How do we know any team is losing money

Discussion in 'Fugu's Business of Hockey Forum' started by Roomtemperature, Jun 30, 2011.

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  1. Roomtemperature

    Roomtemperature Registered User

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  2. cheswick

    cheswick Non-registered User

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    Well we know the Coyotes are losing money cause the NHL received $25 million from the City of Glendale last season which covered actual cash losses. That and the fact they have not been able to find an owner for two years of trying.

    I may be wrong but I think Canada has recently switched from GAAP (which was quoted as being used in thr article) to IFRS in accounting so the methods of reproting things is likely different. I'm not an accountant so not sure if it would amount to a large difference.
     
  3. Tekneek

    Tekneek Registered User

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    It is always debatable, because many of these teams interact with other entities controlled by the owners of the team, which means it can become a shell game. They can legally claim that a team is losing money, while not revealing that the reason it is losing money is (at least in part) due to payments it is making to some other entity owned by the same people. There is a difference between what is legal/ethical under established accounting procedures and what the average person on the street would consider ethical behavior.
     
  4. Tinalera

    Tinalera Registered User

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    *psst*


    Please, please, whatever you do, no one use the Team Marketing Report as a link (no has yet, just forewarning)......kdb won't be very happy......;)
     
  5. Dado

    Dado Guest

    The most straightforward way to know if a team is losing money is when it comes up for sale and nobody wants it at a reasonable price or without relo ability.
     
  6. Tinalera

    Tinalera Registered User

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    That explains why the Teacher's Pension is having trouble selling the Leafs-no relo ablity and not so reasonable price (2.2 Billion is what they're asking) ;)


    In all seriousness (seems the Leafs are the exception for EVERY rule) I think there's merit to this as part of the process :)
     
  7. Confucius

    Confucius Registered User

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    It's why I like how Forbes calculates a teams worth using, operating income. How the team spends it's cash or pays it's taxes after that, should have little meaning. For example if I took 50 million of my operating income and used it to payoff the loan I used to buy the team in the first place. Makes my bottom line for the year seem small (50 million less than it could have been), however I did get a big benefit from the 50 million.
     
  8. Tekneek

    Tekneek Registered User

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    Not necessarily, but it may be a reasonable gauge in most circumstances.
     
  9. sh724

    sh724 Registered User

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    GAAP and IFRS are very similar but the main difference has to do with how they write off expenses under one method you write off expenses at the time they occur under the other you write off expenses when they become relevant.

    Example: If you own a factory and fixed cost are $1000 a month variable cost are $1 per product produced. So if you produce 1000 items in a month than your cost will be 2000 (1000FC + (1VC*1000). Now say in that month you sell 500 items for $10 each for a revenue of $5000.
    To determine profit you can determine how much each product you produced cost for that month 2000/1000 for $2 total cost per unit so your cost of good sold (COGS) for the month would be 2*500(sales) for $1000 COGS and a profit of $4000 with $1000 in cost that carries over but is not considered when calculating profit.
    Or you can determine profit by dividing cost by how much you sold 2000TC/500 sales or $4 per product so COGS would be $4*500= 2000 COGS 5000 profit - 2000 cost for a profit of $3000.
    Method one only accounts for cost when the items are sold but method 2 accounts for cost when they occur using method one companies can mass produce product and leave it sit for long period of times to make revenues seem much higher because cost are not accounted for until the product is sold when in actually revenue would be lower because you have to pay more to store products.
    Back to the example in month 2 the company decided to produce 10,000 items your total cost would be 11,000 (1000+(10,000*1) thats $1.10 cost per product 11,000/10,000 as opposed to the $2 per item before. If you still sell 500 items at $10 your COGS would be 500*1.10 for a COGS of $550 and a profit of 5000-550= $4450 profit. In reality the companies cost increased by $9,000 and they did not have any more revenues but they showed more profit and the cost will continue to rise once you figure in carrying cost per unit and insurance and other cost but those cost will stay hidden until the excess inventory is sold.
    Under method 2 COGS would be 11,000Costs/500 sales for $22 COGS per product and the company will have a lose for the month of $6,000.
    In month 1 the two methods show a difference of $1,000 in profit but in month 2 they show a difference of $10,450. That is one way companies can make their profits look really good or really bad.

    I forget which system it is but under either IFRS or GAAP allows companies to pick what method they want to use and under the other system every company uses the same method. There are more differences than just that but that is one of the biggest differences. Most people believe eventually IFRS and GAAP will compromise and create one system for the world to use instead of the US having different laws than the rest of the industrialized world.
     
  10. sh724

    sh724 Registered User

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    Most contractors do something similar to this they buy a new piece of equipment every year sell the "old" piece for a loss then take out another loan to pay off the loan for the equipment they bought and write off the interest on both loans along with the loss on the equipment they sold and depreciation on both pieces of equipment.

    Another thing S corporations can do is have all share holders be an employee of the company with a relatively small salary then the company board members each get a company car, a clothing allowance, a vacation allowance, a housing allowance, and so on and so on until the share holders have pretty much no expenses and the company has a loss gets passed on to the owners who write it off on their taxes which eliminates their tax liability on all the fringe benefits and they show almost no income because of their small salary.
     
  11. dafoomie

    dafoomie Registered User

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    Thats the other shell game. Your other businesses control revenue streams (the arena, parking, concessions, TV rights, etc) and aren't part of your team's income.
     
  12. Fourier

    Fourier Registered User

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    Instead of calculates, I prefer mouser's term guesstimates. :D
     
  13. BadHammy*

    BadHammy* Guest

    Owners have been obfuscating finances for a really long time but seem to be improving their craft as time goes by. If a team has almost nobody in their building, they're likely losing money but beyond that, it's very hard to know.
     
