The Future of the OOTP Financial System

[kq76]

Posted by many many people, most recently hefalumps
$$ left for extensions = [last year's revenue] - [next year's payroll] + [cash]
$$ left for free agents = [last year's revenue] - [this year's payroll] + [cash]

Everyone says this, but I challenge anyone to show that the extensions formula holds for consecutive (at least 2 in a row) years. It comes close, but I bet no matter what you (except for maybe Markus) do, you'll never get what the game says.

Regardless, these calculations really need to be reworked. Here's some reasons why.

***

1) In OOTP, profit is only added to cash after you proceed to next year. In reality, revenues and expenses will be accumulating year round (some in lump sums, some not. I'll assume most are not.) and your cash will also fluctuate as a result. In OOTP, beginning cash is the same as ending cash (no fluctuation throughout the year whatsoever), which is of course absurd. The significance is that there should be times throughout the current year where you will have more or less cash to spend in trades, free agents, promotions, etc.

2) Basing next year's budget for extensions on last year's revenue just doesn't make sense. You should budget it on next year's projected revenue. I realize next year's would be based on this year's which in turn would be based on last year's, but a true projection would not always be the same as the previous period. Projections need to take events (swings in the market, fan interest, ticket price, team performance) since the last period into consideration. It's just plain silly to assume that 2004's (next year's) revenue will always be exactly the same as 2002's (last year's) revenue, there's 2 years inbetween!

Think of it this way..

_next_ year's projected budget:

profit = revenue - expenses
20M = 100M - 80M

Expenses = player salaries (for the sake of simplicity, let's ignore all non-player expenses for the moment, we can easily add them later). Say the players who you have signed for next year (including already signed extensions and arbitration estimates minus possible FAs) will have total salaries of 70M. That means, within your budget of 80M, you will have 10M (80-70) left over for next year's extensions and FA salaries, etc. Now if you want to go further, you can dip into your projected profit of 20M and your projected cash. This makes sense, OOTP's current formula does not.

3) The FA (or rather the $ for present purposes) formula needs to be similarly reworked.

Think of it this way..

_this_ year's projected budget:

profit = revenue - expenses
30M = 105M - 75M

Again, expenses = player salaries for now. Say projected expenses are only at 70M right now, that means we have 5M room under our self-imposed budget of 75M. However money available for FAs right now for this year should be that 5M, plus, if we really want to, we can eat into our projected profit of 30M _and_ our current (fluctuating) cash reserves (see #1 above).

Put another way, be it for this year (#3), or next year (#2)..

$ available = budget (expense room) + cash (on hand or projected) + projected profit

(Unused budget of course becomes more profit. And this is also assuming flowing revenues and expenses.)

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To get really financially in-depth, taking on debt with interest payments etc could be implemented, but I realize that's a little too far for right now. However, I believe all the above could be fairly easy to implement and I'm sure it would make far more sense to everyone. And perhaps most importantly, being able to set a budget based on fairly accurate projections would probably greatly help GMs, of online leagues especially, to be more fiscally responsible. And we know we'd all love that.

I know we have several finance people on these boards (only jgross comes to mind at the moment) who could probably tweak this to perfection, but I think at least something along these lines would be far more useful than the current system. Please discuss.

[koohead]

It's called Enron Math

[ChipperJones10]

This might be the right place to post this, in one of my franchises, I have this problem where I have $0 to spend on FA in the offseason, but I shouldn't. According to your FA $ formula:

75,294,931 - 73,489,900 + 5,000,000 - I should have about 7 million for FA!

I will be forever indebted to anyone who can help me.

[Markus Heinsohn]

Here is the formula for every case:

Extensions:

$$ left = [Last year marketing revenue + Last year Gate revenue + This year TV contract + Cash] - [salary of players with 2 or more years left on their contract + extensions signed + salary of coaches]

Free agent period:

$$ left = [Last year marketing revenue + Last year Gate revenue + This year TV contract + Cash] - [salary of players on the team + salary of players that have a contract offer + salary of coaches]

Signing free agents during season:

$$ left = [Last year marketing revenue + Last year Gate revenue + This year TV contract + Cash] - [salary of players on the team + salary of coaches]

Hope that helps!

Playoff revenue is not used, it only influences your cash when proceeding to the next season.

[Anonymous Ghost]

Good stuff. Thanks, Markus!

[joncarlos]

I think a step in the right direction would be to just calculate cash every day. If it can be done in FHL hockey you would think it could be done in OOTP6. You get revenue when you're home, you don't when you're on the road, and you pay 1/162nd of all your team's salaries every day. You'd need a cash minimum so teams could always pay their guys on the road.

Then we could add in complexities if we wanted; road teams get 20% of the gate, road teams get an adjustable % of the gate, signing bonuses, different salaries in different contract years (13 mil this year, 15 mil next year, etc), contract buyouts, the list just goes on and on.

[kq76]

For anyone who tries to figure out the "$$$ left..." by hand, some tips:

-when Markus says, "salary of players on the team" he means this year's "payroll", not player expenses
-on the html financial report, make sure you use the _top_ last year's attendance revenue, the bottom one is incorrect

I'm working on a budget spreadsheet and using these #s from the financial report and salary report do produce the correct #s. I'm not saying I agree with how everything is calculated, just that you can produce the same #s as the reports.

[Springtime_for_Hunter]

You ought not to pay 1/162nd of player payroll per day, rather I would suggest paying 2/(# Weeks In Season) every second Friday.

Then you could throw failing to make payroll into the game. Even recievership, bankruptcy, and having to sell the team to your highest paid player to clear debts could follow.

[KurtBevacqua]

I don't think Markus' model is off base at all in emulating financial models of corporations. I do have an MBA and have taken my fair share of finance and accounting courses. I'd like to address a couple of the original issues in this post.

