2
Financial Management

This chapter reviews the increasingly important area of financial management and examines

For years, electronic media education has focused on the operating skills thought to be necessary for a successful career in the industry. Traditionally, the major topics studied have been sales, programming, production, and management. Massive changes triggered by the deregulatory climate of the 1980s catapulted another subject to prominence in the curriculum. That subject is financial management.

Deregulation brought financial speculators into the electronic media business. The prevailing wisdom of the mid-to-late 1980s was the “greater fool” theory. Under this concept, money was made by selling a broadcast license or cable franchise to another at a profit. Operational performance was deemphasized in favor of appreciation potential.

All that changed around 1989. Prices had risen to the point that operations could no longer retire the massive debt run up by speculators. Numerous electronic media companies went into default, and prices dropped.

By the early 1990s, broadcast stations and many cable systems were valued on a multiple of the cash flow they generate. Operational financial performance was the new coin of the realm.

Then, in 1996, everything changed again with the passage of the Telecommunications Act. Gone were the national ownership limits on radio. Those for television were relaxed. In-market ownership combinations of up to eight radio stations were permitted, depending on market size.

The adoption of the new law set off another round of speculative buying and consolidation, almost without regard to financial performance.

The radio consolidation was largely completed by late 2001. Today, operators are returning to the basics of producing operating results and return on investments for public and private investors. Clearly, into the new century, operational financial performance is to be the coin of the realm once again.

This switch has been prompted by the fact that, by the middle of 2004, the post-1996 consolidated operators were receiving negative reviews from financial analysts and were being characterized as market underperformers. Now, more than ever, management personnel must be well versed in understanding and achieving financial results.¹

Pressure to acquire basic financing and accounting knowledge is coming from other sources, too. In the technology-driven decade of the 1990s, lines of distinction between traditional forms of electronic media became blurred or nonexistent. This development spawned a need for a new breed of communication manager—one with both a traditional background and basic accounting and financial skills.² As the industry has progressed since the Telecommunications Act of 1996, the financial management element of the managerial equation has assumed even greater significance. Today’s manager is concerned more about sales and making and meeting budget forecasts, and less about programming.

It is not possible in the pages of this chapter to make anyone a financial expert. The goal here is to acquaint the reader with financial terms and concepts and with the typical financial reports used. It is recommended strongly that today’s electronic media student pursue a more detailed examination of these matters through finance and accounting courses.

THE ACCOUNTING FUNCTION

The accounting function in the electronic media is performed using specialized computer software developed by various companies. The leading television traffic and accounting systems are provided by Columbine. Radio software companies include Computer Concepts and Wicks Broadcast Solutions/CBSI. Some of these systems are integrated or interfaced with digital audio systems. Examples include Digilink by Arrakis and Audio Vault by Broadcast Electronics.

Even with computerized systems, mistakes often are made. Ad agencies report that there is a 70 to 80 percent discrepancy between invoices and what actually aired.³ As a result, stations and agencies are moving to a new form of electronic invoicing—electronic data interchange (EDI). As of this writing, 50 to 90 percent of stations use EDI in some form. Traffic system vendors are testing such systems. Eventually, paper orders will be eliminated.⁴

Whether computerized or manual, certain accounting concepts and terminology are basic. Any person with serious management ambition must master them.

Effective financial management requires detailed planning and control. Planning expresses in dollar terms the plans and objectives of the enterprise. Control involves the comparison of projected and actual revenues and expenses. The basic planning and control mechanism is the budget.

To prepare the budget, management collects from department heads financial data and reviews and edits them. Most stations and systems use a form to display the information for the budget period, usually one year. Figure 2.1 is a 12-month calendar summary form employed by a radio multiple-station operator in an annual budget preparation.

Figure 2.1 Budget worksheet used by a multiple radio station operator.

Budgeting deals with the future. However, past experience suggests realistic revenue and expense amounts. Generally, a reserve account is maintained to cover emergencies. During the year, regular budget reports permit the general manager to compare planned and actual results and to make necessary adjustments.

Budgeting and cost controls, together with financial forecasting and planning, are among the major responsibilities of the business department. Other responsibilities include banking, billings to and collections from advertisers and advertising agencies, payroll administration, processing of insurance claims, tax payments, purchasing, and payments for services used.