  14. 5lidyzer19

    5lidyzer19 Registered User

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    The article isn't all that surprising. I'm sure the teams have planned to make the books look worse for a few years now so that when they open them to the players they can say "see guys things are bad". Not to mention trying to minimize tax liabilities. All the while the owners probably make money from the franchise values going up and other revenue streams. Assuming they aren't just using the franchise as their personal toy and don't care if they make or lose money.

    I'm pretty sure before 2014 the U.S will be converging as well. And yes, there's a considerable differences, although they've tried to merge them to create a better version.

    Being in a 5 year accounting program during the run up to the convergence of gaap and igaap has been awful to say the least. We've had to try to learn and be aware of both systems and trust me when I say ONE is complicated enough.


    Maybe I'm missing something, but the individual employees would have recorded income from all of those perks at FMV in addition to their cash salary and would have been taxed accordingly. I haven't taken taxation on corporations yet so perhaps it's different but wouldn't the owner have the same loss whether he paid a salary of $100,000 or a salary of $10,000 with $90,000 worth of benefits? Tax is a clusted, complicated thing so I'm sure that there's a way.
     
    Last edited: Jul 1, 2011
  15. tarheelhockey

    tarheelhockey Highest Boss

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    Another thing to consider is that major-league owners are often not in this game to make yearly profit. Their largest measure of success or failure is the price tag when they decide to sell, at which point they hope to make a windfall from the appreciation since they bought the team.

    For example, Chicago supposedly lost money last year but the Wirtzes would make a fortune if they decided to sell. I don't know what they bought the team for way back when, but the appreciation has likely been in the hundreds of millions.
     
  16. Killion

    Killion Registered User

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    Chicago is an interesting & somewhat unusual case. "Dollar Bill" Wirtz claimed to have lost $191M between 97-07, $31M in the 06-07 season alone. Bill's father Arthur was a minority partner in Detroit with James Norris, who had bought the old Chicago Stadium in 1936; acquiring the Black Hawks in 1952 under puppet owner by proxy only (Tobin) for very little. Detroit was gifted to Norrises' daughter initially, then given to Bruce Norris, with future NHL President John Ziegler acting as Council & VP.

    Bill Wirtz was appointed VP in Chicago, overseeing the revival of the franchise (Hull, Makita, SC etc) & President by 66. Over the intervening decades, vilified by the Black Hawks faithful for everything from the Esposito trade to Boston, Hulls' jump to the WHA, to letting guys like Belfour, Hasek, Chelios & Roenick walk getting cheaper replacement parts or nothing back in return. Much of the familys wealth is tied up in liquor distribution (as in bootleggers & associates of Capone in in the 20's) and real estate holdings, very wealthy, which made it hard to understand the mans parsimonious ways.

    The original "Madhouse on Madison" was demolished in 94, Wirtz & Jerry Reinsdorf building, owning & managing the United Center ever since, home to the Bulls & Blackhawks, one of the largest & most lucrative arenas' on the planet. Merchandise sales, including retro Black Hawks & "Madhouse" gear continue to go through the roof, sellouts the norm as the teams fortunes improved, which including standing room can top out at 22,000+ for hockey. Concerts, conventions, special events etc combined with concessions including parking, sponsorships, state & city tax breaks etc etc etc & you've basically got yourself one giant cashbox in sports crazy Chicagoland the likes of which I would just have to suspect would push it all well into if not past MLSE territory in terms of value.

    As a privately held company, Wirtz/Reinsdorf are under no obligation to report the "real" revenues & purported losses, though based on Reinsdorfs track record with the Bulls in squeezing out guys like Jordan and his manipulations with the Cubs in Illinois & Arizona; Wirtz Sr.'s well documented frugality, pretty hard to buy into the publicly stated numbers in terms of losses. The NHL receives 50% of the gate (based on regular season pricing) for all Playoff Games from every team participating, but still, absent regular season payroll & including the bonuses many players receive from the teams & their individual playoff performances, including Vezina, Smythe & other awards that if won means cash bonuses & better contracts next time their up for negotiations, you'd really have to be an idiot to buy the guff specifically in Chicago as to so much red ink being bled. I sure dont.

    So, using Chicago as the model, as many of the leagues teams do, you then have to really start wondering about a whole bunch more of them, a lot if not most privately held & run with no obligation to report their true financials'. Like John Ziegler's hilarious pie-charts of 92 & overhead projector presentations using celluloid plastic spread sheets written in crayola, it sure looks tasty & palatable, Im sure it tastes good if you lick it upon conclusion & you'd likely get a pretty decent buzz off it all, but just dont swallow. :)
     
    Last edited: Jul 1, 2011
  17. knorthern knight

    knorthern knight Registered User

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    The owners obviously have an incentive to minimize their HRR (Hockey Related Revenue) numbers, in order to lower the salary cap+floor. What exactly is supposed to be included in HRR, beyond tickets, broadcast rights, and merchandise sales? Are parking and concessions included?
     
  18. sh724

    sh724 Registered User

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    Yes they record income but since it is in S corp and all the owners are employees as well the Business shows a loss and the owners write off the small business losses as personal losses which cancels out all of their benefits. You won't learn about that in a class I took tax accounting and and have an associates degree in accounting (it was my major but I hated it and was only a couple classes short of an accounting minor so i finished the associates) and I never learned about anything like that in class. I only know about stuff like that because my brother manages a bank and he has customers that do things like that and so he had to learn how it works
     

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