Understanding Broadcast and Cable Finance, Second Edition: A Primer for Nonfinancial Managers
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Credit and Collection Administration -- Trade and Barter -- Music License and Syndication Fees -- Taxation -- Financial and Accounting Considerations for Acquisitions From on-air talent contracts and FCC regulations to syndicated program amortization to music licensing fees, electronic media deal with financial principles and jargon that are unique to American business. Understanding Broadcast and Cable Finance helps explain all the financial complexities of a modern electronic media enterprise.
Whether you are a news director, sales manager, engineer or any other non-accounting professional that has a stake in the success of your company, this book will bring you up-to-speed on the essentials of financial management for broadcasting and cable. Log in to your account. Advanced search.
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Login: Password:. Description: xiii, p. ISBN: pbk. At a typical television or radio business, the preponderance of value will typically lie in intangible assets such as FCC licenses, advertising contracts, talent contracts, programming rights, and the like. Measuring, monitoring, and reporting about these intangible assets create unique challenges for financial reporting.
Ownership In the Telecommunications Act of , the FCC relaxed many of the rules regarding broadcast station ownership. This marked an important chapter in a process of deregulation that has dramatically changed the nature of the broadcasting industry. In the early days of the industry, for example, no single company could own more than 12 radio stations. Because of the act, groups that had been limited to ownership of no more than a few dozen stations could now own hundreds of stations—and potentially could serve almost every major market in the country.
The rules for radio were more complex, and were based upon market size and the number of competing stations within a market, including noncommercial stations. In the largest markets, an owner can own as many as eight stations, of which five can be in the same service AM or FM.
During this time period, many broadcasters grew rapidly; Clear Channel Communications, for example, grew to own over 1, radio stations. Increased demand during this period made FCC licenses much more valuable in the marketplace; in fact, licenses doubled and even tripled in value as companies competed to acquire additional stations. In , as an outgrowth of its congressionally mandated biennial ownership review, the FCC began a proceeding to review all of its ownership rules affecting broadcasting.
Its intent was to relax ownership rules even further. On June 2, , the FCC adopted new rules governing local and national television ownership; local radio ownership; and local cross-ownership of radio stations, television stations, and daily newspapers. Before the new rules took effect, however, the United States Court of Appeals for the Third Circuit imposed a stay on their effectiveness pending review. Although a detailed treatment of the ownership regulations is beyond the scope of this chapter, it should be noted that many of the ownership limits are still in a state of flux based upon judicial and FCC review.
Partially as a result of the regulatory uncertainty regarding ownership limits, and partially because of the downturn that hit the technology and media sectors after the year , the pace of consolidation slowed. However, a significant number of television, radio, and cable businesses continue to change hands each year, and placing these businesses on the books of the acquirer is one of the most important financial functions in the industry.
It is in this marketplace, one defined by a strong relationship between audience size and revenues on one hand, and increasing competition on the other, that the broadcasting industry operates. Cable The cable television CATV industry developed in the late s in order to provide television service to communities in rural Pennsylvania that were too isolated to receive over-the-air television broadcasts. The first systems consisted of a simple antenna placed on a tall hill that could receive television stations from distant markets.
The cable system owner ran cables from this antenna location to households Cable 9 throughout the community, sometimes for free, in order to sell television sets locally. Like broadcasting, the industry has grown and diversified to provide a broad range of educational, entertainment, cultural, and sports programming to large urban areas and rural communities alike. These systems now provide telephony, high speed Internet, and business support services as well.
According to data from the National Cable and Telecommunications Association NCTA , the cable industry in the United States consists of approximately 11, operating systems serving over 34, communities throughout the country. In addition, approximately additional cable television franchises have been approved but have yet to be constructed. The cable industry now serves almost 67 million basic subscribers, representing a 59 percent penetration of the approximately million television households nationwide.
Approximately 77 percent of basic subscribers also subscribe to a premium tier of service. Like broadcasting, cable television plays a significant role in the U. Each system has been granted a franchise by its local municipal government or, more recently, by a state franchising authority. Municipal franchisees generally include guarantees that the cable operator will make expensive investments in local employment, local programming, and system technical design.
The efforts of competitors from the telephone industry have resulted in statewide franchises that allow a competitive system to be built without approval from local municipalities. The construction of a cable television system is extremely capital intensive. The cost of installing aerial cable is often the single largest investment made by a cable television system operator. Underground cable television installation is even more expensive, when considered on a per-mile basis.
Additionally, investments must be made in headend facilities, satellite-receiving equipment, call centers, installation and service vehicles, warehouse and office facilities, and subscriber equipment such as converter units, which ultimately deliver cable television services to households. Numerous changes have occurred in the development of cable television technology. Original systems used vacuum tube electronics and provided only a few off-air channels to subscribers. Modern systems are capable of providing hundreds of channels of service, 10 C H A P T E R 1 Introduction to Broadcasting and Cable including satellite signals and locally originated programs.