"1) In OOTP, profit is only added to cash after you proceed to next year. In reality, revenues and expenses will be accumulating year round (some in lump sums, some not. I'll assume most are not.) and your cash will also fluctuate as a result. In OOTP, beginning cash is the same as ending cash (no fluctuation throughout the year whatsoever), which is of course absurd. The significance is that there should be times throughout the current year where you will have more or less cash to spend in trades, free agents, promotions, etc. "

True, revenues and expenses do accumulate all year, but for bookkeeping purposes, it is an accepted practice to only annotate them at the end of the fiscal period, or it is also frequently done on a quarterly basis. I believe the OOTP way of doing this is a valid method created to emulated accepted accounting practices. I know of no large corporations that would annotate revenues on their books on a continuous basis. It's not practical when you start talking in the millions of dollars. Revenue fluctuates too much and too quickly to be tracked in such a way.

"2) Basing next year's budget for extensions on last year's revenue just doesn't make sense. You should budget it on next year's projected revenue. I realize next year's would be based on this year's which in turn would be based on last year's, but a true projection would not always be the same as the previous period. Projections need to take events (swings in the market, fan interest, ticket price, team performance) since the last period into consideration. It's just plain silly to assume that 2004's (next year's) revenue will always be exactly the same as 2002's (last year's) revenue, there's 2 years inbetween!"

Again, there are many companies out there that will produce budget’s on their past year’s numbers. Using projected revenue could land you in hot water if you projections are off base (or if your star player gets hurt and the team tanks). By using last year’s numbers you are basing projections on a a solid, accepted number and as a CEO you cover your butt with the investors by not taking what could amount to a wild guess on speculated revenues. No one will second guess you for using last year's real numbers. Everyone will second guess you if you speculate on future earnings and are wrong.

I do like the idea about throwing interest rates in. There could even be a return on investment calculation. This would all be very nice if we ever had the chance to raise capital to build stadiums. Then we would have to do some real future planning and cost-benefit analysis. I'd argue against adding inflation though. I don't want to have to build a spreadsheet to do current/future costs analysis. That's too much like work.

[Gastric ReFlux]

I would like the option of selling players who have suffered career-ending injuries to organ banks. Thanks.

[ctorg]

And I would like the option of being able to punish my players when they do something I don't like. A few lashes could get those deflated numbers back up, you know?

[Gastric ReFlux]

Originally posted by Gastric ReFlux
I would like the option of selling players who have suffered career-ending injuries to organ banks. Thanks.

Maybe even season-enders if you're running a team that's strapped for cash.

[ctorg]

Originally posted by Gastric ReFlux
Maybe even season-enders if you're running a team that's strapped for cash.

Maybe even the ability to pull a Holy Grail-style I'm-not-dead-yet-but-close-enough thing to get rid of the aging guys.

[kq76]

Originally posted by KurtBevacqua
True, revenues and expenses do accumulate all year, but for bookkeeping purposes, it is an accepted practice to only annotate them at the end of the fiscal period, or it is also frequently done on a quarterly basis. I believe the OOTP way of doing this is a valid method created to emulated accepted accounting practices. I know of no large corporations that would annotate revenues on their books on a continuous basis. It's not practical when you start talking in the millions of dollars. Revenue fluctuates too much and too quickly to be tracked in such a way.

You're looking at it from a purely accounting point of view though. From a finance perspective, corporations do make short-term budgeting decisions based on cashflows. Otherwise you'd be wasting a lot of excess cash or paying a lot of unnecessary interest.

Regardless, my recommendation is _not_ to make OOTP emulate a real company's financial practices, it is to allow us to introduce fluctuating cash so we're not stuck at 0$ (or whatever amount) all season long and as a result unable to do many things that baseball teams in financial trouble can do.

Again, there are many companies out there that will produce budget’s on their past year’s numbers. Using projected revenue could land you in hot water if you projections are off base (or if your star player gets hurt and the team tanks). By using last year’s numbers you are basing projections on a a solid, accepted number and as a CEO you cover your butt with the investors by not taking what could amount to a wild guess on speculated revenues. No one will second guess you for using last year's real numbers. Everyone will second guess you if you speculate on future earnings and are wrong.

I disagree. Shocking? Let me explain. Companies _do_ base their #s on expected future revenue, market conditions, past performance, and many many other things. No major company in its right mind would base their #s solely on last year's #s. And if they do, financial analysts will show them where they're right or wrong and then they'll be forced by investor reaction to redo their projections. And guess what, companies and financial analysts are often wrong. But you know what, they'd probably be even more often wrong if they based them just on last year's #s.

However, again, my recommendation is _not_ to make OOTP emulate a real company's financial practices. It is to allow us to use better budgeting to determine whether we can really afford player X or if we should go with the cheaper player Y, or any other financial decisions we need to make. OOTP is not, and does not have to be, nearly as complicated as real world finance. And I'm not saying we have to do things that necessarily really happen in real world finance, only things that would add to the gaming experience and I think more accurate budgeting definitely would.

In OOTP we can reasonably tell what this year's attendance and merchandising #s will likely be. All you have to do is take the (how long is a baseball season..) 6 months (during the season you would be taking monthly #s from last year) of revenue and project (probably give more weight to this year's #s so far) that over the rest of the season. In the real world, it would be more complicated, but for OOTP's purposes I think that would be sufficient. As it is now, if you had a crappy year last year, but you've turned around the club, your projections will be far too low. If you relied on #s in the opposite situation, you could really screw your finances for a # of years.

Note: I'm kind of in a hurry, but I really wanted to respond asap, so though I think what I said is correct, I don't have time right now to check it.