Financial performance trends of United States Hockey Inc: A resource-dependency approach

Omondi-Ochieng, Peter Article Financial performance trends of United States Hockey Inc: A resource-dependency approach Journal of Economics, Finance and Administrative Science Provided in Cooperation with: Universidad ESAN, Lima Suggested Citation: Omondi-Ochieng, Peter (2019) : Financial performance trends of United States Hockey Inc: A resource-dependency approach, Journal of Economics, Finance and Administrative Science, ISSN 2218-0648, Emerald Publishing Limited, Bingley, Vol. 24, Iss. 48, pp. 327-344, https://doi.org/10.1108/JEFAS-02-2018-0022 This Version is available at: https://hdl.handle.net/10419/253781 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Financial performance trends of United States Hockey Inc: a resource-dependency approach Peter Omondi-Ochieng University of Louisiana at Lafayette, Lafayette, Louisiana, USA Abstract Purpose –The purpose of this paper is to examine the 2009 to 2016 financial performance of the US Hockey Inc., using financial effectiveness indicators and financial efficiency ratios. Design/methodology/approach –With the assistance of financial trend analysis, archival data were used to examine the financial performance (evaluated by net income), financial effectiveness (indicated by total assets and total revenues) and financial efficiency (examined by programme services ratios and return on assets) of US Hockey Inc. Findings –On average, the financial performance of the organization was positive ($30,895 net income per year). Financial effectiveness was steady with increases in assets and revenues. Financial efficiency was poor with 79% of revenues spent on programme services and 1.45% average return on asset. Research limitations/implications –The results can be generalized to similar national non-profit sports federations but not corporate sports entities with dissimilar financial goals. Practical implications –The results revealed that national non-profit sports federations can boost their financial performance by maintaining a double strategically focus on both financial effectiveness and financial efficiency. Originality/value –The study used both financial effectiveness and financial efficiency measures to evaluate the financial performances of a national non-profit sports federation –a neglected approach similar studies. Keywords Trend analysis, Financial performance, Non-profit organization, Financial efficiency, Financial effectiveness Paper type Research paper 1. Introduction USA Hockey, Inc. (USH). (2018) is the national non-profit sports organization (NNSO) that governs the sport of hockey in the USA –with a mission to: [...] provide the foundation for the sport of ice hockey in America; help young people become leaders, even Olympic heroes; and connect the game at every level while promoting a lifelong love of the sport. The core values of USH are sportsmanship, respect, integrity, the pursuit of excellence at the individual, team and organizational levels, enjoyment, loyalty and teamwork (www. © Peter Omondi-Ochieng. Published in Journal of Economics, Finance and Administrative Science. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http:// creativecommons.org/licences/by/4.0/legalcode Financial performance trends 327 Received 26 February 2018 Revised 10 December 2018 Accepted 14 January 2019 Journal of Economics, Finance and Administrative Science Vol. 24 No. 48, 2019 pp. 327-344 Emerald Publishing Limited 2077-1886 DOI 10.1108/JEFAS-02-2018-0022 The current issue and full text archive of this journal is available on Emerald Insight at: www.emeraldinsight.com/2077-1886.htm usahockey.com/). USH, as most NNSOs, is overly overdependent on external funds for survival, making them vulnerable and unable to sustain their mission, services and/or programmes (Cordery et al.,2013;Dayson, 2013;Denison and Beard, 2003;Drees and Heugens, 2013). In this study, organizational performance (OP) refers to the combined measurement of effectiveness and efficiency geared towards ascertaining the degree to which organizational goals are attained (Omondi-Ochieng, 2018a;Omondi-Ochieng, 2018b; Omondi-Ochieng, 2018c). Specific to NNSOs, OP can be divided into two broad categories: on-field performance (measured as win-loss records and championships won) and off-field performances (indicated as financial performance and mission accomplishments). The purpose of this paper is to evaluate the 2009-2016 financial performance of USH using financial effectiveness indicators and financial efficiency ratios. In this study, financial performance is the combined evaluation of financial effectiveness and financial efficiency in the realization of the desired financial goals of an NNSO as USH. As used in previous studies, financial performance can be formulated as (Omondi-Ochieng, 2018a;Omondi-Ochieng, 2018b;Omondi-Ochieng, 2018c): Financial performance ¼Financial effectiveness þFinancial efficiency (1) Financial effectiveness is the ability of organizations to use the proper choice of activities, efforts, initiatives, strategies and/or policies to generate