These systems use solidstate amplifiers and addressable converter equipment to control subscriber service levels. Cable television systems provide movies, entertainment, news, music, and other forms of programming to the public. The cable operator must pay a fee, usually calculated on a per-subscriber basis, to program suppliers.
These fees may either be determined on a fixed basis or calculated as a percentage of system revenues. Given the substantial fixed costs resulting from the capital requirements of the business, as well as high programming costs, cable operators seek to maximize system penetration. Two types of system penetration are of paramount importance in the industry. The first is basic penetration, which is a measure of the number of homes subscribing to cable television as a proportion of the homes that are passed by cable.
If homes subscribed to cable service in a community of 1, homes, basic penetration would be 60 percent. The second important measure is pay penetration, which gauges the popularity of pay services among those households that subscribe to basic cable service. If each of the cable households in the example subscribed to 2 pay services, pay penetration would be percent. The linkage between basic penetration, pay penetration, and customer development is fundamental to the cable industry. Operators constantly seek to provide programming and services that will develop the widest appeal among local households.
This relationship between subscribers and revenues is axiomatic in the cable industry, and is the primary determinant of success or failure among system operators. Cable Regulation 11 As is the case with broadcasting, the cable industry relies heavily upon intangible assets, although the capital asset requirements for a cable system are also tremendous. Multiple headend facilities—which contain satellite downlink and cable and fiber-optic transmission facilities—are required, as well as miles of buried and aerial cable, and additional assets at each household location.
Fleets of installation and repair vehicles are also necessary. However, the value of these assets is often eclipsed by intangible assets, such as franchise agreements which authorize the right to provide cable service in municipalities and the base of paying subscribers. Although cable program networks collectively have made significant inroads, traditional broadcast television stations continue to be the mainstay of television viewing in the United States.
Even at their best, cable network viewing rarely exceeds 5 percent of U. Cable Regulation Cable television franchises were initially awarded by municipalities based upon a competitive application process. Cable operators received an exclusive franchise, and in exchange agreed to pay a fee, usually calculated as a percentage of revenues. They also agreed to adhere to certain standards regarding buildout timetables, service quality, channel offerings, the provision of service to educational institutions, and the like.
Similar to the broadcasting regulatory regime, the government leaves alone the management of the business, and theoretically steps in only when a franchisee runs afoul of the regulations. In October , following a period of significant deregulation that began in , the cable television industry was placed under increased federal and local regulatory control as a result of public concerns regarding rates and service levels.
Several subsequent regulations stipulated price rollbacks and price controls affecting virtually all cable systems. The strategy of these operators was to consolidate systems into regional clusters. These clustered systems could be operated more efficiently and could utilize centralized technical facilities headends to distribute programming throughout the metropolitan service area. Large clusters in metropolitan markets such as Boston; Washington, D. Consolidation also allowed the system to begin selling advertising on its cable channels to create an additional revenue source.
These companies invested heavily in upgrading their distribution systems with fiber-optic cables to provide substantially increased channel capacities and the ability to provide advanced services such as digital cable tiers, high speed Internet access, and telephone service. As a result of the anticipated cash flow from these new services, benchmark prices for cable systems increased dramatically. Because of the numerous revenue streams—including video subscriber fees from basic service, digital tiers, and HDTV, advertising revenue, high speed Internet access, and telephone service—the revenues of clustered cable systems can dwarf those of the most successful local television stations.
However, the expenses can also be extraordinary to construct and operate the systems. Cable programming networks have also seen significant consolidation since the late s. Increased consolidation on the cable system side of the business gave cable operators significant power in carriage discussions with independent networks. In response, cable networks with strong brand identity have either acquired lesser-known networks or launched new channels on their own, using the strength of the popular networks as leverage when negotiating carriage agreements for lesserknown networks.
In Conclusion Although seemingly mundane, finance can be as interesting as the industry that it serves. Fortunately, the broadcasting and cable industries continue to evolve and flourish, spurred not just by the government, but by the dynamism of competition and private-sector ingenuity. This environment will provide ample stimulation and challenge for those involved in finance and accounting. These functions provide the vital controls that ensure the success of the business, and also provide to nonfinancial managers information that facilitates effective planning and decision making.
In Conclusion 13 To support and track the progress of a business, there must be proper accounting for income, expenses, assets, liabilities, and equity. As the entertainment and communications businesses have grown to the forefront of American society, the role of finance and its systems has adapted, grown, and improved to meet the challenge. The years ahead will be exciting ones indeed for financial professionals in the broadcasting and cable fields. This page intentionally left blank 2 The Role of the Financial Manager and Other Personnel Leslie Hartmann From an audience perspective, the business of media must seem like mostly fun and games, but in fact, it is a serious endeavor that demands intelligent, dedicated professionals keeping track of what often are enormous sums of money.
