West Ham 2018/19: Flares’n’Slippers

In January 2020 David Sullivan, West Ham’s controlling shareholder said “Overall, I believe the club’s in a far better state than 10 years ago” so we thought we’d put that to the test with a look at the club’s finances during that period.

Decade of success or standing still? The West Ham that Sullivan and Gold acquired from the former Icelandic Bank owners was certainly in crisis, but have their efforts improved the happiness of fans who now attend the rented London Stadium?

Rebelling fans know West Ham have just announced their accounts for the year ended 30 June 2019, and like events on the pitch last season, disappoint more than excite.

Income

A Football club generates income from three main sources, matchday, commercial and broadcasting.

The matchday income for West Ham in 2018/19 was £27.1 million, which is just £200,000 more than the club’s final season at the Boleyn, and £7 million more than most of the preceding seasons.

Having this amount of matchday income puts West Ham 7th in the Premier League, but a long way behind the ‘Big Six’ that fans thought the club would be challenging when they said farewell to their spiritual and cultural home in 2016.

Every club generates matchday income by (number of matches x average price per ticket x average attendance) and here despite big attendances West Ham are ahead of the provincial clubs but behind the elite.

Relatively low prices at the London Stadium, which has a traditional old school working class fanbase, coupled with fewer matches than those clubs playing in UEFA competitions, meant that West Ham generated only 28 pence per seat for every £1 that Chelsea made last season.

Being tenants at the London Stadium also means that West Ham can effectively only make cash from the stadium for 19 days a season (plus any home cup matches) whereas Spurs can sweat their asset in the form of the new stadium with NFL matches, conferences, catering and concerts.

Every club has a season ticket price policy and West Ham, to their credit, seem to have some available at £299 (£320 for 2019/20) but for some matchdays the cheapest adult tickets are £55 each, which doesn’t include the binoculars needed to see the pitch from these vantage points.

Being able to exploit the modern facilities of the new stadium for commercial gain was another justification for the move in 2016, and this appears to have some merit.

A look at the commercial income totals shows that West Ham have doubled this revenue source over the last decade, with a noticeable jump since moving to the new stadium in 2016/17.

Commercial income follows that of matchday in that West Ham are again ‘best of the rest’ (Everton’s should be treated with caution following their deals with Putin pal Alisher Usmanov) but still far behind the elite.

Keeping up with the Big Six of the Premier League is unrealistic for West Ham unless they can offer sponsors UEFA competition exposure or the attraction of players that have huge social media followings.

A look at Broadcasting income shows a similar story, with West Ham recoding record figures that look good compared to the club’s history, but pale into insignificance when matched against the peer group they want to challenge.

The increase in broadcast income was mainly due to West Ham finishing 10th last season compared to 13th in 2017/18, as each additional place is worth just under £2 million.

The importance of qualifying for European competition is evident from the above table which shows the benefits to the elite clubs for reaching the latter stages of the Champions and Europa League, which can be worth up to an extra £100 million in prize money plus additional gate receipts and sponsor add-ons.

Having European qualification would change things for West Ham but realistically they would have to be regular participants there before competing in the same pond as the ‘Big Six’.

Even if the club did make it to the Europa League, they are now competing for places with Everton, Wolves and Leicester domestically, all of whom have owners who are keen to pour more money into their clubs to secure higher places in the table.

Broadcasting income growth has fallen domestically for the three years starting 2019/20 but the rise in the international rights has offset that, realistically there is limited future growth in traditional TV rights.

Overall West Ham are stuck against the glass ceiling in terms of being the 7th biggest revenue generators in the Premier League but still only earning half of that of Arsenal, the next club in the earnings league.

Costs

Like it or lump it, player related expenses are the highest element of a club’s cost base and generate endless discussion from fans and the media.

Every club needs to pay competitive wages to attract talent, resulting in what Sir Alan Sugar calls the ‘prune juice’ effect of additional money coming into the top of the game quickly exiting at the bottom in the form of player wages and transfer costs.

Year on year in 2018/19 wages increased by over 27% to an average weekly sum of £63,000 for first team regulars.

No one will be surprised that West Ham have the 8th biggest wage bill as they have the 7th biggest income stream, what will disillusion fans is the failure to make more progress on the pitch given that the unpopular owners have invested money on the pitch, albeit poorly.

