem that the statistics $500,00 in assets, $500,00-$1,000,000 in given are an indication of “what should assets, and so on. In SIC#7131, the cur- be.” In fact, they are merely measures of rent and quick ratios for businesses with “what is.” They reflect the current con- less than $500,000 in assets are 1.1 and 0.7 ditions of the entire industrial class and respectively. For larger businesses in the are therefore very useful benchmarks. same SIC, the comparable ratios are 1.6 However, a particular enterprise at a par- and 1.2. This emphasizes the need to con- ticular stage of its development may have duct a ratio analysis using the industry quite different ratios, and what is most norms for the type and size of business important is that the manager of that en- Chapter 19 279

Table 19.2 displays selected ratios for three SIC classes of sport, tourism, and leisure service business in 2006. Again, these are indicators of how things were, not necessarily how things should have been.

Appendices Relevant material may be appended to the business plan. In deciding what to include as an appendix, the information needs of the reader must be the primary consideration. Material should not be included for the purpose of making Figure 19.2 the document thicker. Appended items Sample format for reporting results of should be referred to in the body of the ratio analysis plan and may include the following:

• Full résumés of members of the management team. terprise understands what the ratios and • Management team job descriptions. the comparisons are saying to the readers • Product speciﬁcations. of the business plan. • Relevant photographs.

Table 19.2 Comparison of selected ratios reported for three types of sport, tourism, and leisure industries (Dun & Bradstreet, 2006)

SIC#7991 SIC#7011 SIC#7992 Physical Hotels, Motels Public Golf Fitness Facilities Courses

Liquidity (solvency):(solvency)

Quick (times) 0.9 0.7 0.4 Current (times) 1.0 1.0 1.0 Total Liability to Net Worth (%) 562.5 162.3 110.7 Current Liability to Net Worth (%) 17.5 32.1 33.9

Activity (ef(efﬁciency)ﬁciency):

Average Collection Period (days) 12.1 9.5 1.8 Sales to Inventory (times) 129.2 82.1 35.4 Assets to Sales (%) 112.2 158.7 116.6

PrProﬁtability:oﬁtability:

Return on Sales (%) 5.2 4.6 1.1 Return on Assets (%) 5.2 2.7 1.7 Return on Net Worth (%) 12.5 8.1 2.9 280 Financial Resource Management: Sport, Tourism, and Leisure Services

• List of prospective customers or corporate objectives. Such an informa- sources of customers. tive guiding document will naturally be • List of possible suppliers. of great interest and is, almost without • Consulting reports and market sur- exception, required by potential inves- veys. tors, suppliers, and creditors. Business • Copies of legal documents. plans typically include descriptions of the • Letters of reference. enterprise and its products and production capabilities. Also included are market descriptions and detailed statements Summary disclosing the financial aspects of the enterprise. The business plan reflects both the dreams and the careful consideration of the sport, tourism, and leisure service or- References ganization. It can cover the entire range of services offered by that organization, Dun and Bradstreet. (Annual). Industry norms and key business ratios. Parsippany, NJ: Dun and or just one program or event. Business Bradstreet. plans are just as valuable in public and Robert Morris Associates. (Annual). Annual private not-for-profit organizations as statement studies. Philadelphia: RMA. they are in the commercial sector because Troy, Leo. (Annual). Almanac of business and they describe how the resources of the or- industrial financial ratios. Chicago, IL: CCH. ganization will be utilized to achieve its

NOTES APPENDIX

Interest Tables 282 Financial Resource Management: Sport, Tourism, and Leisure Services Appendix 283 284 Financial Resource Management: Sport, Tourism, and Leisure Services INDE X