long-term and sustainable financial performance. For instance, NNSOs that are financially effective tend to be less dependent on external revenues from corporate sponsorships and government grants and are also better at accumulating additional revenues from internal programmes, memberships and/or events (Hall et al.,2003;Omondi-Ochieng, 2018a;Omondi-Ochieng, 2018b;Omondi-Ochieng, 2018c). Additionally, financial efficiency is concerned with minimizing financial waste during operations by optimally allocating and utilization of scarce financial resources (Omondi- Ochieng, 2018b;Omondi-Ochieng, 2018c). By being financially efficient, an NNSO can save on cost, time, resources, while boosting productivity. In this study, financial effectiveness is the capability of USH to achieve its financial goals as measured by revenues generated and assets accumulated. The structure of the rest of the paper is as follows: justification of the study; conceptual framework and research questions; theoretical frameworks; literature review; methods; results; discussions and managerial implications; and finally, conclusions and research implications. 2. The motivation for the study Using a variety of methodological approaches, empirical research into the financial performance of NNSO is in the upward trajectory and growth (Omondi-Ochieng, 2016; Omondi-Ochieng, 2018a;Omondi-Ochieng, 2018b;Omondi-Ochieng, 2018c;Winand et al., 2012). Some of these studies used qualitative measures from surveys and interviews and aggregate fundamental measures (Ritchie and Kolodinsky, 2003;O'Boyle and Hassan, 2014; Mathieu et al.,2012;Madella et al.,2005;Bayle and Robinson, 2007). Other researches have concentrated on the financial performance of for-profit sports organizations such as professional sports teams using a variety of financial indicators as revenues and expenses (Pinnuck and Potter, 2006;Panagiotis, 2009;Ozawa et al., 2004;Nowy et al., 2015;Ecer and Boyukaslan, 2014;Dimitropoulos and Tsagkanos, 2012;Dimitropoulos, 2010). However, just a hand-full of these studies have examined the financial performance of NNSOs using financial ratios, a much better measure of the financial health than opinions surveys and interviews (Omondi-Ochieng, 2018a;Omondi-Ochieng, 2018b;Omondi-Ochieng, 2018c; JEFAS 24,48 328 Ecer and Boyukaslan, 2014). This study will attempt to add and possibly narrow this gap in the use of financial ratios in evaluating the financial performances of NNPOs. Additionally, most previous studies adopted a problem-based approach, i.e. examining the financial vulnerability and problems of non-profits in general (Helmig et al., 2014;Parsons and Trussel, 2008;Denison and Beard, 2003;Dayson, 2013) and sports organizations in particular (Wicker et al.,2013;Hamil and Walters, 2010;Cordery et al., 2013;Cordery et al., 2013). Such problem-centred approaches may not be of much help to non-profit managers facing serious vulnerability threats caused by financially distressful austerity measures by many governments (Hall et al., 2003;Omondi-Ochieng, 2018c). Under such difficult financial climate, a solution-based approach adopted by this study may be more warranted especially where the managers are ready and willing to implement financial strategies that can make the NNPOs more effective by increasing effectiveness and efficiency. In other words, managers of NNSOs need more solution-based empirical research that can enable them to learn fast and adapt well to reposition their organizations for better financial health while realizing their mission. We, on the other hand, adopt a solution-based approach by researching some possible strategies NNSOs can adopt to boost their become financial health. A solution-based approach is a more direct means of examining the financial health of NNSOs which can also boost overall competitiveness. Moreover, the key findings of this study are that the financial performance of NNSOs can be greatly enhanced by the combined effects of financial effectiveness and financial efficiency. Additionally, the present research provides an interesting and new perspective on the studies of NNSO, by using simple financial ratios which make it clearer and easier for interpretations by donors, managers and/or stakeholders, highlighting financial trends which can help detect overall financial performance strengths and weaknesses, adding additional measure of financial transparency and accountability which can be used to comply with donor requirements and using resource dependency theory to further add to the clarification and understanding of the many possible variations into the causes and catalysts of the financial performances of NNSOs. 