The concern with the wage bill is that West Ham spent £71 on this for every £100 of income, UEFA recommend keeping this to no more than £70 so realistically the club have limited wiggle room in recruiting new players unless some existing ones leave.

Having a new signing does not mean that the whole fee is charged as an expense immediately due to the accounting dark art that is amortisation.

Amortisation is the effective rental cost of a player in relation to the transfer fee paid for his registration.

Numbers for individual transfer fees are difficult to obtain, but amortisation totals give a good long term indicator of the investment in players by the club.

Amortisation is the transfer spread over the contract life so when West Ham signed Haller for £40 million on a five-year contract, this will result in an annual amortisation charge of £8 million a year.

Squad amortisation for 2018/19 was a record £57 million, up 40% on the previous season, again suggesting investment was made, but the decisions made by the recruitment team were unsuccessful.

Overall West Ham’s amortisation cost for the last decade was £270 million, and has increased noticeably in recent years, but this has not turned into better football being seen by fans.

Under a succession of managers West Ham’s recruitment policy looks poor when compared to the amortisation costs of the likes of Spurs or Leicester, with Liverpool’s being only moderately higher too.

Looking at the rapid increase in amortisation costs indicates that West Ham have spent large sums recruiting players from other clubs and paying them handsomely, but the quality of the recruitment must be called into question.

Life in the boardroom at West Ham isn’t easy in the sense that many fans blame Gold, Sullivan and Brady for the lack of progress on the pitch, but this is offset by a 27% pay rise for West Ham’s CEO.

Ed Woodward at Manchester United, another unpopular executive, is the highest paid club CEO but there are now a considerable number earning million pound plus sums each year.

Some West Ham fans may be surprised that the club did make over £12 million profit last season from selling players, nearly all of this is likely to be in respect of Kouyate joining Crystal Palace and Reece Burke going to Hull.

Profits

So overall West Ham went from a profit before tax of £18 million to a loss of £28 million in 2019.

By looking at the above table it’s evident that West Ham’s player policy is the main reason for the reversal of profits is player related.

Owners David Gold and Sullivan have not endeared themselves to fans by charging a further £1.9 million on their £45 million loan to the club though, taking the total interest charges to over £18 million, not a game changer to the club, but high when compared to some other owners, including Mike Ashley at Newcastle, who for all his faults has lent £111 million interest free. .

West Ham managed to fund the loss last season by borrowing money secured on future broadcast rights, whilst this is a common event in the Premier League it will cause problems if the club is relegated.

Losing Premier League status would be challenging for West Ham, but the auditors seem happy with the club’s going concern status and many players have significant relegation wage clauses in their contracts.

Player trading

West Ham signed players for £108 million in the year to 31 May 2019 as Anderson, Diop, Yarmolenko, Fabianski and Co were recruited. Sales were a modest £14 million. Since then the club spent a net £36 million in the summer 2019 window and Bowen, Randolph and Soucek in January 2020.

Over the course of the last decade West Ham spent a total of £444 million on players and recouped about a third of it in sales. What is noticeable is that the club has made many of the player signings on credit, which could be a concern if the club is relegated.

Funding

West Ham have borrowed money from a variety of sources. Gold and Sullivan have lent £45 million and presently charge interest at 4.25%. In addition, there was a £42 million loan from Rights and Media Limited, which was half paid off shortly before the year end and so reduced the liability at the balance sheet date. The loan was then effectively renewed shortly after the year end. David Sullivan candidly admits that 75% of the club’s income is effectively generated between 31 May and 31 July.

The criticisms levelled at the owners are that other club owners have lent money to the club and not charged interest, including the US investors at West Ham, who own 10% of the company. Whilst the interest charged ultimately is relatively insignificant (1.8%) of revenue if the club is not delivering on the pitch then it sticks in the throat of those who have given up what has been a huge part of their lives for an anodyne extension to a shopping centre.