501(c3) Charitable Organizations, 6 balance sheets stock and flow, 254–255 using, 254–256 A base reductions, 221 accountability of public enterprises, 5 Battle Creek, Michigan, Parks and Recrea- accounting tion Department, 140 generally, 253–254 Beckham, David, 26 internal control, 257–260 boards of directors, and fundraising, 143 reporting, 260–263 bond banks, 235 stock and flow, 254–257 bonds for capital improvements, 230–235 accounting management borrowing, public enterprises in not-for-profit leisure service enter- opportunities, 5 prises, 17–18 Boulder, Colorado Parks and Recreation in public leisure service enterprises, 16 Department’s mission statement, 15 Accounting Office duties, 47 Bradford Woods Outdoor Center (Indian accounts payable, 255–256 Univ.), 113–114, 140 acquiring, in financial management, 39 broadcast fees of television sports, 24–25 activity ratios, 275, 276 Bryant, Kobe, 26 added value pricing, 98 budget preparation officer (BPO), 191, admission fees as earned income, 89 200, 201 advertising budget statements, 260–261 sponsorship. See sponsorship budgeting and sport sponsorship, 153–157 budget preparation, 191–201 virtual, 164 budget presentations, 243–251 agency funds, 190 budget processes, 181–190 Alabama State Park revenues, 61–62, capital. See capital budgeting 80–81 common budget formats, 203–221 algebraic calculations for estimating supply determining costs, 174–180 and demand, 57–60 guidelines for constructing, 171–174 annual reports, 19 bulk pricing, 99 annuity funds, 190 Bush, Reggie, 27 Appalachian Mountain Club, 17, 18, 18–19 business plans, preparing, 268–280 appendices section of business plans, 279–280 aquatics program budget, 207–208, 226– C 228 calendar, budget, 184–186 Arlington Heights, Illinois Park District, capital assets, inventory of, 225 246 capital budgeting assessor duties, 39 in commercial sector, 237–240 assets on balance sheets, 255–256 generally, 182, 223–225, 244 attendance, and costs of sporting events, process of, 225–230 27–29 revenue sources, bonds, 230–237 auditor duties, 40, 44 capital costs, and budgeting, 172 Capital Improvement Program (CIP), 223, 247 B capital improvements and public Financing, Baale, Robert, 23 15 286 Financial Resource Management: Sport, Tourism, and Leisure Services

capital project funds, 189 Debt/Coverage/Leverage ratios, 276, 277 certificates of participation, 234 debt management charitable organizations, 6, 136–137 in not-for-profit leisure service chief executive officer (CEO) enterprises, 17–18 budgeting duties, 191, 244–246 in public leisure service enterprises, staffing duties, 197 15–16 Chronicle of Philanthropy newspaper, 117 debt service funds, 189 commercial enterprises debt servicing, 229 capital budgeting in, 237–240 debt-to-net worth ratios, 276 financial management in, 8–10 decision packages, and budgeting, 218–220 income sources (table), 78 declining balance depreciation, 66–67 organization for financial management, dedication fees, 236 45–49 demand and supply competition among public, private economic principle of, 54–60 not-for-profit, and commercial price elasticity of demand, 68–69 enterprises, 10–11 departmentalization in finance, 43–50 competitive pricing, 103 depreciation, 65–67 compulsory income, 78, 79–88 development plan section of business comptroller duties, 39, 43 plans, 273 concessions, and Fan Cost Index, 28–29 differential pricing, 109 contingency director of finance, duties, 39, 44 budgeting, 179 donors, and fundraising, 137–140 costs, and pricing, 104–106 contractual receipts, 78, 91 contractual services, and budgeting, E 198–199 economic impact assessments, 70–73 controller duties, 39, 43 economic principles controlling, in financial management, 39 accounting. See accounting cooperation among public, private budgeting. See budgeting not-for-profit, and commercial depreciation, 65–67 enterprises, 10–11 economic studies and impacts, 70–73 corporate bonds, 240 future and present value, 63–65 corporate foundations generally, 53–54 and fundraising, 140–141 inflation, 60–62 and grantseeking, 114 interest, 62–63 corporate sponsorship. See sponsorship pricing. See pricing cost analysis, 225–229 revenue. See revenue cost-recovery pricing, 97–98, 104 supply and demand, 54–60 costs effort price, 102–103 budgeting, 172–180 elasticity of markets, prices, 67–70 fixed and variable, 104–106 Elmhurst (IL) Park District’s budget cost centers, 209–211 document, 244 credit in private not-for-profit enterprises, employees, and budgeting, 195–197 7–8 encumbered funds, 182–183 cross promotions, 164 endowment funds, 190 cross-subsidization, 106–107 enterprise section of business plans, 270 enterprises See also organizations D commercial. See commercial enterprises Daily Operations Report, 262 competition and cooperation, 10–11 Index 287