Behind every financial statement is a person working within an organization. Leslie Hartmann, Regional Director of Business Analysis for Entercom Communications and a former Chairperson of the BCFM Executive Board, explains the role of a financial manager and that of several other vital employees who help media companies avoid financial chaos. Introduction This book will provide you with insight into many of the unique and relevant areas of finance in the broadcast and cable industry. However, important as systems, regulations, and the financial processes are, it is the people who pull all of these things together to make an organization successful.
This chapter provides an overview of financial organizational structure and a brief description of the various roles and responsibilities of the financial personnel and the skills needed to perform those functions. Centralized versus Decentralized Companies To describe a company as centralized usually implies that many of the accounting and finance functions have been consolidated, either regionally or at a single corporate office.
In a centralized accounting environment, the strength and the number of financial personnel at the operating units is extremely limited compared to 15 16 C H A P T E R 2 The Role of the Financial Manager and Other Personnel those of the corporate finance team. Of the many benefits associated with a centralized accounting environment, cost efficiency and quality consistency typically are the most compelling. Even large corporations that are spread over many smaller markets in which the available talent pool often is limited may favor centralization. Functions that are usually centralized are financial reporting and accounts payable.
Understanding Broadcast and Cable Finance by Walter McDowell, Alan Batten | Waterstones
In addition, many companies find efficiencies in cutting checks from a centralized location, thus maintaining tighter controls over cash and minimizing the number of checks cut to vendors. Some corporations with similar clientele across several markets will even centralize the credit function to avoid duplicating work. In a decentralized accounting environment, individual divisions or local stations are responsible for maintaining many of the daily responsibilities, including much of the financial reporting.
In contrast to the situation in a centralized environment, the corporate office typically maintains a small corporate finance staff, relying on the strength and the resources at the level of the lower operating unit. A major benefit of this type of structure is that the company can be more responsive to changing market conditions. Also, checks can be cut more quickly, and important information can be provided almost instantaneously to management. Another benefit of decentralization can be a higher level of accuracy when market financial managers each prepare financial statements or forecasts.
Because they typically communicate with the department heads on a daily basis, they should be more knowledgeable about pending invoices that need to be addressed or incoming revenue that needs to be recognized.
Most companies do not operate at one extreme or the other, but fall somewhere in between. Obviously, one can find both pros and cons to each structure, so there is no right or wrong approach, just a difference in corporate philosophy. For example, in smaller markets or entities operating in a decentralized environment, one person may perform many duties described in this chapter. For large organizations or clusters of stations or systems, there may be many employees handling the same functions.
Some organizations have realized greater efficiencies by actually outsourcing some functions—such as accounts receivable, collections, and payroll—to specialized companies. Public corporations often require larger staffs, both to handle the additional reporting requirements demanded of public companies by the government, and to ensure strong internal controls, as will be discussed later in this chapter.
The role of the financial manager continually evolves with changing regulations, and varies considerably depending on the type of company, its size, and its structure. At a broadcast station, cable system, or even in a cluster of stations, the financial manager often has the title of Business Manager or Market Controller. He or she is responsible for organizing the Finance Department and hiring the personnel to handle the responsibilities described below.
All financial managers need strong leadership and management skills, good analytical abilities, and a solid understanding of basic accounting and finance procedures. These are dynamic industries, offering daily challenges for all who seek to make a living working in the media. The financial manager handles the financial reporting of the entity; financial reports usually are prepared on a monthly basis, referred to as the month-end close. He or she must ensure that revenue and expenses are reported accurately and in accordance with Generally Accepted Accounting Principles GAAP—standard guidelines that ensure that financial and accounting data have been assembled objectively and consistently.
Reviewing and reconciling all balance sheet accounts, and preparing variance reports, the financial manager also attempts to explain why actual results may differ from budgeted or forecast income. Recently, many financial managers have assumed the role of strategic business partner with their general manager. They work closely with all department heads to ensure accuracy in forecasting and recording revenue and expenses, and they advise management on strategies for improving efficiency and profitability.
These strategies typically take the form of either a cutting costs or b developing new revenue streams. Financial managers often are responsible for reviewing economic 18 C H A P T E R 2 The Role of the Financial Manager and Other Personnel conditions in their respective markets and developing the annual strategies and the operating budgets. Some financial managers provide return on investment ROI calculations for large promotions or capital investments. In addition, some managers work closely with their sales departments, assisting in commercial pricing and inventory control.