Summary

So, where does this leave West Ham? There is no doubt that the Gold, Sullivan and Brady are unpopular with a large proportion of fans. They hugely overpromised and underdelivered in relation to the benefits of the stadium move. The very big financial gap between West Ham and the ‘Big Six’ is as big as ever. What was so great and identifiable historically about West Ham has been lost in the shape of being representative of East End working class culture has been replaced with a very bland, very corporate and very anonymous ‘matchday experience’ that is for many a price too high. If the club was closer in the Premier League table as it is in the income and wage table then perhaps a lot would be forgiven, but until then it’s going to be a hostile environment and a sense of loss by the fans.

Brighton 2018/19: Switch

Introduction

As easy as riding a bike

A lot of money is required to get to the Premier League, but as the 2018/19 Brighton and Hove Albion accounts reveal, it takes a lot to stay there too.

Losses of £21 million were announced for the year to 30 June 2019, reversing a profit of £12 million the previous season as the club finished in 17th position in the table.

Investment in players was the main reason for the deterioration in the financial results, as well as some one off costs following Chris Hughton’s sacking the day after the season ended.

Income

Just ten years ago Brighton’s income was £5 million for the whole season, but this had increased to £143 million by 2019.

A football club generates income from three main sources, matchday, commercial and broadcasting.

Having sold out matches at the Amex for the club’s two seasons in the Premier League matchday income was static in 2018/19.

A club can only increase matchday income by increasing prices, capacity or the number of events that take place at the stadium.

No league attendances fell below 29,600 last season as the club sold out most home matches at the Amex stadium and whilst there were three cup matches at home these were at discounted prices so had little impact on total matchday revenue.

Brighton’s matchday income put it 12th in the Premier League table (note figures are for 2017/18 for most clubs as they haven’t yet published their accounts) which is intuitively higher than you might expect with the club being above the likes of Everton and Leicester.

A look at the small print of club accounts however reveals that some clubs treat the likes of merchandise and hospitality boxes as matchday income and others as commercial, which makes a 100% accurate comparison impossible.

Keeping attendances at close to capacity is a tricky exercise and means that Brighton cannot increase ticket prices too aggressively in case fans revolt.

Sponsorship income mainly comes from American Express and Nike for Brighton and this increased by 7% in 2018/19 but should accelerate due to a revised Amex deal worth an estimated £100 million over the next decade compared to £1.5m a year at present.

Half the clubs in the Premier League have gambling companies as sponsors who historically have paid more than other industries for the non ‘Big Six’ clubs but Brighton seem to have bucked the trend by aiming for a long term relationship with American Express which seems to have paid off.

Income from broadcasting is the main source for non Big-Six teams and Brighton are no exception and last year benefitted from an improved Premier League overseas deal plus an FA Cup run to the semi finals.

Seventeenth position in the Premier League meant that Brighton earned £4m less from the prize pot but this was offset by the other issues, meaning that almost four pounds in every five came from broadcasting.

Total income for Brighton was therefore a record £143 million, but this was not sufficient to prevent them losing money last season and still puts them in the bottom half of Premier League clubs.

Player Costs

Having been promoted in 2017 Brighton’s costs in their first season in the Premier League increased more slowly than income, allowing the club to make a profit, but this benefit reversed last season as Sir Alan Sugar’s ‘prune juice’ comment was evident and wages absorbed more and more revenue.

Every fan knows that player costs are the most significant expense for a football club and this is the main reason why Brighton lost money in 2018/19.

Player’s wages were the main driver of the bill increasing by over 30% to £101 million last season, as new contracts for Dunk, Duffy and Gross, plus the signing of Jahanbaksh, Bernardo, Montoya, Andone, Burn, Bissouma, Button, MacAllister, Tau and others came in with Premier League wage expectations.

Even so, Brighton’s total wage bill is still relatively modest by Premier League standards, and the total cost for the season for all 20 clubs could top £3 billion for 2018/19 once all the remaining clubs publish their accounts.

Relative to every £100 in income Brighton paid out in £71 wages last season, UEFA have a ‘red line’ of £70 although this is far lower than the majority of their time in the Championship.

Some fans may remember Brighton’s first season in the top division in 1979/80 wheret the wage bill for all whole staff was £785,000, equivalent to what the average Brighton first team player earned last season in four months.

In the content of the Premier League as a whole Brighton’s wages are still quite modest, partly as a legacy of being relatively recently promoted and this puts them in the main bunch of provincial clubs in the division.