private not-for-profit. See private not- fiscal year, and budgeting, 182–183 for-profit enterprises fixed ceiling budgets, 194, 204 public. See public enterprises Florida Park Service, 134, 137 samples from North American flow, and stock, 254–257 Industrial Classifications (table), 278 Food and Beverage Division duties, 47–48 equipment costs, 172–173, 199–200 forecasts, profit and loss, 275 equipment trust certificates, 240 Foundation Center, 117 equity, pricing to promote, 99–100 FOX Sports’ football broadcasting fees, 25 ESPN’s football broadcasting fees, 25 franchise values and player salaries, 25–27 Executive Director duties, 46–47 front matter of business plans, 269 executive summary of business plans, funding 269–270 See also fundraising expendable trusts, 190 of public enterprises, 4 expended funds, 183 public subsidization of sport facilities, 23–24 sponsorship. See sponsorship F fundraising Facility Manager duties, 47 charitable organizations, 136–137 factorial budgeting, 194–195 fund development, 137–140 Fair Labor Standards Act (FLSA), 198 goal setting, relationship, and gift Fan Cost Index (FCI), 27–28 pyramid, 141–144 federal government, income sources, as gratuitous income, 88 86–87 importance of, 134–135 fees as earned income, 88–90 philanthropy and, 133–134 fiduciary funds, 190 for private not-for-profit enterprises, financial management 7–8 budgeting. See budgeting role of fund development, 135–136 commercial enterprises, 8–10 sources, 140–141 departmentalization, 43–50 strategies for, 144–150 functions of the organization, 37–41 funds. See specific fund politics and the organization, 49–50 future value, 63–65 in private not-for-profit enterprises, 6–8 in public enterprises, 3–6 G in sport organizations, 21–29 gate receipts of sporting events, 27–28 financial objectives general funds, 188–189 in not-for-profit leisure service general manager duties, 44 enterprises, 17 General Manager (GM) duties, 47 in public leisure service enterprises, 15 General Obligation Bond (GOB), 232–234 financial plan section of business plans, Generally Accepted Accounting Principles 275–279 (GAAP), 254 financial reporting. See reporting gift pyramid, 143–144 financing goal setting, relationship, and gift pyramid, See also funding 172 of public enterprises, 5–6 ‘going rate’ pricing, 108–109 public subsidization of sport facilities, government 23–24 as charitable donor, 141 salaries. See salaries funds, and budgets, 188–190 fiscal authority in public leisure service sport-related policies, 157 enterprises, 14–15 grants 288 Financial Resource Management: Sport, Tourism, and Leisure Services

