In baseball, revenue expectations can rise or fall based on performance thats largely …

EXECUTIVE SUMMARY

• IN PROFESSIONAL SPORTS , employee performance is key to success, but it is also highly unpredictable. Tim Buzard, vice-president of finance at the Chicago White Sox, uses a modified zero-based budget to ensure the organizations plans are in sync with its true current financial position.
• TO MAKE THE PROCESS WORK , department heads are responsible for their own budgets. Assumption forms explaining expenses and the revenues they hope to produce go to the finance department, which checks for consistency and realistic expectations. The process not only offers a thorough understanding of each divisions budget but also allows staff to propose new ideas.
• ONCE BUDGETS ARE SET , department heads must submit revisions every time they vary from them. They are also responsible for coding their own bills and ensuring that they follow proper budget preparation protocols.

Every companys fortunes can be affected by a variety of unanticipated factors, such as weather, buying trends and national or international economic conditions. In professional sports, the variables can be particularly unpredictable. A winning player with a multiyear, multimillion-dollar contract might bring in sellout crowds one season and go into a slump the next, taking attendance figures with him. A teams revenues can surge or sag depending on how well it plays and how loyal the fans remain during losing streaks. “The baseball business isnt just about bottom lines—its about winning,” says Tim Buzard, vice-president of finance at the Chicago White Sox. “Its a challenge to predict anything.” To produce an up-to-date and reliable financial picture, Buzard uses an ongoing, flexible process—with a modified zero-based budget—to ensure that the organizations plans are in sync with its current financial position. Financial managers facing variables in their own businesses may find the teams strategy can be adapted for their own circumstances.

WHOS ON FIRST?

While the teams largest expense is player labor costs, the greatest variable is attendance at games, which can have a significant financial impact. While some teams fans turn out even during the worst slumps, “I think our attendance depends more on how the team plays than in most markets. The north side of our city [where the Chicago Cubs play] has more tolerance for a losing team than the south side [where the White Sox play].” The teams performance generally reflects player quality so “what we pay our players can have an impact on attendance.” But high salaries are no guarantee of success, Buzard says. “Last year we had a very high payroll, but the team still didnt perform very well, so our attendance really didnt support that payroll.”

“A company can usually look at its cost of goods sold and know what its margins are, but were unable to predict some margins. At the same time, we have a number of competitors who want to win at all costs without regard for the bottom line; the focus is not necessarily to make an operating profit as in a typical business. We try to be fiscally responsible, but when youre competing with an organization that doesnt care how much money it loses, and your goal is to win games, that drives up your salaries.” Teams pay between $10 million and $70 million in player salaries per year, Buzard says. “Were probably somewhere in the middle.” Each year, the organizations chairman, Jerry Reinsdorf, sets a tolerance level for salaries based on expected revenues. The greatest financial challenge is to balance the salaries against the results high-paid players can achieve.

New stadiums also have an impact on attendance. For a number of years after the new White Sox stadium opened in 1991, “We were drawing about 2.9 million people annually—which we were quite pleased with. Up until last year, we had the best winning percentage record in the American League during the 1990s, but were now out of the honeymoon period with the new stadium.” Buzard hopes the new field has raised minimum attendance permanently. Before it was built, “we had years when we barely got to one million in attendance, and we hope those days are gone.” However, when the team competes against other clubs that regularly draw three million people a year because of star teams or new stadiums or some other unpredictable factor, “Those teams have roughly double the gate revenue to spend.”

FOOLED BY A “CHANGE UP”

In baseball, the players, coaches and finances are forever changing. To maintain a constant view of the teams finances, the team relies on a modified zero-based budget that is updated daily. This way, it can quickly revise its plans and spend more or less depending on its current situation. CPAs in a variety of industries can use this example to create their own plans for coping with the unpredictability of day-to-day business. You have to be able to alter your opinions as you move forward, Buzard says. Budget assumptions are made in August and September, and, by October 31, we have an operating budget for the next year with our best guesses for where we might be. Alterations are expected, although not always welcome. For example, in the current lackluster season, attendance has been below expectations by 300,000 people. Thats a lot of people that we had to readjust our expectations for, Buzard says. In most businesses, you can look at sales figures and product trends and see a fairly reliable flow. With our franchise, the key is whether we win or lose.

