Top Entertainment Industry Financial Metrics
Top Entertainment Industry Financial Metrics
There are no boundaries or limits to what can be achieved when it comes to the entertainment industry. The industry is growing faster than ever before and has become a significant part of the global economy. But with this growth comes a need to measure success. So what are the top entertainment industry financial metrics?
Yes, we are talking about the side most people usually don’t think much about. The financial analysis side of the media and entertainment industry. Wondering how do they measure their financials in this industry? Read on to find out all about it right here in this article.
What’s the Importance of Financial Analysis?
In any business, it’s important to understand and track the company’s financial performance. This is especially true in industries with high risk and high reward potentials, such as the media and entertainment industry. Without understanding the financials, it can be challenging to make informed decisions about where to allocate resources and how to grow the business.
Entertainment Industry Overview
Technology progress, generational shifts, and the ongoing effects of the global pandemic impacted the media and entertainment industry in 2021. During COVID-19 surges, people sought more media and entertainment at home, avoiding large in-person events. Despite the healthier summer, digital media engagement remained strong during the pandemic. This showed that it has only accelerated preexisting trends in the digital world.
In the United States, television viewership remained stable in 2021 as streaming services gained new subscribers. Also, the global box office reached an all-time high of $99.7 billion, with China contributing over a third.
Vinyl sales continued to grow in the music industry while download sales declined. The gaming industry was worth $300 billion in 2021. Similarly, eSports viewership had grown to over 350 million people by the end of the year.
Intense Competition or Massive Opportunities?
This year’s media and entertainment outlook examine five significant areas. We believe that these areas will be most influential on consumers as well as entertainment businesses:
- We’ll see the sector mature with streaming video industry metrics. They will evolve beyond subscriber counts to lifetime customer value. And existing business models will evolve to find greater profitability amid global competition.
- Entertainment in person will face greater pressure to evolve and differentiate itself from living room entertainment. It is possible by going beyond merely bringing people out of their pandemic cocoons.
- The world’s largest digital aggregator, social media, will be at a turning point. It can build out the next generation of retail.
- New customer engagement and loyalty models will result from the sudden rise of NFTs. The success of NFTs in bringing scarcity and exclusivity to digital goods. Additionally, they will lead to more innovations in digital products, greater empowerment for their creators, and a fuller realization of blockchain, cryptocurrency, and the decentralized web’s grand ambitions.
- With these trends, humanity is moving towards the metaverse (or metaverses), where people will spend more time immersed in immersive, social, and digital worlds while the physical world is drawn into the virtual one.
Video Streaming Services and Changing Business Models
By 2022, streaming video on demand (SVOD) providers will continue competing for viewers’ attention, time, and money, driven by customers juggling multiple subscriptions and demonstrating more cost sensitivity and savviness, as well as generational differences in entertainment preferences. SVOD players have spent billions on content development and global expansion, but their business models may not be able to sustain them in the future.
The churn rate for subscriptions in the more mature US market is around 35%. Providers face several challenges, including producing high-quality content, making sure it reaches the right audiences, keeping subscription prices low enough for the market, and determining how much advertising is needed to subsidize operating costs and subscription costs. As well as managing emerging competition across global markets, they need to develop delivery infrastructure and business partnerships. In a business where margins are nowhere near cable TV, the real challenge is finding profitability among all these costs.
After the outbreak recedes and theaters become more active, streaming service providers – who may also be studios with a streaming platform – will likely struggle to balance direct-to-stream releases with windowed theatrical releases.
There are many strategic questions to be considered for this scenario, including:
- How can large studios determine if they are best suited to become content aggregators and streaming providers, or should they focus on content development and licensing?
- Are there ways to help streaming services reach and retain larger audiences with the help of innovations in pricing tiers, paid content, and loyalty programs?
- What are the best ways to lower content production costs and de-risk larger productions?
This overview doesn’t yet cover the entire entertainment industry. But we believe you have pretty much the idea of what’s going on with entertainment numbers. Now, let’s look at the entertainment industry’s financial metrics.
Return Over Investment (ROI)
Entertainment companies measure their success by how much they earn in relation to how much they put in. This is just like any other industry, by definition. But when it comes to practical implementation, things are very different in this industry. For one, it’s often hard to tell how much one has put in exactly.
With movies, for example, a lot goes into them that doesn’t show up on the balance sheet. There are huge marketing expenses, and then there are the costs of all the people who work on a movie but aren’t actually hired by the studio.
