Introduction
Despite the current state of economy, recent NBA seasons have been very positive in terms of fan response to players, teams and the games generally. General revenues have recorded to be at the uppermost they have ever been with receipts from the gates. These revenues have been significantly high in addition to the team sponsorship sales (Mathews, 2017). The NBA games are on the pace towards having the most watched seasons on television. Growth in subscriptions has also increased melodramatically on NBA television to about fifty-five million homes in the United States. For this reason, NBA sports is experiencing a double-digit growth in revenue in the recent past when considering digital business as well as internationally (Mathews, 2017).
However, for the sports business to achieve the revenue growth that is currently experiencing over the decade, it needs to increase its expenditure to generate the same. This is when compared to past decades, where there was controlled spending that decreased prospects of growth in revenue. Due to this fact, the league has been experiencing significant overall net loses, when compared back in the 1990s (Mathews, 2017).
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Risk Management
As a business, NBA’s risk management including all internal control systems have critical roles in the process of managing risks, which are significant towards the achievements of the objectives of the business (Madura, 2012). A sound financial risk management function tends to safeguard the investments of the shareholders as well as all the assets of the business. Risk management processes enables the management to accurately identify all critical assets and to manage any risks in the face of uncertainty. Besides, such a process is considered to be an integral part in value preservation and creation (Madura, 2012). It is the most effective when an entity builds such mechanisms in the infrastructure and are also considered to be parts of a business’ essence. The process of building a business risk management enables it to implement various strategies that are viable towards the business mission’s fulfillment.
Functions of the Financial Risk Management Process
Financial risk management process is an internal process that is critical in the facilitation of various operations. Through efficiency, it enhances reliability of external and internal reporting and also assists compliance towards existing regulations and laws (Mathews, 2017). Effective financial records involve the process of maintaining proper accounting records as critical elements of internal control. They help ensure that the organization is not unnecessarily exposed to financial risks that are avoidable. Moreover, they enable the organizations to use various financial information within business operations besides for publications (Mathews, 2017). The most important aspect of financial risk management process is safeguarding assets, which include detection and prevention of fraud.
An NBA organization’s objectives including its internal organizations as well as the environment in which it functions are evolving continually. For this reason, inherent financial risks in various operations are continually evolving or changing. Internal control and sound financial risk management systems are dependent on regular and thorough evaluation of the nature in addition to the extent of the risks to which an organization is exposed to (Mathews, 2017). Due to the fact that profit result from successful risk-taking processes and are therefore a form of reward, the purpose of financial risk management and the ensuing control systems is to assist in control and manage risks appropriately as opposed to eliminating them.
Guidance and purpose is used during financial risk management process to reflect sound business practices (Madura, 2012). This especially where internal control and financial risk management systems are embedded in business processes, whereby, an organization pursues its operational or strategic objectives. Guidance and purpose tend to remain pertinent overtime in a business environment such as of NBA, which is ever evolving. It also enables the company to make applications regarding such guidance in a manner that is seen to be appropriate and takes the organization’s specific circumstances into account. In addition, the guidance is a critical tool that requires the supervisory board members as well as the management to effectively exercise sound financial judgement (Madura, 2012). This is in relation to organization’s implementation of the organization’s code requirements that are associated to financial risks management besides internal control systems, which are based on reviews and the reporting to shareholders by developing financial annual reports.
The role of financial risks management is to essentially to help manage the company’s financial positions (Mathews, 2017). In this regard, it is responsible for the achievement of organizational aims, policies as well as strategy and results. It is also liable to the supervisory board including the organizational shareholders. While discharging its roles and responsibilities, the financial risk management process is guided by organizational interests. This includes the interests of the shareholders as well as its affiliated business partners. To achieve this, it has to consistently provide financial reporting information to the supervisory board or the organization’s board, which is critical to the process of exercising various duties and operations (Mathews, 2017).
In addition, the financial risk management process has the inherent duty of complying with all existing and relevant regulations and legislations (Madura, 2012). This is in order to manage identified financial risks that have great impacts towards NBA’s activities including activities aimed at financing the organization. Based on the nature of the process, financial risk management department is tasked with frequently reporting related developments to and also discusses internal control and risk management systems.
More importantly, based on best practices, financial risk management process declares through annual reporting that the internal control and risk management systems are not only effective but also adequate (Mathews, 2017). Besides, they provide clear substantiation of such reporting. Through annual report, the financial risk management reports internal control and risk management systems during the year in review. This enables NBA organizations to describe any substantial changes that have been enacted as well as any significant improvements that have been planned through consultations with the audit committee.
