Boston Celtics Inc. Case Study Essay, Research Paper
Boston Celtics, Inc. Case Study
Business Strategy Analysis
The National Basketball Association (NBA) is the only professional basketball league in the U.S. However there are 23 franchises (member teams) that are all in competition with each other. Boston Celtics, Inc. is one of the 23 franchises in the NBA. There are, both, high levels of competition and a high level of risk involved with these franchises.
It is hard to enter into this industry due to some difficult barriers that a new franchise would need to look at if they wanted to enter this industry. The 23 existing teams are located in 23 major U.S. cities. A new franchise would have to be strategically placed. They would need to look at population in the area, geographic region, market stability, and maybe television ratings to see the popularity of the sport in the specified region. Another barrier, to overcome rejection into the industry, is the high fixed costs of running a team. Fixed costs include salaries of the players and coaches because they receive contracts of one or more years in length. There are also high variable costs. Because of the high fixed and variable costs, the barriers that a new franchise would have to overcome are high.
Since the team and players are the product, there is not much chance of product differentiation. Each team has to have the same regulations and characteristics to become a part of the NBA. However, there can be high levels of differentiation in the players, their performance, and the quality of their play. Also under differentiation, such characteristics as image, appearance, and reputation would stand out.
For Boston Celtics, Inc. the pricing strategies were very structured. For the regular season home games, ticket sales ranged from $8.00 to $23.00 per game in the 1985-86 season. In the 1986-87 season, tickets ranged from $9.00 to $26.00. Home games were held at the Boston Gardens. The average ticket in the 1985-86 season was $16.72, and the average ticket for the 1986-87 season was projected to be $18.49. Other profit drivers include the sales of sweatshirts, shirts, hats, basketballs, and other merchandise with the team insignia on them.
Accounting Analysis
There are several financial statements offered in this case study. They are Balance Sheets, Statements of Operations, and Statements of Cash Flows. The three financial reports gave sufficient information for the financial analysis that follows in the next part of the case study. There is also sufficient information for the organization as a whole and it’s accounting policies. Boston Celtics, Inc. was faced with the decision of whether to take part in a partial sale of the franchise. The franchise’s policies listed in the case study are Revenue and Cost Recognition, Player Acquisition Costs, National Basketball Association Franchise, Media and Other Contracts, Equipment and Improvements, Pension Costs, Income Taxes, and then Financial Statements.
Revenues and costs are recognized in the financial statements provided. Revenues consist of ticket sales and television and radio broadcasting fees, and the costs consist of player and coaches’ salaries, game costs, fringe benefits and insurance, arena rentals and travel, NBA attendance assessments, promotional costs, general and administrative costs, and amortization. The NBA Franchise is amortized on a straight-line method over a 40-year period. Player acquisition costs are first estimated at fair market value for the player contracts. They are amortized on the straight-line method, whether acquired from the draft or another team. Equipment and improvement are recorded at cost, and depreciation and amortization are estimated over the useful lives of the assets. Media and other contracts are recorded at fair market value. They are also amortized on a straight-line method depending on the specific terms of the contract. They are calculated on an accelerated method rather than a straight-line method. Pension costs are amortized on a 30-year period and funded as accrued. Income taxes by the company were provided for federal and state based on income recorded for financial statements’ purposes until 1985. The statement of operations only showed figures from September 27, 1983 to June 30, 1984 because it was equivalent to a full year’s operations that included all revenues for such a year. There were certain financial statements not given that may have been helpful to study the company more thoroughly. They were not needed to show the contemplated liquidation of Boston Celtics, Inc. The Financial records given showed details pertaining to assets and liabilities as to where the money was spent or to be spent. Details about deferred revenues and costs were also given. Furthermore, details were also given on an earning basis and cash basis.
Financial Analysis
Assets 1985 1986
Current Asset Turnover 10.33 7.2
Working Capital Turnover -10.76 -10.56
Current asset turnover and working capital turnover both show how many dollars of sales the Boston Celtics, Inc. is able to generate for each dollar invested in current assets and working capital. The current asset turnover ratio shows that Boston Celtics, Inc. did not improve as it went from 10.33 down to 7.2 within one year. The working capital turnover ratio is up by about .2. It is still in the negative and improvement needs to happen by either improving sales or decreasing current liabilities.