For companies that must report financials publicly, the role of the financial manager has become increasingly important. Although the financial manager has always been responsible for internal controls, firms have become more reliant on their professional skills in the face of the strict compliance requirements of the Sarbanes-Oxley Act, Section , which will be addressed in a later chapter in this book.
These added responsibilities have enhanced the exposure, respect, and prestige of financial managers within public media corporations. The following positions often report to the financial manager. In smaller organizations, the financial manager may even be responsible for performing many, if not all, of these functions.
This person reviews credit history and conducts reference checks on potential advertisers to determine whether the ad buyer should be extended credit. Remember, in most cases, advertisers are not required to pay on an invoice until the entire schedule of commercials has aired.
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Consequently, the broadcasters or cable operator is giving short-term credit to the media buyer. In addition, a credit manager monitors the payment history of existing advertisers to determine if risk factors have changed, thus requiring a change to their credit terms. The credit manager is often involved in the sales-order approval process, and ensuring that funds are collected in advance for clients not granted credit.
Within cable businesses, the credit manager performs similar functions in assessing the creditworthiness of prospective new cable clients and advertisers. This person protects the accounts receivable of the company, with the goal of limiting the amount written off to bad debt. In some organizations, the Account Executives are directly responsible for the maintenance and collections of their accounts. In these situations, the collections manager will provide assistance The Players 19 to the Sales Department by preparing statements, aging reports, and identifying problem accounts.
Typically, the collections manager will tackle the more difficult delinquent accounts by making phone calls, sending past-due letters, and working with outside collection agencies when necessary. In many cases, the credit manager will personally handle the collections function. This individual must possess good communication and interpersonal skills.
A successful collections manager must strike the delicate balance between enforcing a collection and still maintaining a viable business relationship with a valuable client. Accounts receivable employees are responsible for the timely and accurate billing of advertisers, cable operators, and cable subscribers, as well as the overall management of the accounts receivable system. These people post payments to client and customer accounts, assist in resolving account discrepancies, and post billing adjustments and write-offs to ensure the accuracy of the aging report the report shows the history of client payments and all open invoices and statements.
This function often requires strong communications and customer service skills. The Purchasing Department is responsible for researching and obtaining bids from vendors, and placing orders for supplies and equipment. Accounts payable personnel are responsible primarily for ensuring that vendors are paid both accurately and within terms that is, when due and not a moment before. The Accounts Payable Department will place and track purchase orders, ensure the accuracy of all of the invoices, get payment approval as required, code the invoices to the proper general ledger accounts, enter the invoices into an accounts payable system, and process the checks for the vendors.
In addition, they maintain files of vendor contracts and track company leases. In many cases, they usually are also responsible for maintaining vendor W-9 files and processing the end-of-year reporting. Accounts payable personnel must have strong clerical and organizational skills. In a typical radio or television station, a single person or department handles both accounts payable and purchasing.
The Payroll Department is responsible for processing time sheets, salary adjustments, and all payroll deductions, including payroll taxes and employee benefits. Sometimes they are responsible for calculating and preparing salescommission reports and calculating bonuses. He or she maintains and sometimes negotiates employment contracts and manages all of the personnel files. At a station or cluster level, the payroll and HR managers are usually one and the same, but in a cable operation which tends to be larger , they often are separate.
People working in these positions should have good communication skills and an in-depth knowledge of employment and personnel law. In some broadcast and cable operations, the Finance Department may also be responsible for maintaining and managing trade inventory, managing the fixed assets, managing the public files, managing the traffic department, overseeing risk management, and even handling the front desk and other office personnel and office responsibilities, such as general office maintenance and ordering supplies. Some people say that finance gets to handle all of the jobs that no one else in the office wants to do.
They are usually the first to arrive at work in the morning and the last to leave in the evening. In addition to the above functions, cable programming companies generally have a Network Affiliate Finance NAF Department responsible for managing the billing and collection of license fees from companies such as cable operators and satellite companies, which distribute their program content. The single most important function of the Network Affiliate Finance group is affiliate billing and cash application. An affiliate is a cable system or cable operating company that carries a specific program network.
The NAF group is responsible for managing relationships with hundreds of MSOs and representing thousands of cable systems. In situations where the programming company controls multiple channels, the number of relationships and dollar volumes can increase exponentially. Managing this large volume of transactions and the accompanying complexity requires 1 skilled staff, 2 a robust affiliate database containing up-to-date information about each cable system carrying each channel and all contract terms for each affiliated system , and 3 best practices that is, a consistent approach to managing the complex data inherent in the business.