Financial Risk Management Options for NBA players
The best example of human capital is an athlete who is high-priced and whose body is always at harm’s away and therefore, should be protected from career-ending or serious injuries (Madura, 2012). In NBA, such injuries have the potential of preventing critical business contracts as well as sponsorship deals from major companies. Just like in other successful companies from other sectors of the industry, an athlete’s greater asset is usually the ability of playing sports and function well in their specific occupation.
NBA is the most likely sport that best describes the above criteria. An athlete’s contracts are normally protected, relatively iron-clad and guaranteed by the National Basketball Association. In 2014, through a nine-year, $24 billion signed television deal, such contracted headed into the stratosphere (Mathews, 2017). Additionally, this deal enhanced the athletes’ salary caps of 2017-2018 season to rise to about $108 million up from $89. This significant rise in salary is likely to attract or accelerate heavy free-agency spending (Mathews, 2017). The greatest asset for the NBA sport is having athletes who have the capacity of playing their sports and working in their specific occupations.
The recent sugar daddy television deal has enabled every player at any level of the game to gain considerable finance (Mathews, 2017). To the credit of the influencers such as financial advisers or agents or credit to themselves, such players need to realize that such significant increase in income could end with career-ending landmines. For this reason, majority of NBA players have begun ganging for risk management strategies such as getting their disability coverage (Mathews, 2017). This way, they are able to gain a peace of mind whilst seeking bigger and potentially better payout in the following years. This strategy may be regarded as a win-win situation when considering life-changing money.
NBA sports has also changed the players ability to establishing player-friendly options in their career. For instance, recently, Kevin Durant was able to sign a $54 million two-year-old deal with the Golden State Warriors. The deal contained a second-year player option, meaning that it was entirely up to Durant to decide whether or not stay in California, in year two. Also, he had the option of searching for another better company with better offerings, if he was not happy with the team’s direction (Mathews, 2017).
In essence, the players need to engage in financial risk management strategies capable of protecting their careers in addition to safeguarding any potential endorsement deals that are lucrative in NBA (Mathews, 2017). These lucrative deals are able to match the size of the contract of the players. According to Forbes, Lebron James was able to remain as the biggest star of NBA as far as endorsement deals are concerned with some estimated seasonal earnings of about $48 million off the court (Mathews, 2017). In addition, he gained coverage in place 24/7, meaning that he was protected if he gets rear-ended, blows out his knee driving in the hoop or in case he suffers from a neck injury while driving his car.
NBA players will probably continue to wager their free agency status mainly for a grab at the brass ring. This is having the inherent risk of getting injuries that could negatively affect their careers. However, there are many insurance companies with products that offer safety nets to such players, who engage in their walk year (Mathews, 2017). Recent statistics indicate that there has been an increased rate of players who are more willing to take such risks off the table, with the main aim of gambling that more money may be earned. Considering the compressed career lifespan, the process of disability protection is seen to be critical for marquee NBA players having considerable endorsement income (Mathews, 2017).
Risk Management Process
The process of risk management usually involves three critical steps; the identification of risks by utilizing environmental scan approach that is informal, the assessment of the significance or impact of risks by considering its consequence and its possibility finally, the development as well as implementation measures aimed at addressing the risks that are deemed significant by way of decreasing their possibilities, consequences or even both (Madura, 2012). It is also worth to understand that in NBA, arises from different types of categories. In regards the operations of Basketball Manitoba has established several categories that are viable in the identification of risks.
The first category is the operational or program risks, which are related to key programs as far as officials, coach as well as the development of the athlete (Madura, 2012). For this reason, financial risk management process will require the management to focus on human resources that may include volunteers or the staff. It also needs to assess the capacity of the organization in meeting stakeholders and participants’ expectations (Madura, 2012). This is while ensuring that the teams’ competitive advantage remains relevant and vital to the members as well as the inherent risks involved in NBA sport.
The other critical category that needs to be assessed is the compliance risks, in which case, the organization identifies risks involved in failure to comply with established regulations and laws (Madura, 2012). These are laws or regulations that are established to govern important issues such as privacy, employment, new corporation legislations, workplace safety, RCAAA charitable status as well as tenant’s legal responsibility (Madura, 2012). This is in addition to organizational anti-doping standards, accountability, standards for funding including the fulfillment of contractual obligations.
Communication risks are another category that is of critical importance especially when considering financial reporting in the organization (Mathews, 2017). Typically, there are risks that are associated to external and internal communications. This may be identified in the issues and crisis management, information management system, reputation and image management, information management systems especially regarding financial data, missed opportunities that may otherwise be relevant in exploiting or promoting financial successful outcomes. This includes social media management, management of intellectual property as well as confidentiality.