Fundamental to the efficient discharge of the accounting function are the establishment and maintenance of an effective and informative accounting system that will protect assets and provide financial information for decisionmaking and the preparation of financial statements and tax returns. Such a system is based on financial records. As noted above, most such records are produced for electronic media concerns via specialized computer software.

Planning Financial Records

No matter what the electronic media business is—radio, television, cable, or other—management requires certain basic information to function. It includes amounts and sources of revenues and expenditures, and levels of operational profitability on a monthly and annual basis.

Cable system operators are concerned about their main revenue source, subscribers, while broadcasters want details of advertising sales. On the expenditure side, both cable and broadcast managers require information on programming costs. Cable operators need figures on pole rent and contract labor. Broadcasters care about the cost of maintaining the transmission plant.

Whatever the particular need, the quest for management financial information must begin with the design of a recordkeeping system that will produce the desired results. Every manager embarking on the task of setting up financial records is looking for guidance (i.e., What is a good model? or What has worked well for others?). Fortunately, excellent materials are available on records planning.

The principal sources utilized to set up accounting records are software companies that design and customize traffic and accounting systems for single and multiple station operators. Figure 2.2 presents a proposal submitted to a multiple station radio operator for such a system. You will note that the proposal provides for the design and implementation of financial reports. Figure 2.3 depicts how a centralized traffic and accounting system might be configured.

Figure 2.2 Vendor proposal to design and install a traffic and accounting system for a group radio operation.

Figure 2.3 Proposal for a multistation centralized traffic and accounting system.

Another source is the National Association of Broadcasters (NAB), which has published an accounting manual for radio stations.⁵ Included are chapters on financial statements, accounting records, charts of accounts with explanations, and accounting system automation.

Still another source of information is the Broadcast Cable Financial Management Association (BCFM). This organization, composed of industry members, concentrates on financial questions of import to its membership. It, too, publishes an accounting manual.⁶ The contents are principally detailed charts of accounts with explanations, and model financial statement forms.

Whether the system chosen is manual or computerized, it must be designed to deliver to management certain basic information and to render financial reports. It will consist of a number of journals and ledgers that record and summarize all financial transactions and events.

The records most commonly generated are the following:

Information from the general ledger is used to prepare two major financial records, the balance sheet and the income statement.

Balance Sheet

The balance sheet is a statement of the financial position of the station or system at a given time. It comprises three parts:

The term balance sheet is derived from the fact that total assets should equal total liabilities plus net worth or equity. The two sides of the sheet are, therefore, in balance.

Assets

Assets are classified as follows:

Liabilities

Liabilities reflect short- and long-term debts. They are listed as follows:

Net Worth

Net worth, or equity, records ownership’s initial investment in the broadcast station or cable system, as increased by profits generated or reduced by losses suffered.

Preparing Financial Statements

Financial statement preparation begins with a chart of accounts, a list of account classifications. Each account is assigned a number.

The following balance sheet chart of accounts is used by LaTerr Broadcasting Corporation, licensee of KTIB-AM, Thibodaux, Louisiana (Figure 2.5). Asset accounts are numbered 1000 to 2800, 5010 to 5040, and 9520 to 9540. Liability accounts are 3100 to 3400, 6010 to 6500, and 9990. Equity accounts are 4000 to 4150.

Figure 2.5 Balance sheet chart of accounts.

(Source: LaTerr Broadcasting Corporation. Used with permission.)

It is from records of the kind detailed here that the balance sheet is prepared (Figure 2.6).

Figure 2.6 Example of a broadcast station’s balance sheet.

The financial health of a company is often judged by examining two ratios computed from the balance sheet numbers. The first of these is current ratio, which is obtained by dividing total current liabilities into total current assets. A good current ratio is 1.5 to 1. The second is the debt-to-equity ratio. It is computed by dividing stockholders’ equity by long-term debt. A satisfactory debt-to-equity ratio is considered to be 1 to 1.

Income Statement

The income statement also is known as the operating or profit and loss (P and L) statement. It summarizes financial transactions and events over a given period of time. The difference between revenues and expenses is the profit or loss for that period.

