Financial risk management strategies in the sports industry

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

Finance risks

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.

Reputational risks

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.

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.

Business Insurance

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.

Conclusion

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.