Accounts Receivable Turnover 11.24 18.34
Accounts Payable Turnover .14 .13
Accounts receivable and payable turnover ratios show how the working capital is being used in a productive manner. The accounts receivable turnover ratio increased from 1985 to 1986 because sales increased for the year, and accounts receivable decreased from 1985 to 1986. The accounts payable turnover ratio decreased from 1985 to 1986. The decrease was due to a larger increase in purchases rather than an increase in accounts payable from 1985 to 1986.
Current Ratio .51 .59
Cash Ratio .13 .30
Quick Ratio .60 .53
The above ratios measure the franchise’s ability to repay the current liabilities with their short-term assets. The current ratio compares current assets to current liabilities. The increase from 1985 to 1986 shows an increase in both current assets and current liabilities. The cash ratio reveals that there was a decrease from 1985 to 1986 due to an increase in cash and short-term investments as compared to an increase in the current liabilities. The quick ratio increased from 1985 to 1986 due to the same reasons the cash ratio decreased, but there was a decrease in accounts receivable.
Operating Cash Flow Ratio 1.70 1.68
This ratio shows that their ability to generate the resources needed to repay their current liabilities decreased. This was because of a larger increase in the cash flow from operations versus the increase in current liabilities.
Capital Structure 1985 1986
Liabilities-to-Equity Ratio 17.77 1.57
This ratio shows a decrease from 1985 to 1986, which is due to a larger increase in total liabilities versus the increase in shareholder’s equity.
Debt-to-Equity Ratio 23.24 .77
This ratio shows how many dollars of debt financing they used for each dollar invested by their shareholders. Because there was no long-term debt, there was an enormous decrease from 1985 to 1986.
Debt-to-Capital Ratio .70 .43
This ratio gives the proportion of debt in the total capital of the company. This decrease is a result of not having any long-term debt in 1986, as previously stated.
Equity-to-Capital Ratio .03 .39
This ratio shows an increase from 1985 to 1986 due to a small increase in total capital and an increase in total shareholder’s equity.
Interest Coverage .47 -7.43
This ratio shows that the dollars of earnings available for each dollar of required interest payment drastically decreased from 1985 to 1986. Both years have figures below 1, which shows that the company is barely covering their interest expense through operating activities in 1985 and not at all in 1986. This is a bad sign for the company. Because of the decrease there is no cushion to meet their interest obligations.
Profit Margin 1985 1986
Return-on-Equity 1.84 .93
This ratio shows a decrease, which means that the owners, or management, are not allocating the invested funds from shareholders well. This ratio is usually the starting point for an analysis of a company’s performance, this particular ratio shows that Boston Celtics, Inc. is suffering.
Return-on-Assets .05 3.6
This ratio compares the net profit margin or return on sales versus the assets turnover. This increase reveals that they were able to generate more profit per dollar of assets invested in 1986 compared to the previous year.
Regular season revenues increased in 1986 from 1985 as shown in the financial statements. Ticket sales, television and radio revenues, and other revenues increased from 1985 to 1986. Costs were also rising from 1985 to 1986. In some areas, increases in revenues were not enough to cover some short-term liabilities that accrued up to 1986.
Forecasting Analysis
The owners are interested in selling part of the franchise, but they want to keep their control over the franchise. The Celtics would benefit from a Master Limited Partnership (MLP). This would still allow the original owners to keep ownership and control over the franchise. MLP’s offer limited liability to the limited partners, denial of management, and personal tax rates. If the owners of the franchise decided to follow through with selling a part of the franchise, they would still have a majority ownership of 60 percent. The ratios in the above financial analysis are strong indicators that it would be beneficial to the franchise to let new investors help take part in improving the monetary numbers for Boston Celtics, Inc.
The increase in earnings is beneficial. Ticket prices were raised each year, and demand was at a high. This was a result of the Celtics having a winning reputation. They had a consecutive run of 270 home games being completely sold out, filling the Garden’s 14,890 seats. This information would be useful to share with investors upon promoting the partial sale of the company. They brought up the fact that some of their short-term debt had already been paid off, in efforts to increase the attractiveness of their sale to investors.
The success of the franchise heavily weighed on the success of the team. With that in mind, the company would seem to be a risky investment. So, they offered more suggestions about how they would keep afloat. They wanted to try a new accounting system, which would cost $220,000 plus an estimated amortization over five-years and annual operating costs. The cost of the new system was extremely high and was therefore not very good information.
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