BIG SCREEN BUSINESS Part 2 Financial Planning & Analysis

Transcription

1 BIG SCREEN BUSINESS Part 2 Financial Planning & Analysis A Case Study for Business Studies HSC Course - Stage 6 WORLD S BIGGEST SCREENS Pty Ltd LG IMAX Theatre Sydney, Darling Harbour

2 Written by Julie Brown, Group Sales and Marketing Manager, IMAX Theatre Sydney with the assistance of: John Rochester, Chief Executive, Worlds Biggest Screens Pty Ltd Mark Bretherton, Marketing Director, Worlds Biggest Screens Pty Ltd Martin Bagley, Operations Director, Worlds Biggest Screens Pty Ltd Sara Reid, Operations Manager, IMAX Theatre Sydney Paul Fraser, Business Studies Co-ordinator, Turramurra High School, Sydney Ian Biddle, Jamison High School, President Economics & Business Educators Association, NSW Copyright World s Biggest Screens Pty Ltd 2002 Updated 2004 This publication is copyright and may only be reproduced by teachers for use with student groups as part of a Business Studies excursion to IMAX. Any unauthorised copying or distribution is strictly prohibited. World s Biggest Screens Pty Ltd IMAX Theatre Sydney 31 Wheat Rd DARLING HARBOUR NSW 2000 Ph: Fax: sydgroups@imax.com.au Internet: Page 2

3 2. FINANCIAL PLANNING FINANCIAL PLANNING CYCLES The role of financial planning is extremely important at IMAX. A number of different reporting systems are used to monitor performance against budget. Financial planning generally takes place at the start if the financial year (general budget setting) and also prior to the released of each new film. 1. Prior to the start of the financial year At this time, general financial planning takes the form of setting the budget for the financial year ahead. This usually takes place in March or April. This phase of planning involves projecting attendance for the year ahead, based on a proposed range of films and taking into account results from the previous year. Results are analysed as follows: Average Ticket Price (ATP): An average of all tickets sold. Sales Per Paid Admission (SPPA): The amount a visitor spends, per admission ticket, at the candy bar or liquor bar. The ATP and SPPA targets are determined by management and then total theatre revenue projections are established for a range of new film releases. Some of the key line items of the theatre s budget include: Income in the form of: box office admissions candy bar and liquor bar purchases other sources such as sponsorship or theatre hire Major expenditure includes: the costs of prints and royalties general theatre operations various marketing activities Any capital expenditure is added to the budget and can take the form of: a new air conditioning system for the theatre refurbishment of offices repainting the building ADDITIONAL SOURCES OF REVENUE: The Candy Bar, Café & upgrades to the ticketing system The diagram below explains the key elements of the budget for the Sydney IMAX Theatre: Liquor Bar account for a significant portion of the revenue of the theatre. Approximately 15% of total theatre revenue is obtained from purchases at the Candy Bar, Café & Liquor Bar. Ticket prices have low margins because royalty payments are set in US dollars. Candy Bar sales have high margins and provide the theatre with opportunities to maximise profits. Page 3

4 OVERVIEW Theatre Income & Costs Food & beverage - IMAX Café - Candy Bar - Liquor Bar 10-15% of revenue) Box Office Sales - General theatre admissions - Schools - Tourists 85% of revenue) INCOME (Revenue) Other possible source of income: - Sponsorship - Cinema advertising - Theatre hire - Retail sales (accounts for less than 5% of revenue) THEATRE BUDGET Cost of Sales - print costs - Licence fees - Film Royalties - Food & beverage (accounts for approx % of costs) COSTS (Expenditure) Operating Costs - Personnel - Ticketing system maintenance - Building maintenance - Security - Projector bulbs - Staff uniforms - Cash handling fees - Cleaning - Administration eg. stationery, postage, couriers - Services & utilities eg. phone, electricity, water 50% of costs) Marketing Costs - Advertising agency - Directory advertising - Publicity - Printing eg. film flyers, what s on flyers - Design costs - Banners for building - Special promotions - film launches - Tourism brochure & distribution, advertising in tourist publications - Education eg. newsletter & mailouts, teacher preview events 20-25% of costs) INCOME COSTS = PROFIT Page 4