Revenues

A major source of revenue for all broadcast stations is the sale of time to local, regional, and national advertisers. Network compensation may be an additional source for network-affiliated television stations and some radio stations. Another source is Non-Traditional Revenue (NTR) (see Chapter 5, “Broadcast Sales). Other broadcast revenues include the sale of programs and talent and the rental of station facilities. Rents received for the use of station-owned towers or land, and interest and dividends are examples of nonbroadcast revenues.

Revenue sources for cable systems are somewhat different. Most revenue is derived from subscribers. However, systems are developing their advertising revenue through the sale of local and national spots, principally in local availabilities in advertiser-supported networks. Pay-per-view (PPV), video-on-demand (VOD), high-speed Internet, telephone, and music channels are among significant growth areas. Cable operators are required by law to set aside channel capacity for lease to third parties, and some receive revenue from such leases.

Expenses

Expenses are classified either as direct or as operating and other. Direct expenses are commissions paid to agencies for the sale of time. Operating and other expenses are listed according to the organizational structure. Usually, they reflect the costs of operating the major departments or areas of activity. In broadcast stations, they are technical (engineering), program, sales, promotion, news, and general and administrative.

Other expenses are cash and noncash expenses incurred in the operation of the business. Depreciation is an example of a noncash expense and results from the write-off of tangible assets, such as plant and equipment. Typically, the asset is reduced by equal annual amounts over its life. The systematic annual reduction in the asset’s value is an expense and is charged to the income statement.

U.S. tax laws divide tangible assets into useful life categories for purposes of calculating depreciation. For example, buildings have a useful life of 41 years and towers a useful life of 15 years. Other noncash expenses may be amortized, the systematic reduction of an account over a period of time. As noted earlier, an example of an expense that is amortized is goodwill.

The term amortization also is frequently applied to program contracts, which are a cash expense item. Various methods for amortizing program contracts exist. One method is straight line, which permits a deduction of the total contract in equal annual amounts over the term of the contract. The alternate approach is called accelerated amortization. Under this method, larger amounts are written off in the early years of a contract, the theory being that the initial runs of a program have the most value. More detail on the specifics of these two approaches can be found in industry publications such as BCFM’s Broadcast Accounting Guidelines. It should be noted that amortized program contracts are tax deductible and are usually charged to the program expense account, not to the “other” category.

Another common “other” expense is interest. Interest is the premium paid on amounts borrowed to finance acquisitions, purchases of equipment, or construction of a new facility.

Expenses are charged to the department incurring them. Those that are necessary for the overall functioning of the operation, such as utilities, generally are counted against general and administrative costs. Salaries and wages represent an expense in all departments. The following are examples of other broadcast department expenses:

Operating expenses are deducted from revenue to determine profit or loss. Profit is the amount by which revenue exceeds expenses. The profit resulting from the deduction of operating expenses from revenue is called operating profit. Such deductions do not include noncash expenses, such as the depreciation and amortization previously discussed. Once the operating profit has been determined, it is then further reduced by depreciation, amortization, and federal, state, and local taxes. Operating profit adjusted for other expenses and taxes is called net profit.

To operate effectively, electronic media managers must know how much cash their enterprise produces annually, not just how much profit. Cash flow is the term used to describe the cash generated. It is calculated by adding back to net profit the amounts charged to expenses for depreciation, amortization, interest, and taxes. It is the term cash flow that is used to determine the value of an electronic media property by applying multiples to it. For a more detailed treatment of these concepts, refer to the discussion of multiples and prices in , “Entry into the Electronic Media Business.”

No income statement treatment can be complete without a discussion of trade-outs. A trade-out or barter transaction occurs when goods or services are provided in exchange for time. As direct transactions, they do not produce commissionable billings for advertising agencies and, depending upon individual station or system policy, may not result in commissions for account executives either. The transactions must be included on financial statements, with the major questions being the value to assign to them and when to record them.

The Broadcast Cable Financial Management Association recommends that the value of the transaction be equal to the cash saved as a result of the barter. On timing, the BCFM outlines three ways: (1) record income and expense in the same amount in the same period; (2) record income and expense in equal amounts over the term of the barter contract; or (3) record revenue as trade spots are run and expense as goods and services are used. One of these three methods must be selected and consistently applied. Figure 2.7 is an example of an income statement.

