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Budgeting in Baseball

Paul D

Entry posted by Paul D in History 101 ·

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I read today that a lot of fans are annoyed at the Twins ownership because they are unwilling to take on additional salaries in order to increase their chances of winning a World Series.

As a retired CFO of a $14M business with 150 employees, I can vouch for the sanctity of an annual budget.

Preparing a budget takes great knowledge of your business. You need individuals who can anticipate what the businesses expenses for the next year will be. That includes taking into consideration what the cost of utilities, insurance, employee healthcare, the raises you would like to give to your employees, hot dogs and beer and other inflationary increases will be.

When you have created an expense budget (not including player costs), you should then work out your revenue budget. Here you will estimate what you believe are the expected revenues from ticket sales, concessions, TV revenue, etc. When creating these estimates it is important to budget conservatively. A good budget will contain income estimates that are attainable. Additionally your expenses should be budgeted accurately with extra funds built in just in case there are unexpected obligations.

You will now have a revenue budget and an expense budget, still to come are your team’s salaries and benefits, and the organization’s profit goal. The basic format becomes:

+Revenue

-Expenses

=Net Income

-Player Compensation

=Profit

Now let’s throw in some numbers -

$500,000,000 – Revenue

-$300,000,000 – Expenses

$200,000,000 – Net Income

$ x,xxx,xxx – Player Compensation

$ 50,000,000 – Budget Profit

In order to balance out the budget Player Compensation would be $150,000,000.

This is what the Twins administration will go through every year when determining how much money they should allocate for players salaries.

What can change the player budget? A couple of things can happen: 1) ownership can decide that rather than having a return on their investment (profit) of $50,000,000, they will only expect $25,000,000. This can afford them an opportunity to allocate additional budget dollars to player salaries, or 2) they can review their original budget data and determine that some expenses may end up being greater or less than they had originally thought, this difference (which can be a plus or minus) can be used to add or subtract from player salaries, or 3) they can review the revenue budget and make changes to the player budget based on getting more or less than expected. A good example is getting less TV Revenue. A loss of $15,000,000 from Bally gets adjusted by lowering the player budget by the same $15,000,000. Of course it could happen that ticket sales are strong and halfway through the year they feel that ticket sales will be $10,000,000 over what they budgeted. In this case player salaries will have additional funds to use to make changes at the trade deadline.

Naturally, as a fan, I would like an unlimited player salary budget. But as an accountant, I understand that a sound business is based on profitability. Businesses that consistently lose money will eventually run into financial difficulties. When this happens most fans will say, why doesn’t ownership throw in additional cash flow to help out the business. But the whole idea of owning a business is to make an annual profit and to built up the equity in the team so that one day in the future, you can sell the team for a nice profit.

True most baseball teams are owned by people with significant personal wealth, but they are limited to how much they would be willing to lose of their wealth in order for the team to succeed.

There are only so many Steve Cohen’s and George Steinbrenner’s and there are a lot of owners who need the team to be profitable in order for them to succeed.

I think the Pohlad’s are wise to operate the Twins as a business and not a hobby and it is wise to hold the line on spending to what the business can afford.

This is a very simple example is only meant as an aid to showing the complicated process of putting together an annual budget and how teams may determine what they can spend on players.

 

I am not taking a side in discussions, only pointing out the importance of a business preparing a budget and trying to maintain financial sanity.

5 Comments

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Schmoeman5

Schmoeman5 3,193

Posted

Not an argument but how can ANYONE know without ALL the information needed. Owners do not nor will they open the books for full transparency so its all ballpark guess work. The only 3 real known factors are payroll, TV revenue and ticket sales. You knew what your revenue and expenditures were because you had to. If a team makes money for 10 straight years and loses money for 1 year. The only one they'll talk about is the 1 year they lost money. I'm not one who advocates over spending, but when all the people who know way more than I do are scratching their heads at the Twins acknowledged payroll cuts and how they plan on putting a more competitive team on the field. It makes one wonder.

Paul D

Paul D 117

Posted

The real unknown is what do they budget for a profit. If its a breakeven ($0 profit) that one thing, but what if its $100,000,000? You are so right about the financial info not being available. We could be looking at excessive profits or reasonable gains. No one knows.

harmony55

harmony55 153

Posted

10 hours ago, Schmoeman5 said:

Not an argument but how can ANYONE know without ALL the information needed. Owners do not nor will they open the books for full transparency so its all ballpark guess work. The only 3 real known factors are payroll, TV revenue and ticket sales. You knew what your revenue and expenditures were because you had to. If a team makes money for 10 straight years and loses money for 1 year. The only one they'll talk about is the 1 year they lost money. I'm not one who advocates over spending, but when all the people who know way more than I do are scratching their heads at the Twins acknowledged payroll cuts and how they plan on putting a more competitive team on the field. It makes one wonder.

