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.