In Conclusion 21 Further complicating the job of NAF is that the bills sent to affiliates are based on estimates. The affiliates report actual monthly results with the payment. It should be no surprise that discrepancies are common. For this reason, traditional accounts receivable and credit and collection staffs are not the best candidates to fill these positions in an NAF organization; financial analysts are better suited for managing NAF responsibilities.
The ability to understand complex contract terms coupled with advanced knowledge of database software used to manipulate and analyze large volumes of data are necessary skills for addressing and resolving payment issues. Some finance functions are handled only on a corporate level. Although corporate finance responsibilities are very different from those found on the station or cable system level, they are quite similar to the finance activities in other industries and other corporate offices. These positions are typically focused on the long-term assets value of property, equipment, and other capital assets expected to be usable for more than one year and long-term liabilities liabilities that extend beyond the current year on the balance sheet.
The corporate finance team works closely with the stations or divisions in developing policies regarding financial controls, financial reporting, and providing general support. In Conclusion As we have seen in this chapter, trained and knowledgeable financial personnel are essential for achieving success. A thorough familiarity with the organizational structure, both corporate and local, is necessary in understanding the roles of the financial personnel, and the skills required of these professionals.
This page intentionally left blank 3 Understanding Financial Statements Glenn Larkin as Updated by William Mangum1 To an untrained eye, looking at a typical financial statement can be a frustrating experience. What do all those numbers and terms mean?
Can worthwhile information about the financial health and future of a media business be gleaned from this puzzling array of numbers and unfamiliar words? The answer, of course, is yes, given a little tutoring. Introduction By analyzing financial statements, managers can make decisions based on fact rather than intuition or imperfect knowledge. They also help managers to make intelligent decisions about cutting costs, discovering revenue-growth opportunities, improving productivity, and evaluating competition. A management team without the expertise to prepare financial statements or the ability to interpret financial statements is like a baseball team insisting that a shortstop play without a glove.
These standards are driven by a number of conceptual guidelines that provide reporting consistency from company to company, industry to industry, and time period to time period. This chapter introduces these guidelines for financial statement preparation, and discusses the many uses to which the statements can be applied. We would like to acknowledge the work done by Glenn Larkin for the version of this book, whole portions of which were again used here.
Financial statement users in a broadcast or cable setting may include station or company management including department heads or project leaders , lending institutions, taxing authorities, investors, regulatory agencies, and certain employees. Each of these users requires specific information. For example, banks often need financial statements showing detailed liability information.
Investors—interested in such metrics as earnings per share, dividend potential, and taxing authorities—require financial statements to substantiate income and deductions constituting the basis upon which taxes are assessed. Management relies on these reports to make daily operating decisions regarding the current and future course of the television or radio station or cable system.
Very simply put, timely information given to management should result in accurate decisions leading to increased productivity and profitability. Such a variety of needs suggests that an accounting and financial system must be geared to fulfill all of the reporting requirements of a business. Further, preparing statements suitable for many users requires skills beyond simple accounting.
Financial Statement Preparation Conventions To understand a financial statement, the reader must understand some of the conventions used in its preparation. Financial statements basically function as a measurement medium. Whether it is the measurement of a bottom-line result, of cash flow, or of total debt at year-end, each requires the use of certain GAAP guidelines. When these requirements are met properly, auditors examining the quality of these statements will issue what is called a clean opinion certified statement.
The following constitutes a brief discussion of the more important GAAP conventions. It is used in the measurement of revenues, sales, or gains of a business. For revenue to be recognized, several criteria must be met: a services must be rendered or goods received by the buyer, b there must be evidence of an arrangement with a fixed or determinable price, and c collection must be reasonably assured. In a broadcast or cable setting, this convention applies to commercial spots aired and cable programming provided to subscribers, as well as to all other types of customer sales.
Without these two rules, financial statements would include inconsistencies and unguided value judgments on the part of statement preparers and users. An example of a misguided judgment would be the temptation to record revenues for signed but unperformed contracts, resulting in an improved bottom line that would encourage plans to float a public stock offering. Similarly, costs incurred in a transaction could be recorded at an amount less than the purchase price, temporarily increasing the bottom-line result.
In this case, the reason may be a belief that future revenue potential justifies recording the lesser charge initially, and then carrying a higher portion of the costs into later time periods. Hence, at the end of a measurement period, many unpaid expenses need to be accrued. Where inventories are involved, this matching principle becomes even more critical because inventories associated with revenues realized in a financial statement must also be clearly reflected as a cost deduction in calculating net income.
This is to avoid carrying such costs on the financial statements as if the expenses were still contributing value to the business. Certain expenses may need to be accrued at the end of an accounting period to bring conservatism to the bottom line. The conservatism convention avoids overstating profit and the value of assets, or understating losses and liabilities—all of which can negatively impact the reported financial status of an operation. For example, conservatism within a broadcast or cable setting suggests that purchased programming that is intended to be aired over several time periods, but whose value to any one period is not specifically known, should be taken as an expense in the financial statements on an accelerated timetable i.
