How Is Financial Risk Management Applied Effectively by a Sports Business? Essay

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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.

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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.

Effective use of financial risk management in sports businesses

The risk management process in sports related businesses comprises of three steps: risk assessment, risk treatment and risk control (Emery, 2011). Risk assessment involves an analysis of the specific risks that a particular business is prone to. Once identified, the severity of the risk is evaluated to find out the danger it pose to that particular business. The next stage is the treatment of the risks that have been identified. Suitable risk reduction plans are identified, and if they will reduce or eliminate the financial, reputation, or accident risks, they are implemented. The final stage is risk control where the progress of risk reduction plans is monitored and the achievements communicated to management. Constant review is needed to ensure new risks in the industry are well-handled.

There are four risk management techniques that can be applied by sport organizations to manage the….....

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