Figure 2.7 Broadcast station income statement.

(Source: LaTerr Broadcasting Corporation. Used with permission.)

Different proportions of revenue are provided by each source to radio and television stations, and radio and television stations incur expenses differently. Regrettably, it is no longer possible to compare the specific revenue and expense differences between the two media. That is because the National Association of Broadcasters discontinued its Radio Financial Report in 1992. And, in the post-1996 environment, it is unlikely that the major consolidators will be willing to divulge financial information that could lead to a resurrected report.

The NAB continues to collect and report TV industry financial data. The 2004 report showed that local advertising accounted for more than 60 percent of gross advertising revenues for a typical affiliate of ABC, CBS, and NBC.⁷ The biggest expense items for those stations were news (29.1 percent) and programming (20 percent).⁸

COST CONTROLS

Radio, television, and cable have discovered the importance of cost controls comparatively recently. For most of their history, all three enjoyed almost automatic and sizable annual revenue increases. In that climate, management increased profits primarily through such increases, not through reducing costs.

In the late 1980s, the equation changed for broadcast radio and television. The combination of general economic conditions, the rise of niche marketing due to cable, and the fragmentation of audience shares related to the FCC’s liberal licensing policies all but eliminated the customary annual sales increases.

That tide was reversed with a booming economy in 1993 and has continued. Radio has increased its overall share of mass media advertising. Television is still growing in sales volume, but at a lower annual percentage than radio. Cable progress has been impacted by the emergence of DBS as a competitor. Cable rate regulation expired in 1999 under the terms of the 1996 Telecommunications Act. However, continued subscriber rate increases have caused Congress to contemplate possible reconsideration of that provision. Now that it passes 97 percent of the nation’s 109 million TV households, cable must look to rate increases, new services, and advertising for revenue growth.

In the new environment, albeit at different times, radio, television, and cable turned to cost controls. The most effective control technique capable of producing significant immediate results is personnel reduction. The 1996 act permitted expanded ownership consolidation, especially in local radio. That development has occasioned extensive reduction. Radio and television eagerly seized on this method, occasionally producing headlines with it. Increasing reliance on sophisticated automation for television, and automation plus utilization of satellite formats for radio, accelerated staff cutbacks.

When cable’s moment of truth came, it focused initially on personnel adjustments, too. Cable also relied on automation technology to achieve some of its personnel goals. In addition, it turned to outside contractors to perform some of the functions formerly undertaken by staff. Cable uses independent contractors for installation, rebuilds, and other technical duties and, in some instances, for the sale of local and spot advertising.

Once the immediate cost benefits of personnel reduction are realized, additional expense reduction is a lot more tedious and requires persistent management attention. Continuing vigilance and monitoring of certain expenditure categories historically have led to savings. Many of these items involve commonsense administration and are common to radio, television, and cable. They include the following:

MONITORING FINANCIAL PROGRESS

Management can monitor financial performance in a number of ways. The most obvious is to compare actual results for a month, quarter, or year with the budget and the comparable period for the prior year. A good financial statement, balance sheet, or income statement will give a manager all that information on one piece of paper.

Another important monitoring technique is the comparison of the station’s or system’s financial progress with that of peers. As noted earlier, one of the principal sources that provided comparisons for radio stations has been discontinued. However, television stations still can benefit from an examination of the NAB/BCFM Television Financial Report.

There are other sources for comparative information. One consists of newsletters and annual reports issued by Paul Kagan Associates, Inc., of Carmel, California.⁹ Annual reports include the Radio Financial Databook, TV Station Deals & Finance Databook, and the Broadband Cable Financial Databook. Additional sources are available from the Radio Advertising Bureau (RAB),¹⁰ the Television Bureau of Advertising (TVB),¹¹ and the Cabletelevision Advertising Bureau (CAB).¹² Revenue reports for some markets are compiled by Miller, Kaplan, Arase & Company.¹³

Another useful tool is the NAB’s Television Financial Monitoring System, whose customized reports allow for the comparison of financial results of a particular station with those of similar stations. To use the system, it is necessary to send the NAB a special order form with details of the stations for which comparative data are desired (Figure 2.8).

