When talking about "making money" in discussing sports team, it is very important to keep several related concepts straight.
Accounting Profit
Economic Profit
Cash Flow
Adjsted Cash Flow
Accounting Profit: Accounting profit is what is reported according to generally accepted accounting principles. This number involves things write-offs of intangibles such as depreciation, goodwill, ietc. and does not include unrealized capital gains.
Sports accounting is very complicated because of the way player contracts are valued for both tax purposes and reporting purposes. Ordinarily, the only things that can be written off are physical assets. But when buying a sports team, the player contracts at the time of the purchase are considered assets that can be written off against taxes. Since sports teams are generally organized as partnerships. This means that accounting losses can be used to offset profits from other sources.
Economic Profit is the total increase in shareholder value net of all dividends and capital infusions. It includes all the values received including unrealized capital gains (the team is worth more but not sold), the tax benefits of accounting loses, and all other benefits transferred to the owners.
Cash Flow is all the cash received after all cash payments including interest. It is the actual cash received and the actual cash paid out. A team can show major accounting loses while having large economic profits while cash flow could net zero. It takes cash to pay bills, so high economic profit does not help if the team has to borrow money to pay bills.
Adjusted Cash Flow is relevant when depreciation is involved. In theory, depreciaiton is what is needed to replenish physical assets, so adjusting cash flow for depreciation but not other intangibles is useful to get an idea of what is sustainable.
Questions about whether the Suns are "making money" or not cannot be answered with determining which definition of "making money" is being used. Due to the increase in value of major sports teams, it is quite likely the Suns are experiencing economic profits but may not be doing so well generating positive adjusted cash flow.
Teams that do no produce positive adjusted cash flow end up having to borrow or dilute equity by selling pieces as a way to keep going. If they cannot, then their only option is to sell to somebody with adequate outside income that can use the tax losses. As a rule, ownership groups do not want to be forced to sell out.
However, owners are likely to cry "we're losing money" when all they are referring to is accounting losses. But cash flow is a better measure, but it can also be distorted by selling players or other assets for cash. This is a process that in accounting terms is considered an "extraordinary" gain and reported differently.
[NOTE: My undergraduate degree was in economics and my MBA was in finance and accounting.]
Accounting Profit
Economic Profit
Cash Flow
Adjsted Cash Flow
Accounting Profit: Accounting profit is what is reported according to generally accepted accounting principles. This number involves things write-offs of intangibles such as depreciation, goodwill, ietc. and does not include unrealized capital gains.
Sports accounting is very complicated because of the way player contracts are valued for both tax purposes and reporting purposes. Ordinarily, the only things that can be written off are physical assets. But when buying a sports team, the player contracts at the time of the purchase are considered assets that can be written off against taxes. Since sports teams are generally organized as partnerships. This means that accounting losses can be used to offset profits from other sources.
Economic Profit is the total increase in shareholder value net of all dividends and capital infusions. It includes all the values received including unrealized capital gains (the team is worth more but not sold), the tax benefits of accounting loses, and all other benefits transferred to the owners.
Cash Flow is all the cash received after all cash payments including interest. It is the actual cash received and the actual cash paid out. A team can show major accounting loses while having large economic profits while cash flow could net zero. It takes cash to pay bills, so high economic profit does not help if the team has to borrow money to pay bills.
Adjusted Cash Flow is relevant when depreciation is involved. In theory, depreciaiton is what is needed to replenish physical assets, so adjusting cash flow for depreciation but not other intangibles is useful to get an idea of what is sustainable.
Questions about whether the Suns are "making money" or not cannot be answered with determining which definition of "making money" is being used. Due to the increase in value of major sports teams, it is quite likely the Suns are experiencing economic profits but may not be doing so well generating positive adjusted cash flow.
Teams that do no produce positive adjusted cash flow end up having to borrow or dilute equity by selling pieces as a way to keep going. If they cannot, then their only option is to sell to somebody with adequate outside income that can use the tax losses. As a rule, ownership groups do not want to be forced to sell out.
However, owners are likely to cry "we're losing money" when all they are referring to is accounting losses. But cash flow is a better measure, but it can also be distorted by selling players or other assets for cash. This is a process that in accounting terms is considered an "extraordinary" gain and reported differently.
[NOTE: My undergraduate degree was in economics and my MBA was in finance and accounting.]
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