Learn about the common types of financial risks in sports and how to use different techniques to assess them in this informative and practical article.

Financial risks in sports, like overcommitting to player contracts, demand careful assessment. Sports managers analyze factors such as player age, injury history, and performance consistency. For instance, in the NBA, "supermax" contracts pose risks if players underperform. Agents and managers use stats and market trends to gauge return on investment, often structuring contracts with performance-based incentives or clauses to mitigate risks. Diversifying revenue streams through sponsorships or merchandise sales further safeguards teams against financial impact from individual player contracts.

What are the financial risks of sports, and how can you assess them?

Sports are a lucrative and competitive industry, but they also involve various financial risks that can affect the performance, reputation, and sustainability of sports organizations, athletes, and stakeholders. In this article, you will learn about some of the common types of financial risks in sports, and how you can assess them using different tools and methods.

1 Revenue volatility

One of the main financial risks in sports is revenue volatility, which refers to the uncertainty and fluctuation of income streams from different sources, such as ticket sales, media rights, sponsorships, merchandising, and gambling. Revenue volatility can be influenced by factors such as market demand, consumer preferences, economic conditions, legal regulations, and competitive dynamics. To assess revenue volatility, you can use techniques such as forecasting, scenario analysis, sensitivity analysis, and break-even analysis, which can help you estimate and compare the potential outcomes and impacts of different revenue sources and scenarios.

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Kent Jenkins

Helping unlock Asia's immense potential.
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Effective financial management and control is critical in sports, as there are so many factors to consider with many outside of your direct control. Market risks are a prime focus, such as evaluating the economic conditions, the fan base, market trends to develop diversified revenues streams and even to adapt marketing strategies based on market changes. Regular risk assessments, strategic planning and proactive management to potential challenges are essential components of effective risk management in sports management. Revenue volatility can be a direct result of poor player or team performance, competing sports/ interests, ticketing prices and so on. Being aware of these scenarios and proactively planning is a key.

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2 Cost inflation

Another financial risk in sports is cost inflation, which refers to the increase and pressure of expenses related to sports operations, such as salaries, wages, transfers, facilities, equipment, travel, insurance, and taxes. Cost inflation can be driven by factors such as supply and demand, bargaining power, inflation rates, exchange rates, and contractual obligations. To assess cost inflation, you can use techniques such as budgeting, benchmarking, variance analysis, and ratio analysis, which can help you monitor and control the level and allocation of costs and resources.

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3 Financial leverage

A third financial risk in sports is financial leverage, which refers to the use and proportion of debt and equity to finance sports activities and investments. Financial leverage can be beneficial or detrimental, depending on the cost and availability of capital, the return and risk of investments, and the cash flow and solvency of the sports organization. To assess financial leverage, you can use techniques such as capital structure analysis, debt service coverage ratio, interest coverage ratio, and debt-to-equity ratio, which can help you evaluate and optimize the balance and mix of debt and equity.

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4 Fraud and corruption

A fourth financial risk in sports is fraud and corruption, which refers to the intentional and dishonest manipulation of financial information, transactions, or activities for personal or organizational gain or advantage. Fraud and corruption can occur at different levels and forms in sports, such as match-fixing, doping, bribery, embezzlement, money laundering, and tax evasion. Fraud and corruption can damage the reputation, credibility, and integrity of sports organizations, athletes, and stakeholders. To assess fraud and corruption, you can use techniques such as auditing, internal control, compliance, ethics, and whistleblowing, which can help you detect, prevent, and respond to fraud and corruption.

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Ibrahim ElOraby

Senior Curation Performance Executive - Content Operations @ Shahid | Personalization | Data | AI
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This is an area of expertise for me as someone who has covered governance in sport really well. In a nutshell, the industry needs an independent global regulator for sports, that can enforce action and sanctions due to the many forms of financial crime in the industry. I have covered the entire scope of financial crime in football in my ebook money laundering and compliance in sports. Where I have also proposed a global regulatory compliance model for the entire sports industry beyond football

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5 Legal liability

A fifth financial risk in sports is legal liability, which refers to the potential and actual claims and lawsuits that can arise from the breach or violation of laws, regulations, contracts, or rights in sports. Legal liability can result from various issues and disputes in sports, such as injuries, negligence, defamation, discrimination, intellectual property, labor relations, and governance. Legal liability can incur significant costs and damages for sports organizations, athletes, and stakeholders. To assess legal liability, you can use techniques such as risk identification, risk analysis, risk mitigation, and risk transfer, which can help you identify, evaluate, reduce, and transfer the legal risks and exposures in sports.

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Drishti Bagla

Sports Content Creator | Deloitte India | Ex-KPMG | Young India Fellowship | York University - Canada | All views are personal |
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Financial risks in sports, like overcommitting to player contracts, demand careful assessment. Sports managers analyze factors such as player age, injury history, and performance consistency. For instance, in the NBA, "supermax" contracts pose risks if players underperform. Agents and managers use stats and market trends to gauge return on investment, often structuring contracts with performance-based incentives or clauses to mitigate risks. Diversifying revenue streams through sponsorships or merchandise sales further safeguards teams against financial impact from individual player contracts.

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6 Environmental impact

A sixth financial risk in sports is environmental impact, which refers to the effect and influence of sports activities and events on the natural environment and resources, such as land, water, air, energy, and biodiversity. Environmental impact can be positive or negative, depending on the design, management, and evaluation of sports activities and events. Environmental impact can also affect the financial performance and reputation of sports organizations, athletes, and stakeholders. To assess environmental impact, you can use techniques such as environmental impact assessment, environmental management system, environmental reporting, and environmental certification, which can help you measure, improve, and communicate the environmental performance and responsibility of sports.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Debbie Larry-Izamoje,fnimn

Chief Operating Officer | Brila Media | Media Executive | Top 25 Women in Nigerian Sports Business | Women in Sports Advocate
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In the realm of technology and cybersecurity, as our reliance on technology increases, there is a growing risk of cyber attacks that can compromise critical financial information or disrupt operations. To address this challenge, it is essential to allocate adequate resources to establish robust cybersecurity measures, conduct regular audits, and ensure that our teams are well-equipped to identify and prevent potential cyber threats. To safeguard against these threats, organizations must implement effective cybersecurity measures that are tailored to their specific needs.

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What are the financial risks of sports, and how can you assess them?

1

2

3

4

5

6

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1 Revenue volatility

2 Cost inflation

3 Financial leverage

4 Fraud and corruption

5 Legal liability

6 Environmental impact

7 Here’s what else to consider

Sports Management

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What are the financial risks of sports, and how can you assess them?

1

2

3

4

5

6

7

1 Revenue volatility

2 Cost inflation

3 Financial leverage

4 Fraud and corruption

5 Legal liability

6 Environmental impact

7 Here’s what else to consider

Sports Management

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