Thank you, Paul Danesi, for the analysis.

An MLB team is no different than most closely held corporations that do not "open the books for full transparency." However, one could argue that governments should require financial transparency of any sports team (or any private entity for that matter) that seeks public assistance. 

Fans typically follow sports teams as a hobby; the owner of a sports team (or any private enterprise) customarily runs a business for profit. If a consumer does not like a product the consumer can instead buy a better product. Major League Baseball, with its antitrust exemption, curtails the marketplace by limiting the number of its franchises. The antitrust exemption may or may not place a higher obligation for public disclosure of finances.

The topic yields no easy answers.

https://ecampus.oregonstate.edu/soc/ecatalog/ecoursedetail.htm?termcode=all&coursenumber=450&subject=FIN

JD-TWINS

JD-TWINS 6,152

Posted

So, I don’t think any rational person would argue your points and general overview of business. IMO, there’s no need for transparency (complete) in a privately held business. There’s nothing wrong with profit either.

Sports teams are high profile entities that are entertainment based with a broad cross-section of the public as customers/fans. Part of their Marketing approach to the customer base is to describe their “general thinking” on how they expect to compete - payroll being one element.

That said, the Twin’s payroll total in 2024 has a few supporting factors that point to an expected total $30M higher than where they currently stand.

They were 16th - 18th - 17th in payroll out of 30 MLB teams the past 3 years…….17th in 2019 as well.

Right now, the team’s total is very near $122M……….the issue I have is that the revenues for ‘24 that are transparent, $$/seat - attendance, TV revenue, MLB Revenue Sharing, minimal net revenues from concessions & merchandise, are all pretty firm numbers. The commitment from the ownership has been a spending of 50-52% of liquid revenues. The general total revenue for ‘24, in a minimum range, seems to be $325M…………..50% equaling $162M.

Twins are currently $3M under 2021’s payroll of $125M and change. They are $12M under 2022’s payroll. They are $32M under (an inflated spend in ‘23) 2023’s payroll.

2023 also netted increased revenues from the expected/budgeted norm, due to Playoff games and some portion of that TV revenue and Gate at Target field for a few games. This revenue should have significantly offset any extra payroll spend in ‘23. 

Not sure, with success & inflation, how the Team can justify the spending going backwards to a sub-2021 level this year?

Trov

Trov 4,782

Posted

On 2/20/2024 at 10:23 PM, Schmoeman5 said:

Not an argument but how can ANYONE know without ALL the information needed. Owners do not nor will they open the books for full transparency so its all ballpark guess work. The only 3 real known factors are payroll, TV revenue and ticket sales. You knew what your revenue and expenditures were because you had to. If a team makes money for 10 straight years and loses money for 1 year. The only one they'll talk about is the 1 year they lost money. I'm not one who advocates over spending, but when all the people who know way more than I do are scratching their heads at the Twins acknowledged payroll cuts and how they plan on putting a more competitive team on the field. It makes one wonder.

There is one team that has to open their books, the Braves as they are a publicly traded company.  The link below is from last March where Atlanta had record revenue, but less profits from the prior year. https://www.forbes.com/sites/mikeozanian/2023/03/01/atlanta-braves-post-record-revenue-but-profit-falls/?sh=6c91a8c03bcc They brought in 535 mil from baseball, 53 mil from non baseball stuff.  The reported operated income was 71 mil, which was 36% less than year prior.  They have debt of 546 mil, which was down as well from 602 mil.

Of course MN is not Atlanta.  However, it give some glimpse at a teams books, at least 1 team.  It is true we do now know the books of the Twins, and many believe the Twins are raking in record profits every year, maybe they are, maybe they are not.  However, if people do think that, then stop giving your money to them if you think the owner are just going to pocket it and not invest in players. 

I think also fans forgot you need to be concerned of more than just 1 year.  Most players do not want to sign 1 year deals.  So even if the team could spend an extra 20 to 30 mil this year, there are no players out there that are worth that per season that would sign for just 1 season.  So now you need to invest in future seasons on that player.  How will that affect your ability to sign other players in future years?  For example, lets say Twins decided to give Snell what he wants 7 years and 30 mil a year.  In a few years, Lewis, and most likely others, will need big raises.  Will the fact that we are paying Snell 30 mil and others like CC large contracts prevent us from signing the other guys?  If so, you need to think about that, and not just think about this year alone. 

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