Part A - Concept Check
1. Why is the budgeting process important to the success of a sport organization?
2. How do budgeting and forecasting differ?
3. How does incremental budgeting differ from program planning budgeting? How does it differ from zero-based budgeting?
4. What are the strengths and weaknesses of incremental budgeting?
5. How does program planning budgeting differ from zero-based budgeting?
6. What are the strengths and weaknesses of program planning budgeting?
7. What are the strengths and weaknesses of zero-based budgeting?
8. How does modified zero-based budgeting differ from zero-based budgeting?
9. What are the advantages and disadvantages of modified zero-based budgeting?
10. In team sport (professional or college), which form of budgeting should be used?
Part B - Problems
1. The Columbia Arena Company formed in 2015 and uses the accrual basis of accounting. Using the company's 2015 budget, provided in Exhibit, develop a pro forma operating budget for 2016 based on the following revenue and expense estimates:
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COLUMBIA ARENA COMPANY 2015 OPERATING BUDGET
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Revenues:
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Rent from Sports Teams
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$465,000
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Rent from Events
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$729,000
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Equipment Rent
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$27,600
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Concessions (Gross)
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$2,512,000
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Merchandise (Gross)
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$244,600
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Advertising and Sponsorships
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$580,400
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Naming Rights
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$327,000
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Box Office
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$150,000
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Suite Revenue
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$781,700
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Club Seat Revenue
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$549,360
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Ticket Fees
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$654,000
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Parking
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$482,000
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Total Revenues
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$7,503,230
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Less COGS:
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Concessions COGS
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$1,507,300
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Merchandise COGS
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$122,300
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Total COGS
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$1,629,600
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Gross Profit
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$5,873,630
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Operating Expenses:
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Personnel
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$981,000
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G&A
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$218,000
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Non-reimbursed Event Costs
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$163,500
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Utilities
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$490,500
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Insurance
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$272,500
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Maintained
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$369,800
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Contract Services
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$119,900
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Marketing and Promotion
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$218,000
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Management Fee
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$109,000
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Reserve
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$163,000
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Total Operating Expenses
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$3,105,700
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Operating Income (Loss)
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$2, 767, 930
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a. It is forecasted that costs and expenditures will change in 2016 as follows:
- Merchandise COGS, G&A, Event Costs, and Maintenance will increase by 2.5%.
- Concessions COGS will increase by 4.5%.
- Utilities will increase by 8.0%.
- Personnel will increase by 2.5%.
- Insurance, Contract Services, Marketing, Management Fee, and Reserve are forecasted to remain the same.
b. The arena is expected to generate cash receipts in 2016 as follows:
- All rent will increase by 5.5%.
- Concessions Gross will increase by 4.0%.
- Merchandise Gross, Suite Revenue, Club Seating Revenue, Advertising Revenue, and Naming Rights are forecasted to remain the same.
- Box Office, Parking, and Ticket Fee revenues will decrease by 2.3%.
2. After you have calculated the 2016 budget, suppose your boss asks you to revise it so that overall revenues increase by 4% and operating expenses decrease by 1.5%.
a. Based on current trends in facility management, what revenues do you anticipate can be increased? What expenses can be decreased?
b. Use the 2016 budget that you created in Problem 1 and create a new 2016 budget based on the revenue increases and expense decreases outlined in Problem 2 and your work on Problem 2a.
Part C - Case analysis
The intercollegiate athletics department at Coastal Atlantic University (CAU) has major budgeting issues. For the 2015 fiscal year, the university's Board of Trustees has approved a $20.4 million budget for the department. The budget projects a $1.4 million shortfall. After CAU's president shifted $1.4 million to athletics to cover the shortfall, groups across campus complained loudly about the role of intercollegiate athletics on CAU's campus.
The CAU athletic program competes as an NCAA Division I-FBS team. The school is a member of a mid-major conference and has 16 varsity teams, the minimum number required by the NCAA for competition at the Division I level. The athletic department's budget is relatively small compared to those of other Division I-FBS teams. The team's football budget was in the bottom half of conference budgets in fiscal year 2013. For the 2014 fiscal year, the budget was cut by 5%. The athletic department employs relatively few staff members, but in 2014 ten positions were cut, saving the department $700,000. In fiscal year 2014, the department spent $20.4 million while generating $4.5 million in revenues. After the athletic department's portion of student fees was transferred to the department, it had a $1.9 million deficit. The department has overspent by a total of approximately $8.2 million over the past few fiscal years.
Beyond its athletics department, the university as a whole faces serious budgeting challenges. Due to a slowly recovering economy and declining state support, CAU will have to cut between $11 million and $24 million in fiscal year 2015. For fiscal year 2016, the cuts may grow higher, to as high as $39.5 million. As the university acts to balance its budget, many are questioning the athletic department's deficit spending. One member of CAU's faculty senate stated, "The athletics department drains resources at a time when academics are being threatened by overall cuts at the university." Other faculty members are asking whether operating the athletic department is worth the expense.
Case Questions-
1. If you were advising the athletic director at CAU, what budgeting advice would you provide?
2. What budgeting approach should the athletic department use if it intends to balance its budget in the 2015 fiscal year?
3. For an average athletic department, which budgeting method would most likely keep the program from running a deficit? Why?