Some studios have begun to change the way they account for these so-called “below the line” costs, but most have not. That means that when they look at their ROI, they’re underestimating it. They’re also underestimating how risky their business is. A movie can cost $200 million to make, but if it only takes in $500 million at the box office, the studio considers it a failure.
But that’s not really a fair assessment. You have to take into account all the money the studio made from things like DVD sales and TV rights. When you do that, the movie may actually have been quite successful.
This is one of the big problems with trying to measure success in the entertainment industry. It’s not always black and white.
This is where Oak Business Consultant’s professional financial analysts come in. You can always rely on us for any kind of financial analysis.
Closely Related to ROI is ROA
There are other ways to measure success, too, besides ROI. One is Return on Assets (ROA). This measures how much profit a company makes on its assets. It’s not limited to movies but includes things like music and books as well.
It’s a little more straightforward than ROI because it doesn’t take into account things like marketing and production costs. It just looks at how much money the company made on what it has.
This is a more common metric in other industries, but it’s still not used all that often in the entertainment industry. That’s mostly because it’s hard to get good data on things like music and book sales.
But as streaming becomes more popular, ROA is likely to become more important in the entertainment industry.
Revenue
Of course, no analysis of the entertainment industry would be complete without looking at revenue. This is the most basic measure of how successful a company is. It’s simply how much money they made.
It’s not the most important metric, but it’s still important. You can’t stay in business if you’re not making money.
There are a lot of different ways to measure revenue. You can look at it from a global perspective or from a regional perspective. You can break it down by product or by source.
But no matter how you slice it, revenue is always an important metric. As you can see, there are a lot of different ways to measure success in the entertainment industry. It’s not always easy to do, but it’s important to do so.
How do Different Entertainment Sectors Measure their Revenues?
When it comes to entertainment, there are different types of entertainment sectors. Each entertainment sector has its own way of measuring revenues.
For example,
- The film entertainment sector measures success by box office numbers.
- The television entertainment sector measures success by ratings (viewership).
- The music entertainment sector measures success by record sales.
- The book entertainment sector measures success by book sales.
- The sports entertainment sector measures success by ticket sales and viewership.
As we mentioned, each entertainment sector has its own way of measuring revenues. But at the end of the day, revenue is still the most important metric. It’s how you stay in business. And it’s a good indicator as to whether or not your entertainment product is successful.
How Can this Industry Get Back to In-Person Entertainment Revenues Again?
Despite swift subsidence, the pandemic’s effects will likely linger for some time. Is that bad news for live entertainment?
For venues like concerts, sports stadiums, and movie theaters, the challenge may be attracting customers who are less inclined to venture out of the house. What can they do to demonstrate that the onsite experience is better than what people can get at home?
Entertainment venues can evolve into flexible spaces to drive revenue and foot traffic. Venues can also look to technology to enhance the customer experience.
Some ideas include implementing:
– In-venue augmented reality or virtual reality experiences
– Ticketless entry and express pick-up for pre-ordered concessions
– RFID wristbands that can be used to purchase merchandise or access VIP areas
The entertainment industry is always changing. It’s hard to stay on top of things sometimes. But that’s what Oak Business Consultant is here for. We’re here to help you with all your financial guidance needs. Whether it’s measuring success or simply staying in business, we can help.
Working Capital
Working capital is a measure of how much cash a company has available to them. You can calculate it by subtracting current liabilities from current assets.
Current assets are things like cash, accounts receivable, and inventory.
Current liabilities are things like accounts payable and loans.
Working capital is an important metric because it tells you whether or not a company has the cash they need to operate. If they don’t, they’ll likely go out of business. The entertainment industry is no different. They need to have a good working capital in order to stay afloat. But this working capital differs majorly from one entertainment sector to the other.
Working Capital for Movies Production
In the movie production industry, a good working capital is anywhere from 3 to 6 months of operational expenses. That’s because movies can take a long time to produce and they often go over budget.
Movies also have a lot of upfront costs. For example, they need to pay for actors, crew, locations, and equipment. So, it can take a while for them to see any profits.
Working Capital for Television Entertainment
In the television entertainment industry, a good working capital is anywhere from 3 to 6 months of revenue. That’s because TV shows are typically produced in batches. Also, they usually air within a few months of production.
TV networks also have upfront costs, but they’re not as big as movie studios.
Working Capital for Music Entertainment
In the music entertainment industry, a good working capital is anywhere from 3 to 6 months of revenue. That’s because it takes a long time to produce an album and there are a lot of upfront costs.
Musicians also have a lot of touring expenses. So, they need to have good working capital in order to stay afloat.
