Financial Risk Management: The Sports Industry
Financial risk management is the process of reducing a firm’s exposure to various risks. According to Emery (2011), it is a process that enables organizations to reduce failures and increase their profitability by carefully evaluating the risks they are exposed to and developing strategies to manage them. The sports industry can learn a lot from the business industry in regard to risk management as it is often prone to issues such as corruption and drug abuse, which it is often insufficiently prepared/equipped to deal with. The office of Sport and Recreation Tasmania (as cited in Emery, 2011) claims that today, risk management is a central part of sports organizations’ strategies because it enables management result to balanced and responsible decision making. This text examines risks sports businesses are exposed to, how financial risk management can be applied, and the strategies that should be applied to protect business finances.
Risks faced by sports businesses
Most major leagues operate under the constant threat of financial instability. Bankruptcies distort products and interfere with the financial capability of an entire league. The American National Football League (NFL), for instance, is known to be the most successful league globally but it constantly struggles to secure its financial stability (Troelsen and Kuperman, 2006). It uses salary caps and equal revenue distribution tactics to increase cost savings and reduce loss control.
News of corruption, age cheating, identity theft and doping are becoming quite popular in the sports industry. These charges are bad for the image of any sports business and league, since they damage hard earned credibility. The International Association of Athletics Federation (IAAF) acknowledges that “some member organizations and athletes will go to great lengths to gain a competitive advantage” (Troelsen and Kuperman, 2006). Sports organizations have to devise ways to deal with image risks to avoid reduced profitability that stems from low ratings and poor performance.
Accidents and injuries
According to Emery (2011) every injury in sports is accompanied by 600 near misses and 10 minor injuries. Risk management should reduce the number of injuries and near misses that occur by identifying potential dangers and evaluating options that can reduce severity of accidents to athletes and the audience.
Effective use of financial risk management in sports businesses
The risk management process in sports related businesses comprises of three steps: risk assessment, risk treatment and risk control (Emery, 2011). Risk assessment involves an analysis of the specific risks that a particular business is prone to. Once identified, the severity of the risk is evaluated to find out the danger it pose to that particular business. The next stage is the treatment of the risks that have been identified. Suitable risk reduction plans are identified, and if they will reduce or eliminate the financial, reputation, or accident risks, they are implemented. The final stage is risk control where the progress of risk reduction plans is monitored and the achievements communicated to management. Constant review is needed to ensure new risks in the industry are well-handled.
There are four risk management techniques that can be applied by sport organizations to manage the various risks they are prone to. These include the avoidance, transfer, reduction and acceptance of risks (Troelsen and Kuperman, 2006). Risk avoidance techniques generally involve the intentional omission of activities and events that may cause risks. Race car drivers should not be allowed to race without all the required protective gear. Risk transfer involves shifting the responsibility of some activities to parties that are better equipped to handle them. Security, for example, is often outsourced. Procedures to mitigate risks can also be applied. For instance, the Major League Baseball (MLB) uses insurance policies in their risk management systems to reduce their financial risks (Troelsen and Kuperman, 2006). Risk acceptance, on the other hand, is a technique that involves cutting costs by accepting that a risk is affecting performance and finding other ways to salvage the situation. A good example is the reaction of the IAAF to doping and cheating charges. Once allegations are confirmed, the officials get together to determine what the best course of action is, and they formulate ways of dealing with the crisis (Troelsen and Kuperman, 2006).
What risk management strategies would be used to protect business finances?
Effective risk management should ensure that organizational leaders are able to identify and evaluate the various financial risks that may affect the businesses’ finances. There are various risk management strategies that may be applied. These include:
Risk financing and budgeting
Organizations should have financial reserves that will enable the continuity of operations even in times of financial difficulty. Effective budgeting ensures money is allocated to every department according to its needs and functions, to prevent problems of inadequate cash.
Insurance enables a business deal with unexpected events. It makes it possible for an organization to transfer substantial risks to insurance companies which saves it from bankruptcy in the event of a disaster or in times of consistent losses.
Avoidance of risks
Once the management of an organization becomes conversant with the specific risks their businesses are prone to, it should do its best to avoid them (Frigo, 2008). This saves the organization a considerable amount of time and resources that would have otherwise been incurred when dealing with the consequences of these risks.
Mitigation and retention strategies
According to Frigo (2008), key areas that are found to cost an organization more than the revenues they generate should be eliminated. Long-term projects which may also be non-profitable in the long-term should also be abandoned. Management should also critically evaluate the assets that should be retained and those that lead to cumulative losses.
The sports industry is prone to a variety of risks that can affect performance; however, there are no standard risk management procedures applicable to every sports business. Every organization should thoroughly assess its risks areas and examine different scenarios that may affect its success. Once this are established, risk assessment, treatment and control techniques should be effectively applied in all areas of the organization. Risk avoidance, acceptance, transfer and reduction measures should then be implemented. Sports organizations should abandon disorganized risk management strategies and borrow a leaf from the business industry, where appropriate strategies are applied in accordance to an organization’s circumstances in an effort to reduce exposure to risk.
Emery, P. (2011). The Sports Management Toolkit. New York, NY: Routledge
Frigo, M.L. (2008). When Strategy and ERM Meet. Strategic Finance. Retrieved 24 January 2015 from https://driehaus.depaul.edu/about/centers-and-institutes/center-for-strategy-execution-and-valuation/center-sev-initiatives/Documents/11When_Strategy_and_ERM_Meet.pdf
Troelsen, T. & Kupperman, B. (2006). What sport can learn from business about risk management. The Olympic Capital Quarterly, Vol. 1(3): 1-7
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