5 2. Prior to the release of each new film Before even deciding to release a new film, a comparison of financial performance overseas is undertaken. Most films are released in theatres overseas prior to their release in Australia. This gives World s Biggest Screens the ability to assess the likelihood of the film to perform well in our marketplace. The film contract is then negotiated based on the projections we have made for the film s performance in Australia. Only on rare occasions do we take films without having analysed their performance overseas. FILM COSTS ANALYSIS The following simple analysis compares the costs associated with releasing and screening a new film against the estimated total number of admissions for that film. This analysis takes into account costs associated with purchasing the print, marketing the film, running the theatre, paying staff and the royalty fee. The total figure represents that portion of the average ticket price which is consumed by costs. Film Cost Example The following breakdown is an example of film costs associated with each new film. Estimate $2.40 Royalty fee per budgeted admission, paid in US Dollars and subject to exchange rate fluctuations* (usually charged as a percentage; eg % is not unusual) $1.00 Marketing spend per budgeted admission $1.51 Payroll costs per budgeted admission $2.70 Operating costs per budgeted admission $0.40 Print cost per admission, based on a budget of 100,000 admissions, paid in US Dollars and subject to exchange rate fluctuations* $8.01 (All amounts are in Australian dollars) Average Ticket Price The Average Ticket Price (ATP) is simply the average of all admissions to the theatre over a period of time. The ATP is a simple calculation as follows and usually sits at about $10.00 (taking into account highest ticket price of $17.00 and lowest ticket price of $7.50): Total Box Office (revenue from ticket sales) = Average Ticket Price (ATP) Total Admissions (number of tickets sold) The ATP for potential new films is estimated in advance, based on the track record of other similar films and importantly, how well the film has performed overseas. Film costs are compared against the average ticket price (ATP) for each new film to determine potential profitability. The information that this financial analysis provides, forms the basis of negotiations with film distributors on film royalties and terms of exhibition. Royalty Fees One of the main elements of change within this financial framework, is the royalty fee paid to film distributors. This either charged as a flat royalty fee per ticket (ie. up to $2.40 per ticket in some instances), which impacts on the profitability of each film, depending on how successful it is. Increasingly, the terms of distribution are based on a percentage of the gross box office (total revenue) (ie. around 25% is desirable). This limits the impact of royalty fees on our bottom line, particularly in the case of under-performing films. Page 5

6 *Note: Hedging All film contracts are negotiated in US Dollars, regardless of the country of origin of the film. This leaves us open to exchange rate fluctuations in the process of releasing all new films. World s Biggest Screens Pty Ltd does not undertake hedging to offset the impact of exchange rate fluctuations, as the costs of such activity far outweigh the benefits for a company of our size. ON-GOING ANALYSIS & EVALUATION FEEDBACK On-going analysis and evaluation of results takes place on a weekly basis, providing managers with important feedback. Weekly Operations Management meetings are held at the Head Office level to review attendance patterns against budget, with a view to closely monitoring how each theatre is tracking against its set financial objectives. These weekly meetings analyse attendance patterns for the cinema week, Thursday to Wednesday (and in particular, the 4 days from Thursday to Sunday). The following example illustrates the type of financial comparisons made on a week to week basis. This is carried out for each individual theatre for every day of the year. Example Admissions Admissions Admissions 4 Date Sydney Budget Last Year Days Thursday Friday Saturday Sunday Monday Tuesday Wednesday FEED FORWARD In tandem with the review of past attendance, analysis of future attendance (eg. advance bookings for schools and attendance projections for new films) is a fundamental part of the financial planning process. These feed forward controls enable changes to be made quickly if indicators show that a film is not performing to expectation or performing above expectations. Because of the tight margins and the numerous external factors which can impact on theatre profits, constant feedback and feed forward controls are an integral part of the theatre s financial planning. Like any plan, the World s Biggest Screen s financial plan is a working document which is constantly being fine-tuned to ensure the desired outcomes are being met. Page 6