Working Capital for Sports Entertainment
The sports entertainment industry is one of the most lucrative in the world. They bring in billions of dollars in revenue every year.
But, to stay in this industry, they need a lot of working capital. That’s because it takes a lot of money to keep things running. They need to pay for athletes, coaches, and stadiums. They also need to cover advertising and marketing costs.
Budget Variance
Budget variance is another important financial metric in the entertainment industry. It tells you how much a company has over or under-budgeted for a project.
This is important because it can help companies learn from their mistakes. If they know that they’re always going over budget, they can take steps to correct that.
The entertainment industry is constantly making new movies, TV shows, and albums. And with every new project, there’s a new opportunity for budget variance. That’s why it’s so important for companies in this industry to track it closely.
If you are not sure how to track your budget variance, Oak Business Consultant’s professional help is just a click away!
Debt to Equity Ratio
The debt to equity ratio is a measure of how much debt a company has compared to how much equity they have.
You can calculate it by dividing total liabilities by total shareholders’ equity.
This is important because it tells you how risky a company is. A high debt to equity ratio means that a company is taking on a lot of risks. And, in the entertainment industry, that’s not a good thing.
That’s because companies in this industry are often hit with lawsuits. If they can’t pay their debts, they could go bankrupt. That’s why the debt to equity ratio is so important for companies in this industry.
Cash Conversion Cycle (CCC)
The cash conversion cycle is a measure of how quickly a company can turn its cash into revenue. You can calculate it by subtracting accounts receivable from accounts payable.
This is important because it tells you how efficient a company is. A high cash conversion cycle means that a company isn’t very efficient. And, in the entertainment industry, that’s not good news.
That’s because companies in this industry need to be efficient in order to stay competitive. They need to be able to turn their cash into revenue as quickly as possible. We use this metric to determine how long it will take a company to sell its inventory, collect its receivables, and pay its bills with no penalties. Depending on the nature of business operations, the CCC may differ.
Cash Conversion Cycle (CCC) Formula
In order to calculate the net aggregate time involved in the cash conversion lifecycle, the CCC mathematical formula is as follows:
CCC = DIO + DSO − DPO
where:
DIO=Days of inventory outstanding, DSO=Days sales outstanding, DPO=Days payables outstanding
While DIO and DSO are related to cash inflows, DPO is linked to cash outflows. This is the only negative figure in the calculation. Alternatively, you can consider DIO and DSO as linked to inventory and receivables, respectively, which are considered short-term assets and are taken as positive. A negative DPO is associated with accounts payable, a liability.
There are three distinct stages in the cash conversion cycle of a company. You must consider several items in the financial statements to calculate CCC.
Payroll Headcount Ratio
The payroll headcount ratio (PHCR) is a financial metric used to measure a company’s efficiency in employing its workers. The PHCR is calculated by dividing the company’s total payroll cost by its total number of employees.
This metric is most commonly used in the entertainment industry, as it is a labor-intensive industry. A high PHCR indicates that the company is spending a lot of money on payroll, while a low PHCR suggests that the company may be understaffed.
There are a few factors that can affect the PHCR, such as the type of work being performed and the cost of living in the area. For example, a company that employs mostly actors will have a higher PHCR than one that employs mostly stagehands, as actors tend to have a higher salary.
Similarly, a company located in a high-cost living area will have a higher PHCR than one located in a low-cost living area.
The PHCR can be used to determine if a company is over or understaffed, and can help managers make better decisions about hiring and firing employees.
Revenue Per Employee
The revenue per employee (RPE) metric is used to measure how much money a company makes per employee. This metric is calculated by dividing the company’s total revenue by its total number of employees.
This metric is important for companies in the entertainment industry, as it can be difficult to generate large sums of revenue. A high RPE indicates that the company is making a lot of money per employee, while a low RPE suggests that the company is not generating as much revenue.
There are a few factors that can affect the RPE, such as the type of work being performed and the cost of living in the area. For example, a company that produces movies will have a higher RPE than one that publishes books, as movies tend to generate more revenue.
Similarly, a company located in a high-cost living area will have a higher RPE than one located in a low-cost living area.
The RPE can be used to determine how effective a company is at generating revenue and can help managers make better decisions about which types of work to pursue.
Why Choose Oak Business Consultant for Financial Analysis?
Oak Business Consultant is a professional services firm that provides financial analysis to companies in the entertainment industry. We have years of experience working with companies in this industry and understand the importance of these financial metrics.
If you’re looking for help understanding your company’s financials, or need assistance calculating these metrics, contact us today. We would be happy to help!
Drive Your Entertainment Business Forward with Precision Financial Insights