Amortisation is the other player expense, which is calculated as transfer fees spread over contract life, so the signing of Ali Jahanbaksh for £16 million on a five-year deal works out as an annual amortisation cost of £3.2 million (unless you’re Derby County, in which case it is mysteriously lower).

Nevertheless, despite the amortisation charge increasing by 500% since promotion in 2017 Brighton’s total of £33m again places them, as you would expect from a squad that still has a number of Championship and academy/youth signings, towards the bottom of the Premier League table in regards to this expense category.

Profits/(Losses)

Profit (and losses) are calculated as income less costs and Brighton’s pre-tax loss of £22 million may have surprised some but the figure was impacted by the cost of sacking Chris Hughton and paying compensation to Swansea for Graham Potter.

‘Exceptional’ items as the above management changes are called are usually set out in detail by Premier League clubs (such as Manchester United sacking Mourinho for £19.6m and Arsenal having £3.1m in their 2018/19 accounts too) but Brighton are notoriously coy when it comes to disclosures and have frustratingly not disclosed any details here.

Losses would have been higher had it not been for selling some fringe players which generated modest profits, without these Brighton’s losses would have been £24.6 million.

Everton made the highest losses in the Premier League of over £1 million a week in 2018 and what may surprise many is that only a Norfolk handful of clubs made a profit, relying on owner bailouts and player sales to cover the losses.

Player trading

Brighton’s singings detailed above cost a combined £78 million in 2018/19 although their impact on the pitch can best be described as ‘mixed’ none of them made a huge impact on the pitch. This took the total cost of the squad to £152 million.

In the summer 2019 window Brighton bought Maupay, Webster, Trossard and Clarke, but again, unlike most Premier League clubs, frustratingly didn’t disclose the gross or net spend in the window.

Funding

Brighton have been dependent upon owner Tony Bloom for over a decade. He originally was providing money for signings (such as Glenn Murray from Rochdale in 2007 for £300k) behind the scenes but since becoming chairman has underwritten the cost of the stadium, training ground and operational losses to a total of £352 million.

This investment is split between interest free loans and shares, and 2018/19 was no exception as he lent the club a further £49 million to provide funds for further infrastructure and player spending.

Whilst no doubt Bloom wants the club to be self sufficient at some point, at present his benevolence has advanced the club from the wrong end of League One to a third season in the Premier League. More investment may be required if his stated aim of a regular top ten place in the Premier League is achieved.

Summary

So, where does this leave Brighton? The achievement of getting to and staying in the Premier League had worn off for both fans and owner last season as Chris Hughton’s pragmatic but unlovable football during the second half of the season ultimately led to his dismissal.

The club still needs time to establish itself in the Premier League and no doubt has seen how the likes of Sunderland, Middlesbrough and Stoke have struggled when relegated to the Championship.

Fans have been impressed with the style of football under new manager Graham Potter, but with a very compacted middle part of the table two or three consecutive wins or defeats can have a club such as Brighton eyeing up Europa Cup or relegation spots.

The losses made by Brighton last seaon do perhaps suggest that those who think that buying a club in the Championship or League One and underwriting losses to get to the Premier League are probably chasing fool’s gold.

Brighton are fortunate to have an owner in Tony Bloom who has a strategy for the club and as such is unlikely to indulge in some of the madcap short term schemes that have left many in the EFL looking very vulnerable. Those club owners gambling on selling stadia, unusual sponsorship deals and creative accounting are taking a huge risk.

Manchester United 2018/19: Waterfall

Now, you’re at the wheel, tell me how, how does it feel? So good to have equalized, to lift up the lids of your eyes

In May 2018 Ed Woodward, Manchester United’s vice-chairman said, “Playing performance doesn’t really have a meaningful impact on what we can do on the commercial side of the business.”

Down at the Stretford End hardcore United fans were unimpressed with the comment at the time and no doubt Woodward is squirming after the club’s moderate start to the 2019/20 season.

Reds fans know United have just announced their accounts for the year ended 30 June 2019, and like events on the pitch last season, they are a mixed bag of results.

Income

A Football club generates income from three main sources, matchday, commercial and broadcasting.