3. Conceptual framework and research questions This study argues that sustainable financial performance is the ultimate goal of most NNSOs as captured by two components, namely, financial effectiveness and financial efficiency, in a three-stage conceptual framework (Figure 1). The prescriptive framework stresses the inter-correlation between the two components in assessing the financial Figure 1. Linking financial performance to financial effectiveness and financial efficiency • Asset Acumulation • Revenue Generation Financial Effectiveness • Program Sevices Ratio • Return on Assets Financial Efficiency •Net Income Financial Performance Source: Own elaboration Financial performance trends 329 performance of NNSOs based on the following reasons. First, financial effectiveness relates to the ability of a NNSO to acquire needed but scarce financial resources such as assets and revenues. Second, upon acquiring these scarce financial resources, the resources can be efficiently used in providing operational services and programmes at low costs. This is so because in a climate of scarcity the majority of donors are increasingly demanding for more accountability, thrift and transparency (Alexander, 2000). Additionally, rising competition for revenues, medals and international recognition has pushed NNSOs to attempt to be both effective and efficient –a very difficult endeavour to accomplish. The major issues addressed in this study is to ascertain whether USH has been both financial effective and financially efficient from 2009-2016. Through the development of a conceptual framework that links financial performance to financial efficiency and financial effectiveness (Figure 1), is a broader way of analysing, monitoring and adhering to what may lead to the realization of the mission and vision of a NNSO. The framework can enable sports managers to identify the function of each component, thus having the ability to change, adopt or take corrective action/s when needed. The present study attempts to provide answers to the following research questions: RQ1. Was USH financially effective as indicated by its ability to generate revenues? RQ2. Was USH financially effective as indicated by its ability to accumulate assets? RQ3. Was USH financially efficient as indicated by its programme service ratios? RQ4. Was USH financially efficient as indicated by its return on asset (ROA) ratios? RQ5. Did the financial performance of USH improve as indicated by yearly net income? By answering the five questions, this paper presents a framework for the application of financial effectiveness and financial efficiency in measuring the financial performance of USH. 4. Theoretical framework: resource dependency theory The resource dependence theory (RDT) was propagated by Preffer and Salancik in 2003 with the view that organizations are dependent on their external environments for scares resources (i.e. knowledge, networks, contracts, loans among other critical resources) (Barman, 2008;Malatesta and Smith, 2014) and that the ability to acquire and maintain resources is essential to the survival of an organization (Hodge and Piccolo, 2005;Jung and Moon, 2007). RDT adds that organizational effectiveness results from three important forces –the firm’s ability to manage resources (Bingham and Walters, 2013;Nienhüser, 2008), the firm’s capacity to secure critical resources from the environment (Wry et al., 2013;Pfeffer and Salancik, 2003) and the firm’s ability to adapt to changing and challenging circumstances (Mitchell, 2014). RDT stresses that for organizations to succeed, they must gather, harness and secure internal and external critical resources and capabilities required to survive by interacting and co-opting (a mixture of corporation and competition) with other firms and individuals beyond their boundaries (Macedo and Carlos Pinho, 2006;Rivas, 2012;Verbruggen et al., 2011). However, a firm’s inability to produce its own resources often leads to interdependence on external resources. Such dependence on external resources can make the organization lose control, become vulnerable leading to a reduction in autonomy and power (Casciaro and Piskorski, 2005;Miles et al., 1999). Put in another way, with increased dependence on external resources, the autonomy of the organization decreases (Pfeffer and Salancik, 2003; Froelich, 1999). Additionally, when internal and external resources become scarce, most JEFAS 24,48 330 organizations react by seeking alternatives elsewhere, which may shift power as the autonomy of the organization decreases (Drees and Heugens, 2013;Hillman et al.,2009; Pfeffer and Salancik, 2003). RDT can be used to help understand how scarce resources are acquired and maintained organizational survival and success in sports. Previous sports-related studies that have used RDT include Coates et al. (2014), Vos et al. (2011) and Wicker et al. (2013). Specific to sports organizations, resource scarcity may be due to lack of funds, volunteers, equipment or facilities, which often paralyse their capability to handle associated challenges. In the event of serious resource scarcity, an organization must adjust, do without, reduce services/ programmes or seek alternatives external to the organization. In sum, the key to organizational survival is the ability to acquire and maintain resources (Hodge and Piccolo, 2005). Moreover, the structure, behaviour and strategy of an organizations can be explained by their resources (Preffer and Salancik, 2003;Macedo and Carlos Pinho, 2006;Mitchell, 2014), as, in general, organizations that suffer from acute resource scarcity (defined as a short supply of important resources) also tend to perish or fail as long-term survival is impeded. Resource scarcity can greatly hamper and disable the production of goods and services customers or clients demand (Macedo and Carlos Pinho, 2006;Moulton and Eckerd, 2012). 