Or, how to big companies leverage debt, and/or manage operating losses? Is this just a matter of creative accounting, or do companies actually lose huge sums of money. Take the following examples into consideration:
**The New York Yankees. **
They apparently had a operating loss of 37.1 million in 2004. In 2005, they will lose even more.
The Boston Red Sox are in a similar situation, with operating losses of 11.3 million dollars, and a depreciating franchise.
Additionally, there are plenty of movie that supposedly lose money, Microsoft is losing hundreds for each xbox360 it sells, and Trump’s casino lose money every year (adding to their substantial debt).
My question is, how do these companies pull this sort of thing off? Is it just a matter of banks not being able to afford to see a company fail, or is there more to it. Also, do the heads of these companies still make money if they own part of an unprofitable business?
Well, for a regular firm I’d say they can’t sustain such losses.
For the MLB sources you cite I’d call bullshit. If the Yankees lost that kind of money I’ll eat my cat. I’d want a team of auditors to attack those books with pitchforks and torches. Sports teams can do things like:
Franchise out parking to another firm that’s controlled by the same people. Hence, parking isn’t on the team’s balance sheet. Ditto concessions, television, etc.
Move cash around to give the appearance of such.
Not have licensing revenue (Team shirts and other logo-wear) earned by the team but rather by the holding company.
Never forget: Lie.
I don’t have a particular hard-on for the Yankees. But if the Yankees can’t make money then no one can and baseball should close up shop.
I can’t tell you about the sports teams, but Microsoft treats their consoles as a loss leader. They want people to buy a 360 because they’ll make that money back by licensing all the games made to play on the 360–they get some percentage of the proceeds from every game sold.
Normal businesses can run at a loss for as long as their cash reserves and/or their ability to borrow holds out. Northwest Airlines, for instance, has been losing money hand over fist, but had hundreds of millions in cash which kept them going for a while. Some businesses show a loss on their income statements due to non-cash items, such as write-downs in the value of things they own. It is possible to have a loss while having an increase in cash under that condition.
Some sports teams are run at a loss over long periods because their very wealthy owners have the money to run what is essentially a hobby business at a loss as long as their personal fortune holds out.
Finally, some of the information we get about the profitabilty of sports franchises, almost none of which are publicly traded corporations, may be fiction.
Well I can’t say for ‘big businesses’ but I can comment from the experience of running a small business for seven years. Not profitable doesn’t equal not able to keep the doors open. There are a lot of factors;
how long did/do the owners expect the business to operate at a loss
if the losses are not great, a simple infusion of more investment by the owners keeps things going
if the losses are right at the break even point then simple reassigning when new investments / buying less / hiring less keeps things going
Even without fancy accounting. Most Mom and Pop businesses open up knowing they aren’t going to make anything for some period of time, usually measured in years, as far as profits go. They are gambling that in the long run their idea / management will make it a profitable company. It’s a tough gig, which is why it isn’t for everyone.
Personally I ran my business for 7 years without realizing more than a few thousand (less than 10K) in profit. Why keep at it you ask? The business was growing, I took an existing business and increased its gross revenue by 4-5 times. I thought if I kept riding the wave, then it would eventually plateau out and I could begin to reap the rewards. Unfortunately, I burned out somewhere around year 4-5 from 16-20 hour days, 6-7 days a week, all year round.
The Yankees may have lost that much money, but the income from the YES Network that they own makes up for any shortfall.
And that’s the answer: companies that lose money every year but still survive have some separate division that makes up the shortfall. For xbox, Microsoft’s income from PC software makes up the difference.
Game consoles cost more to make than they will sell for, so Sony loses $$ for each PS they sell, and M$ loses cash for every Xbox they sell. The idea being to get SOME money for them to offset part of the losses, but to get the boxes into as many homes as possible.
They make their profit on game sales. Every single game made for one of those boxes generates a licensing fee for the console maker. In fact, to ensure they get paid for all the discs, game manufacturers must send in their final game discs directly to Sony or M$ and they mass produce the discs for the publisher. During this process, secret errors are burned into the disc, and the game consoles recognize those errors as codes legitimizing the disc as non-pirated. (The errors don’t affect the game, they are on otherwise unused portions of the DVDs.)