External risks are usually never direct and may not be controlled directly in any NBA organization. For instance, financial risk management involves mitigating risks inherent in the funding framework of the organization. This may be from various sponsorship deals, various agencies as well as from the government. There is need to critically examine existing relationships with various games associations, government as well as the international federations regarding NBA sport. In order to avoid high financial risks especially during events, NBA organizations need to critically assess their involvement with regards to other sport partnerships, hosting requirements and financial decisions (Mathews, 2017).
Any sporting organization needs to fully comply with existing regulations and laws that govern the sporting body (Madura, 2012). While assessing government risks, it is imperative to study responsibilities and roles, organizational performance and structure, oversight and decision-making, conflicts and disputes of interests. However, the most critical financial risks involved with the government and regulations are tax, new laws as well as financial reporting (Madura, 2012). Organizations need to plan adequately for succession and diversity within the Board and committee when considering critical aspects such as financial knowledge transfer and retention.
Risks linked to financial monitoring and reporting processes are critical in any NBA organization (Mathews, 2017). This includes; deficit reductions, sponsorship attraction as well as retention, flexibility to direct funding, long term financial sustainability and management and investment of reserve funds of any given NBA organization.
In regards to financial risk management of any NBA organization, risks may be employed using various strategies. A company may decide to retain the existing risks, which have been established to have low possibilities and consequences (Madura, 2012). Moreover, some risks are usually inherent in the NBA sport itself and are thus, accepted usually in their present form. Organizations may make the decision of reducing possibilities or the potential established risks, mainly through efforts such as policies, effective planning, supervision, delivery, monitoring or education within the NBA organization.
Various NBA organizations often choose to transfer their risks either partially or wholly to others (Madura, 2012). For instance, many players may choose to secure their future financial freedom by using insurance, other business contracts as well as waiver of agreements of liabilities. Nonetheless, the most effective strategy of dealing with financial risks is by avoiding any identified risks. In this case, the NBA organization may avoid certain activities that often give rise to risks. This means that organizations decide to eliminate certain forms of activities that tend to initiate or attract risks.
Financial Reporting and Communication
In order to ensure that financial risk management process remains a critical process within NBA organizations, and to promote organizational culture that is able to embrace perspectives regarding risk management, the most standing item is risk management (Mathews, 2017). This is in regards to the Board’s meetings’ regular updates on risk management. NBA organizations need to recognize the fact that communication is an integral and critical process in the process of risk management. Such a policy is needs to be regularly communicated to the committee, staff, clubs as well as the PTO’s. (Mathews, 2017) Moreover, NBA organizations tend to encourage all participants as well as members to communicate any issues or concerns regarding risk management.
The process of ensuring that financial risk management is maintained as a high priority process within the organization, it establishes a comprehensive insurance program (Mathews, 2017). Such a program is capable of providing general liability, Sports Accidents and Officers and Directors’ Errors of Omission coverages to staff, members, officers, volunteers as well as to the sponsors (Mathews, 2017). Normally, these organizations are forced to consult with respective insurance providers upon annual renewals of various policies. This is if there are new issues, gaps or concerns that needs to be addressed through renewals of such policies.
However, it is imperative to note that NBA organizations can not entirely ensure all risks. Part of the management’s commitment to financial risk management, organizations often take reasonable steps aimed at ensuring that insurance coverage is particularly available for all essential activities towards the achievements of their missions (Mathews, 2017). The management is forced to consider only those activities that carry significant risks and those that are insurable.
Conclusion
Finance is the body that is responsible to manage risks that are linked with business operations and to the owners of assisting business units as well as to the commissioners in maximizing financial results. This critical financial department involves itself in all financial aspects, which involved all transactions that includes confirming league-wide financing is available usually at competitive rates. The financial department also provides support in financial analysis for important business agreements as well as team sales transactions. Despite the fact that such activities are readily available to NBA fans, they are all critical in the process of developing a steadily successful product to them.
The principle area of emphasis is typically the expansion of capabilities that are associated with financial reporting. This is in addition to focus towards analysis of team’s results as well as that of the league as a whole. It is worth to note that the NBA sport has a growing business in support. Considerable part of such growth results from international markets and has already acquired a lot of attention towards planning processes aimed to achieve growth as well as in the process of financial risk management. This in regards to operations in different regulators, tax and the labor environment.
References
Madura, J. (2012). International financial management . Mason, OH: South-Western, Cengage Learning.
Matthew, B. T. (2017). Financial Management in the Sport Industry . Florence: Taylor and Francis.