Accounting Periods 27 Conservatism would also dictate the speedy write down of an unpopular program acquisition that has deteriorated value to the business—meaning poor ratings, and therefore disappointingly low commercial rates. An example of deterioration might be a syndicated talk show that has provided a reasonable return for a TV station i. Unfortunately, the station may be forced to absorb a cost or charge to its income statement.
These guidelines provide for comparability, consistency, and understanding of the financial statements, whether used internally by management or externally by other users. Accounting Periods As the accounting conventions discussed above are applied to the business activities of an entity, a decision is required regarding the time period to be measured. These terms will be defined in detail later in this chapter. In general, the income statement and the statement of cash flow measure activity over a time period, such as individual months, individual quarters, or a combined 28 C H A P T E R 3 Understanding Financial Statements year.
On the other hand, a statement of financial position reports balances of assets, liabilities, and equity at a specific date. Financial statements can be prepared and published as frequently as management or other users desire; however, the administrative costs, labor, and time associated with preparation need to be considered. Many broadcast and cable operations, like other businesses, use quarters and calendar years as their reporting time frame.
Understanding Broadcast and Cable Finance
A fiscal year may be designated in lieu of the calendar-year approach. Sometimes more than one reporting time frame will be used for different financial statement users. Once selected for reporting, an annual period may be broken down into monthly or quarterly interim-reporting time segments, depending on the need for more-timely financial data.
Such interimperiod financial statements are used by management, and may be less precise or less detailed depending upon their planned use. Most state and federal tax authorities, as well as regulatory agencies, require annual financial statements. Audited financial statements require a higher level of scrutiny in their underlying accounting procedures.
Once the accounting periods and cutoff dates have been established for financial statement preparation, the same time frames should be consistently used over subsequent reports when possible. The continued use of similar reporting periods facilitates comparability in the underlying data from period to period. This comparability allows better evaluation of the progress of the business. Certainly, if there is a justification for changing accounting periods and report dates, that situation can be accommodated, but the advantages of year-to-year comparability will be lost during the transition.
Financial Statement Descriptions Four principal financial statements typically are prepared and published together. They include: 1. The Statement of Cash Flows 4. The following section discusses the basic purpose of each statement in a broadcast context, together with an illustration of each.
Revenue includes all the sales and other taxable income of the business, excluding gains on the sale of property and any extraordinary items see Chapter 4. Operating expenses are all the costs of doing business, including salaries, employee benefits, supplies, and services required to operate the station efficiently— and, management hopes, profitably see Chapter 5. Depreciation and amortization constitute a special category of operating expenses, representing a noncash charge to the period being measured of costs associated with long-term assets.
Certain indefinitely lived intangibles e. For instance, actual results are commonly compared to proposed budget expectations, and also to prior performance of the same month one year ago, referred to as year-to-date information. Other operating analyses might include the calculation of earnings per share, profit margin, or percentage variances of revenue and expenses as compared with budget or prior periods.
Expenses are commonly broken down into fixed and variable portions to determine controls that can be exercised realistically over discretionary spending. As the name implies, variable expenses are those costs that Financial Statement Descriptions 31 tend to vary in relation to increases or decreases in revenues, such as sales commissions. A sales executive who exceeds his or her expected sales budget increases station revenue—but at the same time, he or she increases commission rewards a station cost for achieving such a high sales figure.
Again, as the name implies, fixed expenses generally remain constant despite variations in revenues. Examples of fixed expenses include transmitter maintenance and leasing agreements. Most other broadcast and cable programming costs are relatively fixed across different levels of revenue over time. Some costs do not increase proportionately with subscriber growth—such as a base level of trunk, headend, and feeder-system costs that are incurred initially and represent fixed expenditures. Both fixed and variable expenses have a significant impact on the well-being of a business.
For best results, these expenses should be monitored and managed separately. Certain items such as income taxes and interest payments are typically included separately at the end of the income statement. This manner of presentation is informative for several reasons.
First, it facilitates the calculation of a profit before interest and taxes, which provides a pure measure of the efficiency of a reporting unit. This is because interest and taxes typically cannot be controlled by the management of a media operation, and therefore should not interfere with performance evaluations. The statement of financial position see Figure 3. The categories of current assets and current liabilities are those that are expected to be realized or paid within the following month period.
Current assets represent those assets expected to be collected or consumed by the operation of the business within the month period, such as cash or accounts receivable. Current liabilities represent the amount of payables or debt due during the same month period, such as accrued bonuses and accounts payable. A financial statement reader can get a quick view of the near-term financial stability of the operation by comparing current assets with current liabilities on the balance sheet release date.