Buzards department includes nine people in the controllers office as well as less than a dozen in human resources, ticket processing and data processing. To make the exhaustive budget process work, the finance people rely on input from staff in all of the organizations other divisions. At the start, Reinsdorf stipulates salary and other budget guidelines based on the team managers ideas for improvement. Department heads are responsible for their own budgets. They have to explain the revenues and expenses theyll produce each year. We put together books composed of 1,500 to 2,000 pages of assumption sheets for every account in our general ledger that details issues such as how many security people well need for each game based on expected attendance levels, what their pay rates are, whether there are different rates on weekends, and whether there are any recommended increases or union contract requirements. The department heads prepare these from scratch each year. The forms spell out each departments recommendations and highlight changes. The departments prepare the forms on Excel templates, then the forms are printed and reviewed on paper.

The next step is a series of accounting meetings in which Buzard, the accounting manager and the controllerall CPAsreview budgets with the various department heads. We make sure the budget is consistent. If were assuming two rainouts, we have to see that no one has assumed three. Since expected attendance will affect projected parking and concession fees, we have to be sure everyone is in sync there, too.

Once assumptions are made, the finance team examines them to see if theyre realistic. We play devils advocate. We try to prepare them for what the chairman may ask. The assumption sheets go back to the departments for revision based on these meetings. When they are final, they are reviewed by Reinsdorf, who uses them to construct his business plan for the coming year. Reinsdorf then sits in on another round of accounting meetings and asks his own questions.

The process not only offers a clear picture of each divisions budget but also allows staff to propose new ideas. Besides listing plans for ongoing projects, the assumption forms ask what a department head would do with unlimited funds or with a much smaller outlay. That can lead to conversations where we learn about what could happen if we gave a division another $10,000. People are encouraged to talk about ideas they might have been reluctant to propose formally. Jerry likes to focus on options that could be positive investments.

After the budgets are set, department heads must submit revisions every time they deviate from them. For example, if a division spends less than expected on an item, its staff must complete a budget revision form and return the savings. Its also acceptable to submit a revision asking for more funds because of unexpected expenses or opportunities. The most frequent adjustment is a new idea that develops once the season starts. The regular stream of adjustments are all prepared by the departments, not the accounting staff, taking a great deal of pressure off Buzards staff. Department heads are also responsible for coding their own bills and following proper budget preparation protocols. Buzards department receives all the adjustments and keeps the budget current.

A WINNING CAREER

As a CPA in a field in which finances are not always the most important concern, Buzard recommends that financial managers remember the importance of skills outside of accounting. On every morning commute, he listens to professional development tapes on subjects such as listening skills or dealing with difficult people. The stereotype of accountants is that they are not people-oriented, but thats actually an opportunity, because when youre personable you stand out. I seek professional development in areas outside the technical parts of the job because ultimately thats what gives people who advance the edge.

Another advancement tool for Buzard has been his ability to create his own opportunities by remaining true to his passions. A diehard White Sox fan, Buzard played college ball before an injury forced him to give up his dream of a professional career. After starting out with a small CPA firm that later merged with Ernst & Ernst, he was known around the firm as a baseball devotee. As another one of his passions was music, he had no qualms about leaving Ernst to take a 50% paycut to work in a small Chicago record company. A couple of years later, in 1981, when Ernsts client, the White Sox, needed a controller, a firm partner remembered Buzard. Although there were a number of other candidates for the job, Buzard believes one factor in his favor was his work at the record company, which, like the team, was a partnership in an unusual business. I think that made me stand out. Buzard says his loyalty to his dreams is the basis of his success. I got lucky, but sometimes you make your own luck.