As for movies, studios make 6-10 films/year. If 5 of them lose $1mil each and one of them makes $50mil, the winner offsets the losers. And winners are often turned into losers on paper by saying the profits were all used to offset studio expenses and losses from other movies. In other words, they move numbers around to make huge hits seem like big failures, so that they don’t have to pay a percentage of the suddenly non-existant profits to anyone with profit sharing in the film. (That’s why the big names negotiate for a percentage of box office total, not a percentage of the profit, a technique called Monkey Points because only a monkey thinks they’d ever see any of that money.)
Some businesses have large fix costs–sunk costs–that will go on whether the
enterprise continues or not. So it’s a question of whether continuing to operate
will have a lesser loss than closing completely.
Then of course there are the Ponzi type accounting schemes that can show great profits without any actual business whatsoever(see Enron), in hopes of attracting new investors.
Another key phrase is “operating loss.” Let’s say I’m the Yankees and I have a $300 million payroll. I sign a studly pitcher for a four year, $40 million contract, but part of it is a $10 million signing bonus. Even though the first year, I’m paying the pitcher $17.5 million, which pushes my payroll above my $300 million budget, for the next three years I’m only paying him $7.5 million a year. I have an “operating loss” this year, but I won’t next year.
Sometimes a company will set the goal for itself of customer growth, and cheerfully take a loss per transaction. Of course the company has to have a reserve of cash in order to be able to sustain such losses over time, and the situation can’t be permanent, obviously.
I work for such a company; we’re quite large and for about 9 years seldom turned an operating profit. Now our focus is shifting towards profitability, so we’re less concerned about roping in customers and more concerned about roping in the right customers, who will not become delinquent and who will generate profit-making sales of add-ons. And now we’re turning profitable.
Another thing to look at is, what percentage of their total budget this shortage represent. 100 million is alot of money to you and me, but to something the scale of say Boeing, Ford, American airlines, etc this could be less than 1% of their total budget. Of course a 1% operating loss is a far less impressive headline than 37 million. In addition many companies of this scale will have significant reserves and capital and or the ability to take out 8-9 digit loans for short term shortfalls.
In the small business world, I know of a couple “hobby” businesses that are basically tax writeoffs for the owner. They make a lot of money elsewhere, then have a business for something they just like to do (e.g., one is a bicycle shop) but at which they can’t make money. They write-off all of the expenses for the hobby as business expenses. I guess they lose less to expenses than they would have to taxes, or something. It’s all numbers-magic to me.
Big businesses do the same sort of thing, just on a larger scale.
Note that :operating loss" can include ‘depreciation’. And major league sports have convinced the IRS that they can ‘depreciate’ the players that they ‘own’’. Thus if the average fastball pitcher lasts just 4 years in the majors, they can depreciate their fastball pitchers at 25% of their contracted value each year, and record that as a ‘loss’ against their income. With that kind of bookkeeping, it isn’t hard to come up with an “operating loss”.
And the owners can then write-off that loss against their income from other sources. Even toward income taxes back onto past years, or forward into future years.
So you get to have all the fun of running a pro sports team, and it costs you nothing, just money you would have paid in taxes anyway. So you have your fun, and other taxpayers make up the difference!
Well like it or not its always better not to spend the money than deduct it. Depending on your tax bracket you are effectively getting a 20-30% discount on deductible items due to reduced tax liability. So if you do have some sort of hobby centered micro business you can soften the blow by becoming a business.
I am currently drastically underpricing many of my competitors in town, I do have some cash reserves but i also have a plan to increase my prices a bit corresponding to an advertising release. That increase will still put me below most of my significant competition but those below me have minimal advertising and marketing.
You say that as if it were a bad thing. All the people he pays wages to will pay taxes too, and the state will receive sales taxes from all the merchandise and concessions that he sells. All in all, the economic activity generated by the franchise will more than outweigh the loss of tax revenue from his deductions. So don’t demonize the franchise owner too much!
The pro sports teams in the Twin Cities, Minnesota area have been trying for several years to sucker the public into building them new stadiums. So we’ve seen a whole lot of ‘economic studies’ on this topic. Most debunk this notion.
But it’s not fair to derail this thread with a discussion of pro sports eonimics. Start a new thread if you want to discuss that.