The individual classifications of assets and liabilities reported on the balance sheet are likely supported by numerous accounts in the general ledger, combining to the totals shown on the report. The general ledger is a summary of every transaction that occurs, and serves as the building blocks, or raw material, for all of the other financial statements described in this chapter.
Typically, any material items or balances, whether assets or liabilities, short or long term, are broken out and identified separately on the balance sheet to add transparency regarding business activity. As the media entity conducts business—such as selling airtime, incurring expenses, or buying capital equipment—the balances of the assets and liabilities consequently increase or decrease on the balance sheet.
The net change of all such activity is reflected in the equity section. The net change in equity exclusive of dividends or other capital transactions from one period to the next is also the 34 C H A P T E R 3 Understanding Financial Statements net income shown on the income statement.
Assuming the enterprise is profitable, equity can be distributed to owners and shareholders in the form of dividends. Reading the balance sheet usually starts with current assets followed by various asset classifications, and concluding with liabilities. In reviewing liabilities, readers commonly compare the duration and size of the liabilities to the assets available to pay down, or liquidate, the debt.
The net result minus liabilities from assets is the equity, or book value, of the business. Of course, the various users of financial statements will place varying degrees of emphasis on different sections of the balance sheet. A lender, for example, might give significant attention to the liquidity i. A system or station manager, on the other hand, may be interested in the cash position or the assets against which he or she might borrow money.
A prospective buyer of the operation might be interested in the future cash flow generating potential and the value of the long-term assets such as an FCC broadcast license or a prime real estate location. Statement of Cash Flows The statement of cash flows, as one might guess, reports the sources and uses of dollars coming into and going out of the business during the period specified. It also reports on the beginning and ending dollar balances for the period.
This statement reveals how changes in balance sheet and income accounts affect cash. As such, it is particularly useful to bankers, investors, and local management. Cash flow from operating activities summarizes revenues and expenses from day-to-day operations e. Investing activities constitute the major areas of operations and asset categories in which cash is committed to ultimately generate a return to owners.
Is there buildup in accounts receivable and inventories, reflecting a slowdown in cash flows with which to liquidate payables and debt commitments? All three financial statements have a critical role to play in the analysis and monitoring of business activity. A financial statement user should have a complete set of all three statements before commencing a review.
This statement is required only when there has been a change that Media Company Inc. Figure 3. Financial Statement Footnotes The grouping, summing, and subtracting of numbers in financial statements in and of itself sometimes is inadequate to present a complete picture of business activities. Consequently, parenthetical notations are often found within the statements themselves.
Another option is to include some text—referred to as footnotes, or just notes—in addition to the financial statements. The notes must be read in conjunction with the basic financial statements, and should provide additional explanation of the many accounts of an enterprise. The financial statements will reference relevant footnotes at key points within the data disclosures. Examples of items typically found in footnotes include significant accounting policies; a breakdown of asset types included in the long-term-asset category; information on acquisitions and divestitures; investments; tax disclosure; long-term debt, commitments, and contingencies; and share-based compensation.
Footnotes typically clarify in more detail information revealed in the standard financial statements, such as descriptions of revenue recognition conventions or 38 C H A P T E R 3 Understanding Financial Statements detail on debt instruments. Footnotes may also explain unique aspects of the financial statements. In fact, to a sophisticated interpreter of financial statements, the footnotes may be the most informative portion of the financial statements. It should be noted that the majority of the statements discussed in this chapter are examples of those used internally.
Publicly reported statements prepared to conform to public accounting requirements may be presented in a different format. The purpose of internal statements is to help management evaluate performance. Publicly reported statements are intended to help shareholders both evaluate their investments and compare investments across industries. In Conclusion No operator of a broadcast station or cable system can effectively manage operations without the aid of standardized financial statements prepared on a monthly, quarterly, or annual basis.
Recognizing that many broadcast and cable professionals are not accounting experts, having qualified accounting personnel review these statements with these operational managers is a good idea. Once management understands the financial patterns and trends uncovered in these reports, financial statements will become important tools in recognizing problems, seizing opportunities, and, ultimately, earning a reasonable return on investment for owners and shareholders.
Together, these three authors unravel the complexities of revenue in this chapter, and expenses in the next chapter. Introduction From the sale of products and services to customers, businesses generate revenue. This chapter discusses the revenue streams typically associated with the broadcast and cable industries, and explains how these industries account for those revenues. As the industries evolve with growing pressure from new competitive sources, new revenue sources continue to emerge, so the items in this chapter should not be considered a comprehensive list.
Revenue for broadcasters is generated primarily through the sale of local, regional, and national advertising on the local stations and their networks. The primary revenue generator for cable systems is subscriber fees as of this writing, cable systems typically generate only 5 to 10 percent of their revenue from advertising.
