"Citius, Altius, Fortius”
This is the common motto of ‘the best games ever’, Olympics Games. Translated as ‘swifter, higher, stronger’, Olympics grew their sports kingdom with a big impact to many aspects related. They had to be swifter, higher, and stronger indeed to manage facing potential economic impact on the host city, even on the host nation as a whole. Unlike Montreal Olympics which incur a budget deficit of more than $1 billion, management risk (especially in financial risk) on holding Olympic Games is a must. The conclusion whether to accept being the host should be seen as a capital budget decision, as its useful needs on evaluating long terms project. This defines the success or failure of a country since investments in fixed assets (venues, infrastructure, facilities) affect the financial health for many years.
Capital budgeting decision consist calculation on investments that outlay now in order to obtain future return. Focusing on cash flows, capital budget allows decision makers to identify new cash that will arise from a project and compare it to expenditures the project demands. Combined with knowledge of timing and amount of resources needed, it helps ensure that all financial obligations are met. The actual games of Olympics itself may last only for few weeks, but preparations commence up to decades before and may define considerable investment expenditures that can have longer term economic significance.
Specifically, cash flows contain outflows and inflows. Cash outflows, consist initial investments, increased working capital needs, repairs and maintenance, and incremental operating cost. On other hand, cash inflows consist of incremental revenue and release of working capital.
Main cash outflows highlighted in this article are initial investments and incremental operating cost. As an extreme example of cash outflows, China made the biggest cost in Olympic history ($42 billion), where initial investment (venues, facilities) and operational costs account for 31.8 billion Yuan in total. The massive project investment included the $500 million Bird Nest National Stadium construction. Not only from venues, but also initial investment came from infrastructure according to the access needed. In china, roads are access route from city’s airport to venues.
As mentioned earlier that initial investment on venues are prepared decades ago. The construction itself would occur with a year range before the planning game. London’s Olympic stadium started in May 2008 and is forecast to be completed in summer 2011. Therefore, decision makers must calculate the time value of money. This occurred because the money today is worth than money in the following year, moreover for several years later. No wonder why London’s Olympic budget spiraled from £2.4 billion (2008) to £9.35 billion (2011).
Incremental revenue on cash inflows are managed mostly by operating cash surpluses. It could be seen as revenue generated from game operations. But surprisingly, other surpluses could be generated in a wider economic ‘revenue’ impact. We can see this as direct and indirect cash flows. Game revenue relates specifically to the host city’s organizing committee budget, where costs must meet revenues directly generated from game events. On the other hand, the economic ‘revenue’ impact relates to wider effects consisting economies arise from associated factors, such as increased number of tourism and improved infrastructure. Even though unquantifiable, this impact are more contested than the previous. Olympic generates an economic boost from increases of investments and tourism, since consume factor tourist spend by their shopping behavior.
Net present value (NPV) represents the main method of analysis on capital budget. Projects with a positive NPV will increase the firm’s value exceeding the outflow in order to gain bigger wealth. Olympic hosts must see this. But related to calculation, limitation occurs on what is called by payback period. How long should Olympic venue have its useful life? Depending on the scale of business and plant-equipment invested, payback period on construction investments round about 20 – 30 years (Busch Stadium requires forecasting cash flows from 2006 - 2036). But once again, detailed prediction of the useful life of project is often hard to estimate. This proved the need on post-audit analysis when the project is completed where there are many uncertainties in forecasting cash flows.
Looking back at some histories about risk management in Olympics, capital budget decision is a compulsory in holding Olympic games. The risk carried by time value of money-investment, is calculated by resulting a maximum net present value. In conclusion, the decision whether a country accepts the challenge in holding Olympic Games, is answered by whether "if they (the country) wanted to change the image (of their own country) according to have better business in the future, then something like the Olympic Games is an option”. After all, Beijing 2008 is a good example on an acceptable investment project because it promises a greater return than the required rate of return with a positive net present value.
Reference:
____. Capital Budgeting, [online]. Holcomb Hathaway. Available from: http://www.hh-pub.com/client/samples/HH2044.pdf. [Accessed: 21st March 2013]
Fowler, Geoffrey. China Counts the Cost of Hosting the Olympics. Paris: 2008. [Online].Available from: http://online.wsj.com/article/SB121614671139755287.html. [Accessed : 21st April 2013]
Garrison. 2011. Managerial Accounting: An Asian Perspective. McGraw-Hill
Gold, John. Olympic Cities: City Agendas, Planning, and the World’s Games, 1896 – 2016. [online]. Available from: https://www.google.co.id/search?tbm=bks&hl=en&q=capital+budgeting+ china+olympics&btnG=.[Accessed : 21st April 2013]
Jennings, Will. London 2012: Olympic Risks, Risk Management, and Olymponomics. 2008. [Online]. Available from: http://www.academia.edu/206866/London_2012_Olympic_Risk_Risk_Management_and_Olymponomics. [Accessed : 21st April 2013]
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