Figure 2.8 NAB Special Television Financial Reports order form.

(Reprinted with permission of the National Association of Broadcasters.)

Additionally, in some markets, stations report their revenue results to an accounting firm retained by all stations. Where available, this procedure provides a method of determining a station’s revenue performance as a percentage of the total for the market. Since stations are no longer required to report their financial results to the FCC, this can be a valuable method of monitoring station and market performance.

Financial results are now the most important measurement of a manager’s effectiveness. The electronic media manager must be knowledgeable about these important matters.

WHAT’S AHEAD?

No one can predict the future in a consolidating, technology-driven industry like electronic media with any accuracy. All we can do is spot trends.

One emerging trend is publicly traded megacompanies that are vertically and horizontally integrated. Public companies are earnings-driven, and the market is unforgiving when profit forecasts are not fulfilled. As consolidation progresses, more and more publicly-traded entities will be operating radio and television stations, even in small, unrated markets.

The stock market has begun to question the underperformance and economics of these megacompanies.¹⁴ As shareholders watch the declining value of their equities, it does not take too much imagination to understand how important financial performance skills will be.

More than ever, financial management will be the measure of management success. Accordingly, it is vital that any aspiring broadcaster, cablecaster, or future electronic mediacaster of whatever technical innovation comes along be well acquainted with financial terminology and concepts.

Electronic media students should include computer, business, accounting, and financial courses in their curriculum planning. The industry will become more centralized as to product and management. It will be more computer-driven, and the number of program staff will decline. What will be left largely will be financial, sales, and promotion personnel.

SUMMARY

Financial management demands an understanding of the accounting function, basic financial statements utilized by managers, methods of preparation, and the terminology employed.

The accounting function begins with the budget process, continues with the recording and reporting of transactions, and concludes with an analysis of financial results.

The budget is a planning and control document that plots the course of projected financial transactions (i.e., revenue, expense, profit, or loss). Actual daily results are recorded in journals and ledgers, and are transferred to financial statements by using charts of accounts. The two main financial reporting forms are the balance sheet and the income statement. The balance sheet reveals the condition of the business at a fixed point in time. It discloses total assets, liabilities, and capital of the operation. Ratios are then applied to balance sheet results to determine the relative strength or weakness of the company.

The income statement is another measure of financial health. It measures revenue and expenses, resulting in profit or loss for a given period of time.

After the results are reviewed and compared with the budget, cost control methods may be required. Even if financial results meet or exceed the budget, the electronic media manager might still be underperforming. Financial progress also is judged by a comparison of the results achieved with similar facilities inside or outside the market. Once made, those additional comparisons may require management to effect further changes in station or system operations.

CASE STUDY

Dustin Hoffman is busy burning his graduation shoe leather making the rounds of well-situated communications graduates from his alma mater, “I Can’t Believe U.”

Dustin’s interviews have focused his attention on what he should have learned but did not. Collegiate Bowling 101 was a sure GPA builder but it was not accounting concepts. Mating habits of the North American Bison was no substitute for Software Concepts for Managing Information in a business that sells intangible products.

It seems that his best opportunity is with an ailing radio station blessed with a new owner, an alumnus, who pawns the station through intensive sales, electronic efficiency, and multiple-hat staff members.

Dustin’s offer from WFIX-FM is an entry-level sales position. He must oversee the installation of a computerized accounting and monitoring system to track sales performance and profits.

It’s either this or go to work in his father’s waste management business. He takes the job, and has to solve the following problems.

EXERCISES

NOTES

ADDITIONAL READINGS

Jablonsky, Stephen F., and Noah P. Barsky. The Manager’s Guide to Financial Statement Analysis, 2nd ed. Hoboken, NJ: John Wiley & Sons, 2001.

Radio & Television Business Report. Lake Ridge, VA: Radio & Television Business Report (published monthly).

TFM: The Financial Manager. Northfield, IL: Broadcast Cable Financial Management Association (published bimonthly).

Tracy, John A. How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, 6th ed. Hoboken, NJ: John Wiley & Sons, 2004.

Understanding Broadcast & Cable Finance: A Handbook for the Non-Financial Manager. Northfield, IL: BCFM Press, 1994.