5. Literature review: financial efficiency using financial ratios Financial efficiency is the cost-effective use of the financial resources of a NNSO to accomplish its programmes and services objectives, as indicated by financial ratios. The origins and uses of financial ratios can be traced back to the need for sound financial management pertaining to credit valuation, the business transactions and negotiations between and among lenders, rating agencies and investors (Zietlow et al., 2011;McLaughlin, 2016). To date, various types of financial ratios have been adopted to assess and measure the overall financial efficiencies of NNSOs to detect the efficient use or misuses of revenues, donations and other monetary resources. In a competitive, resource-scarce environment, the uses, applications and value of financial ratios have evolved to be the premier financial efficiency measure –both for-profit and NNPOs. The contribution of financial ratio analysis theory in this area is significant. Previous studies indicate that the uses and applications of financial ratios to ascertain financial efficiency have the following advantages: simplification of complex financial data; enabling easier comparison; easing trend analysis; and highlighting important financial information (Omondi-Ochieng, 2016;Zietlow, et al., 2011;Trussel and Greenlee, 2004). Financial ratios can be classified according to the information they provide and the specific goal of assessment. As such, the aim of this study is to use financial ratios that are specificto evaluating the financial efficiencies of NNSOs such as programme services ratio, net income and ROAs. 5.1 Programme services ratio Programme services ratio measures how a NNSO is efficient at delivering its programmes and has previously been used by the following researches: (Baber et al.,2001;Baber et al., 2002;Buchheit and Parsons, 2006;Hughes and Luksetich, 2004;Omondi-Ochieng, 2018a; Omondi-Ochieng, 2018b;Omondi-Ochieng, 2018c;Tinkelman and Donabedian, 2007; Financial performance trends 331 Trussel, 2003;Van Der Heijden, 2012). For instance, a programme service ratio of 0.1 or 10 per cent is better than 0.7 or 70 per cent, as the latter indicates risky and wasteful use of hard-to-get revenues. Program Services Ratio ¼Total Program Services Total Revenues (2) A lower programme service ratio may provide free additional resources which may later reduce competition with other potential partners and dependency on external funders (Malatesta and Smith, 2014;Mitchell, 2014;Verbruggen et al., 2011). 5.2 Net income Net income is also known as net profit and measures the amount of total revenue that exceeds total expenses. As non-profit organizations operate under a service maximization agenda and not a profit maximization agenda, most studies that have used net profit have emanated from professional sports teams (Barajas et al., 2017;Ecer and Boyukaslan, 2014; Dimitropoulos, 2010;Dimitropoulos and Limperopoulos, 2014;Gimet and Montchaud, 2016; Sakinc, 2014;Plumley et al.,2017;Pradhan et al.,2017;Rey and Santelli, 2017). The few studies that have examined profitability on NNSOs include: (Omondi-Ochieng, 2018a; Omondi-Ochieng, 2018b;Omondi-Ochieng, 2018c). Net Income ¼Total Revenues–Total Expenses (3) Net income measures how efficient the company is at producing profits, with higher profits almost always preferable and is also used by donors, creditors and the board members to gauge the financial position and ability to efficiently managed assets. The advantages of a NNSO having a positive net income is that it can be used to offset loans, initiate or improve programmes and services, save for future emergencies and/or add additional permanent professional staff. Additionally, higher net income may reduce the dependency of the NNSO with the potential individual, corporate and/or government funders (Hodge and Piccolo, 2005;Jung and Moon, 2007;Macedo and Carlos Pinho, 2006). 5.3 Return on assets ratio ROAs, also known as asset utilization ratio, is commonly used as a profitability ratio that measures the net income produced by total assets over a set period (equation (4)). ROA comparers net income to average total assets. ROA has previously been used by: [(Ergul, 2010;Dimitropoulos and Tsagkanos, 2012;Sakinc, 2014;Sendy et al.,2014) for professional sports teams and by (Omondi-Ochieng, 2018a;Omondi-Ochieng, 2018b;Omondi-Ochieng, 2018c) for NNSOs] Return on Assets ¼Net Income Average Total Assets (4) ROA is increasingly being applied in measuring how efficient an organization can generate revenues or produce profits by using its assets which may include administrative offices, cars, training facilities such as gym and fields, stadium and office furniture among others. The ratio can help managers and donors to evaluate how well the organization converts its investments in the form of assets into revenues or profits. In short, the ratio measures how efficient an organization uses its assets to gain a net profit–with a higher ratio being better. JEFAS 24,48 332 For instance, a ROA of 0.9 or 90 per cent is excellent compared to 10 per cent. Additionally, high ROA may also reduce the potential dependency on the NNSO from potentially demanding, controlling and/or unreliable funders (Barman, 2008;Froelich, 1999;Casciaro and Piskorski, 2005). 