From a cable network programming perspective, the proportion of revenue acquired from cable advertising versus cable subscription varies, depending on the type of program content. For example, most premium services, such as HBO, have almost no advertising. The primary revenue generator in this case is a subscriber fee shared between the cable operator and the program content provider.
At the other end of the basic spectrum are less popular program networks that receive little or no subscriber compensation from cable systems, and struggle for advertising dollars. Stations incur an agency commission based on gross revenue associated with the advertising dollars placed on the station that are secured through an advertising agency or specialized firm.
Stations report revenue as gross revenue less agency commission to achieve net revenue. National advertising dollars are acquired by a station through the help of a rep firm, which serves essentially as a broker between the station and major advertising agencies representing national advertisers. The rep firm is compensated through a commission formula based on net revenue generated by that firm. Depending on the structure of the representation agreement between the station and the national rep firm, the commission paid to the rep may be reported as a sales expense or may be netted out against revenues in a manner similar to that used for agency commissions.
See Chapter 5 for more on selling expenses. Revenue is recognized when it is realized, or realizable and earned. For operational purposes, stations separate revenue into several categories to help managers evaluate performance, build budgets and projections, and explain variances. The most common classifications of advertising revenue for radio and TV stations and cable companies are listed and discussed in more detail below.
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They fall into four distinct categories: on-air advertising, nonspot revenue, emerging revenue, and cable-specific revenues. Unlike tangible goods, commercial inventory is very limited, in that audiences will tolerate only so many interruptions within program content. This inventory is also perishable, in that once the inventory time lapses, it can no longer be sold, similar to seats on an airline flight. Advertising clients purchase the commercial inventory to use as spot, or on-air, advertising.
Spot advertising typically is sold according to varying lengths, such as s second spots , s, s, and s. The commercial value of the spot is based on viewership, time of day, and, in the case of spots sold on cable systems, channel location not all channels are available to all subscribers. Spot rates are typically determined by sales management or general management based on complex calculations reflecting client demand, market competition, supply available inventory , and seasonality.
For radio, audience ratings by day part influence the value of a spot. The more listeners i. Because audience numbers and time spent listening vary considerably, commercial rates for these day parts are not always the same. For example, commuters tend to spend more time listening to the radio in the morning and afternoon drive times, so those rates typically are the highest on a station. For TV and cable, audience ratings differ by day part and by show, with prime time attracting the largest audiences, and consequently commanding the highest commercial rates on a station.
The actual audience size is merely an estimate or projection based on prior ratings performance for the day part or program. Once the purchased commercials have aired, the estimated CPP and estimated units delivered are used to create an invoice. Then, when the station or network receives the actual audience ratings, they are used to true up the actual delivered units and the final revenue. This may result in an adjustment to revenue if the delivered units were more or less than the units agreed upon.
If the delivered units were less than agreed, revenue needs to be reduced, and a liability needs to be created. A refund of the deficiency to the advertiser, otherwise called cash back, can also reduce the liability. By and large, finance professionals rarely if ever are notified about overdelivery of units. These representatives are employees of the station. This discount is referred to as an agency commission.
This kind of firm functions much like a local agency, but instead of representing the advertiser, they represent the station or cable system to larger national advertisers. These firms charge the stations or systems a fee similar to that for local agencies for their services. This category may also include ads placed in unsold inventory by a third-party company representing its own group of clients. This can occur when a station or system signs a contract to accept spots in unsold inventory with such a third-party company.
In these cases, the revenue generated from the spot is classified as trade revenue, or barter revenue, for income statement purposes. As the station uses these goods or services, an expense is recognized to account for the usage. Generally speaking, recognition of revenue for spot advertising described here occurs when a contract is approved by the client and the commercials air on the station, as outlined in the contract.
As indicated above, invoices for commercial schedules are issued after the spots have run, so this is when the receivable is created. As competition increased, however, stations had to develop new revenue streams, leveraging their vast audience in new ways. The following are some alternative sources of revenue. Also included in this category would be the sponsorship of a station van or other promotional item. Because employers must contribute the employer taxes on these amounts, the expense related to this talent fee is recognized in production and programming expense, as discussed in the next chapter.
In any case, the revenue generated from the sale of auctioned goods would be classified here. Stations and systems often procure those goods to sell at auction via trade. This is especially common for sports stations and companies that have a strong niche audience e. Although this is a source of revenue for the television broadcaster, it is an expense for the cable operator see Chapter 5. Typically, recognition of revenue for nonspot revenue described above occurs only when the event is completed. However, the timing of revenue recognition might be more complex if an event sponsorship fee is coupled with a commercial spot schedule.