granting environment, 114–116 J grantseeking process steps, 116–131 James, Lebron, 26 reason to pursue, 113–114 jobs creation, and sports facilities, 24 Grantsmanship Center, 117 gratuitous and earned income, 78, 88–90 L Land and Water Conservation Act H (LWCF), 87 historical analysis, and budgeting, 195 late fines, 99 hospitality benefits of sponsorship, 164 lease purchases, 235 hotel/motel taxes, 84 legislative/legal parameters for financial hotel/resort financial management management organization, 47–49 of commercial enterprises, 8 Human Resources department duties, 47 of private not-for-profit enterprises, 6–7 of public enterprises, 4 I leisure service enterprises impact fees, 236 financial management in not-for- impact taxes, 86, 87 profit, 17–19 income financial management in public, 13–17 See also revenue operational and fiscal authority in statements, preparing, 254–257 public, 14–15 taxes, 84 organizational structures in not-for- Indiana Sports Corporation, 14 profit, 17 Indiana University’s Bradford Woods organizational structures in public, Outdoor Center, 113–114, 140 13–14 industry section of business plans, 270– liabilities on balance sheets, 255–256 271 license fees as income source, 86 inflation, 60–63 line item budgets, 203–208 insurance policies, and fundraising, 148 liquidity ratios, 275, 276 interest, 62–65 loan funds, 190 interest tables, 281–284 Louisville, Kentucky Metro Parks, 16 Intermodal Surface Transportation Efficiency Act of 1992 (ISTEA), 87–88 M internal rate of return (IRR), 229 management Internet broadcasting of sporting events, expenditure, 169 25 financial management inventory of capital assets, 225 departmentalization, 43–50 investments team section of business plans, 274– future and present value, 63–65 275 income, 78, 90 market analysis section of business plans, return on investment (ROI), 158 272 IRS (Internal Revenue Service) market management 501(c3) Charitable Organizations tax price change sensitivity, 67–70 status, 6 techniques for commercial enterprises, and charitable organizations, 136–137 9 and not-for-profit organizations, 17, 19 techniques for private not-for-profit enterprises, 7 techniques for public enterprises, 4–5 Index 289 market pricing strategy, 103–104 O marketing benefits of sponsorship, 163–164 object classification budgets, 191, 203–208 plan section of business plans, 272–273 objective price, 110 Marketing and Sales Department duties, 47 Olympics, sponsorships, 156 materials, and budgeting, 199–200 open-ended budgets, 194 merit services, and pricing, 100–101, 109 operating budgets, 182, 244 Miami-Dade County Parks and Recreation operating funds, 190 Department, 141 opportunity pricing, 102 mission statements, 15 Orange County, Florida’s Parks and mitigation land banks, 236 Recreation budget presentation, 246 monetary prices, 101–102 organization charts, 245, 274 mortgage bonds, 240 organizational structures municipal taxes, 81 financial management functions, roles municipalities, revenue structure for, 94 (fig.), 38 in not-for-profit leisure service enterprises, 17–19 N in public leisure service enterprises, Naperville’s Riverwalk Foundation, 92 13–14 NASCAR sponsorships, 155 organizations National Association of State Park See also enterprises Directors, 77 charitable, and fundraising, 136–137 National Highway System, 88 functions and offices of, 37–41 National Hockey League (NHL), 28 support, and fundraising, 149–150 National Park Service, 134 National Parks Foundation, 17 National Recreation Trails Act, 87–88 P NBA (National Basketball Association) partnerships and collaborations, income gate receipts, 27 from, 91–92 NBC (National Broadcasting Company) payback period, 239–240 and NFL ratings, 24–25 performance bonds, 99 NCAA Big Ten Conference, television performance budgets, 203, 212, 214–215 broadcasting deals, 25 performance evaluation net present value (NPV), 237–239 in not-for-profit organizations, 18–19 net revenue, loss, 256–257 in public leisure service enterprises, New England Patriots, 25, 28 16–17 New York City parks, income from permits as income source, 86 partnerships, 199 personal property taxes, 83 New York Yankees, 26 personnel NFL (National Football League), television in business plans, 274–275 ratings, 24–25 estimating service requirements, NIKE sponsorships, 157 195–197 nonprofit enterprises. See private non- petty cash, 257–260 profit enterprises, public enterprises Philanthropy and American Outdoors North American Classification System Workshop, 134–135 (NAICS), 21–23 philanthropy and fundraising, 133–151 pie charts, 250 planned giving (fundraising), 145, 146– 148 planning 290 Financial Resource Management: Sport, Tourism, and Leisure Services