6. Methodology This section contains data sources, measurement variables (dependent and independent) and the trend analysis. 6.1 Data sources This study used archival data from audited financial reports and form 990 sourced from www.usahockey.com/page/show/837015-financials for the period 2009-2016. Audited financial reports are examinations of an entity’sfinancial statement and accompanying disclosures by an independent auditor. From the audited reports, the author examined the following statements: statement of financial position, statement of activities and changes in net assets and the statement of cash flows to access the financial health of USH. Form 990 is an Internal Revenue Service form that is filed by tax-exempt organizations and is intended to give the government and the public a clearer picture of the organization’s activities annually. Form 990 also had information pertaining to mission, number of employees, expenses, revenues and assets, among other highlights. 6.2 Measurement variables The study variables were divided into two categories –dependent variables and independent variables. The dependent variable was financial performance measured as net profits from 2009 to 2016. Independent variables were financial effectiveness (quantified as the annual total asset and total revenues) and financial efficiency calculated as programme services ratios and ROAs ratios over the same period. As indicated in Table I, other researchers have used similar variables. 6.3 Financial trend analysis Financial trend analysis (FTA) evaluates changes in an organization’sfinancial information over a period of three possible situational time frames –short-term (days to weeks), intermediate-term (weeks to months) and long-term (months to years). From the definition, “there is no minimum amount of time requirement to perform a trend analysis”–it all depends on the circumstance (Omondi-Ochieng, 2018c). Based on the general consensus of past studies (Iba and Aranha, 2012;Morris, 2013;Omondi-Ochieng, 2018c;Pickens, 1986; Raughley and Lloyd, 1999;Wong and Venkatraman, 2015), the aim of FTA is often to: examine the financial health of the organization; make projections for strategic financial planning; predict future production of goods and services; compare and contrast past and present revenues, costs and investments; dissect failure analysis as an early warning indicator of anticipated, unexpected and/or impending financial problems especially when combined or supplemented with targeted financial ratios; and forecast sales growth and interest rates among others. Financial performance trends 333 Ratio types and formulae Uses and interpretations References (a) Program services ratio ¼Total program services Total Revenues Measures how a non-profit organization is efficient at delivering its programmes. Benchmark –Lower is better Rating –high (1-32%) medium (33-65%) and low (66- 100%) Baber et al., 2001;Baber et al., 2002; Buchheit and Parsons, 2006;Hughes and Luksetich, 2004;Prentice, 2016;Omondi- Ochieng, 2018a;Omondi-Ochieng, 2018b; Omondi-Ochieng, 2018c;Tinkelman and Donabedian, 2007;Trussel, 2003;Van Der Heijden, 2012 (b) Net income ratio ¼Total revenues Total expenses Measures how profitable a non-profit organization is. Benchmark –The higher the better Rating –Positive (profits) or Negative (losses) Barajas et al., 2017;Ecer and Boyukaslan, 2014;Dimitropoulos, 2010;Dimitropoulos and Limperopoulos, 2014;Gimet and Montchaud, 2016;Sakinc, 2014;Plumley et al., 2017;Pradhan et al., 2017;Rey and Santelli, 2017;Omondi-Ochieng, 2018a, 2018b;2018c. (c) Return on assets ¼Net income Average total assets Measures how efficient a non-profit organization is at using its assets to generate revenues or profits. 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Schmidgall, R.S. and DeFranco, A.L. (2004), “Ratio analysis: financial benchmarks for the club industry”,Journal of Hospitality Financial Management, Vol. 12 No. 1, pp. 1-14. Tuckman, H.P. and Chang, C.F. (1991), “A methodology for measuring the financial vulnerability of charitable non-profit organizations”,Non-Profit and Voluntary Sector Quarterly, Vol. 20 No. 4, pp. 445-460. Winand, M., Zintz, T., Bayle, E. and Robinson, L. (2010), “Organizational performance of olympic sport governing bodies: dealing with measurement and priorities”,Managing Leisure, Vol. 15 No. 4, pp. 279-307. Corresponding author Peter Omondi-Ochieng can be contacted at: [email protected] For instructions on how to order reprints of this article, please visit our website: www.emeraldgrouppublishing.com/licensing/reprints.htm Or contact us for further details: [email protected] JEFAS 24,48 344