business planning generally, 267–268 public enterprises business plans, preparing, 268–280 financial management in, 3–6 plans income sources (table), 78 business, 268–280 organization for financial management, revenue structure, 93–94 43–45 politics and financial management public subsidization of sports facilities, organization, 49–50 23–24 Portland Area Metro Parks budget process, purchasing agent duties, 39–40 186–188 purchasing, and budgets, 200 presenting budgets, 243–251 pricing approaches to establishing, 103–104 R appropriateness and feasibility of, ratio analysis, in financial plans, 275–279 100–101 real estate transfer taxes, 236 calculating costs for unit, 104–107 real property taxes, 79–83 in commercial sector, 9 recordkeeping, 253–254 considerations in establishing, 107–109 reference price, 110–111 inflation, 60–61 rental fees as earned income, 89 in marketing plans, 272–273 replacement fees, 99 nature of, 101–103 reporting price change sensitivity, 67–70, 109– accounting types, 260–263 111 in not-for-profit organizations, 18 in private not-for-profit enterprises, 7 in public leisure service enterprises, 16 in public sector, 16 responsibility centers, 211 purpose of, 97–100 return on investment (ROI), 158 private foundations, and grantseeking, revenue 114–115 See also financing, funding private not-for-profit enterprises bonds, 232–234 financial management in, 6–8, 17–19 capital improvement sources, 230 organization for financial management, compulsory sources, 79–88 45–49 contractual receipts, 91 product/service offering section of gratuitous and earned income, 88–90 business plans, 271 on income statements, 256–257 production/operations plan section of investment income, 90 business plans, 273–274 leakage, 24 profit/loss statements, 254–257 partnerships and collaborations, 91–93 profit motivations in commercial sources in gift pyramid, 144 enterprises, 8 structure plan, 93–94 profitability ratios, 275–276, 276–277 types of sources, 77–79 Program Coordinator duties, 47 revolving loans, 236 program fees as earned income, 89 RevPAR (revenue per available room) programs reports, 261–262 budgeting, 172–180, 203, 208–212, 213 River Network, 150–151 involvement in financial management, running budgets, 215–217 45–46 project/event reports, 261–262 property taxes, 79–83 S proposals, sponsorship, 163 salaries proprietary funds, 190 budgeting, 172, 196–197 psychological price, 102 in business plans, 274 Index 291

sports player, 25–26 straight line depreciation, 66 and supply and demand, 54–55 strategic planning, and budgeting, 191, sales revenue, 89 194, 225, 244 sales taxes, 83–84 subjective price, 110–111 San Francisco Giants stadium funding, 85 subsidization schools, financial management of sport facilities, 23–24 organization of, 46–47 and unit pricing, 106–107 serial bonds, 230–231 success sinking funds, 232 indicators for financial management of social benefits, 227–228 commercial enterprises, 9–10 social roles/expectations indicators for financial management of of commercial enterprises, 8–9 private not-for-profit enterprises, 7 for financial management of private indicators for financial management of not-for-profit enterprises, 7 public enterprises, 5 for financial management of public Super Bowl enterprises, 4 advertising, sponsorship, 154 solvency ratios, 275 television ratings, 24–25 special assessment funds, 190 supplies, and budgeting, 199–200 special events, and fundraising, 141, 145, supply and demand, 54–60 148–149 supply vs. stock, 54 Special Olympics, sponsorships and support organizations, and fundraising, funding, 118 149–150 special revenue funds, 189 SPINDEX method of evaluating sponsorship, 165 T sponsorship tax increment financing bonds (TIFs), corporate perspective on, 160–161 234–235 generally, 153–155 taxes growth of sports, 155–157 as compulsory income, 79–90 marketing benefits of, 163–166 and philanthropy, 135 selling the opportunity, 162–163 real estate transfer taxes, 236 setting objectives, 157–160 special, 237 sport organization’s perspective on, status of commercial enterprises, 8 161–162 status of private not-for-profit sport enterprises, 6 attendance costs of events, 27–29 subsidization of sports facilities, 23–24 business of, 21–23 taxing authority of public enterprises, 5–6 demand curve for professional athletes, television 55–56 and growth of sports industry, 21–23 franchise values, player salaries, 25–27 ratings and sports broadcast fees, public subsidization of facilities, 23–24 24–25 sponsorship growth, 155–157 term bonds, 230, 232 television ratings, broadcast fees, 24–25 ticket price sports facilities/stadiums See also pricing funding of, 85–86 and Fan Cost Index, 28–29 public subsidization of, 23–24 title page of business plans, 268–269 spreadsheets, using for budgeting, 172–180 tourism industry, and RevPAR reports, staffing, and budgeting, 195–198 261–262 state park organizations, 13 treasurer duties, 39, 43 stock vs. supply, 54 Turner, Ted, 136 292 Financial Resource Management: Sport, Tourism, and Leisure Services

two-tiered pricing structures, 99

U unit pricing, 104–107, 194 United Way, 17–18 use taxes, 84 user fees as earned income, 89

W Williams, Marco, 26–27 work plans, preparing departmental, 195 workload measurement, and budgeting, 194 World Series, television ratings of, 24–25

X X Games, 157

Y Young, Vince, 27

Z zero-based budgeting, 203–204, 217–221