A screenshot of a cell phone

Description automatically generated

The matchday income for Manchester United in 2018/19 was £111 million, impressive by Premier League standards and above that of any other club in that division (whose figures are from 2017/18 as no one else has published results yet). .

However, there has been hardly any growth in matchday revenue since Sir Alex Ferguson retired in 2013 and critics say that Old Trafford is falling behind rivals in terms of modern facilities and comfort.

A screenshot of a cell phone

Description automatically generated

Each club’s matchday income is calculated as the number of home matches played multiplied by the average attendance multiplied by the average ticket price.

Respect is due for United keeping season ticket prices frozen for the eighth year and Old Trafford is sold out every match, so there is little opportunity to increase this income stream unless Old Trafford has its capacity increased.

Historically commercial income is where United have been the smartest kids on the block through their policy of selling rights to commercial partners in different countries for similar products and services.

A concern for the boardroom at Old Trafford is that this total too was relatively static in 2018/19 and perhaps suggests a lack of silverware is taking its toll as sponsors like to associate their products with success.

A screenshot of a cell phone

Description automatically generated

Very few clubs can match United’s global appeal, but the club’s kit deals with adidas and Chevrolet signed a few years ago effectively locked it into long-term totals and other clubs are starting to catch up.

Even though broadcasting income increased by 18% in 2018/19 the numbers hide a more concerning story.

Reporting an increase in broadcast income of £37 million sounds impressive this was all due to a new Champions League TV deal starting in 2018/19.

In winning the Europa League 2016/17 United made £38 million in prize money.

Champions League prize money of £83 million was however made in 18/19 when United made the quarter finals of the Champions League but as UEFA award 80% of prize money for the Champions League and 20% for the Europa League United will face a drop this season. .

Having new ten-year club coefficients come into play in 2018/19 for clubs in the Champions League helped United earned €31 million, more than any other English club from this particular pot on the basis of their historic success over the last decade.

As there was success for other English clubs in UEFA competitions last season combined with United’s 2009/10 Champions League performance slipping out of the ten year equation has however seen Manchester City and Liverpool advance ahead of United in the club coefficient.

Results in the Premier League were moderate leading to a fall from 2nd to 6th and meant that Manchester United’s domestic broadcast earnings fell from £155 million to £148 million.

Despite this United still top the table for total income over their ‘Big Six’ peer group but the lead is eroding.

Keeping ahead of rivals financially is essential if United are going to compete for players and whilst in 2017 United earned £217 million more than Liverpool, the following season this fell to £135 million.

European success for Liverpool and/or Manchester City in the Champions League in 2019/20 could eliminate the gap totally, with Spurs coming up on the rails on the back of the new stadium.

One of the footnotes in United’s press release states the club expect 2020 revenues to be in the £560-580 million range, a fall of up to £70 million.

Costs

Getting costs under control for a club is difficult as the main expenses are player related, in wages and amortisation.

Having to keep up with the competition, United’s wage bill, despite paying fewer win and trophy bonuses than the previous season, increased to £332 million in 2018/19.

Alexis Sanchez’s contract for the full season, along with new contracts for some other players and Champions League participation bonuses being triggered, were the main drivers of the 12% wage bill increase.

The wage bill at United since Sir Alex Ferguson retired in 2013 has increased by 83%, putting the average weekly wage at approximately £160,000 a week.

This means that the wage bill is by some distance the highest in the Premier League but remember that other clubs have not yet reported figures for 2018/19.

Having a high bill is affordable on the back of United’s revenue streams, with wages representing £53 of every £100 of income generated, the highest for a decade.

Even so United fans can be relatively relaxed as this is well below UEFA’s ‘red line’ of 70% when comparing wages to income.

Wages are one way of attracting talent but the other means is through player signings and these are dealt with in the profit and loss account via amortisation.

Having a new signing does not mean that the whole fee is charged as an expense immediately.

Every fee payable is spread over the contract life so when United signed Fred from Shakhtar Donetsk last season for £52 million on a five-year contract, this resulted in an annual amortisation charge of £10.4 million a year.

Every amortisation charge is then added together to give a total charge for the whole squad last season of £129 million, treble the amount of when Sir Alex was last in charge.

Looking at the rapid increase in amortisation costs indicates that Manchester United have spent large sums recruiting players from other clubs and paying them handsomely, but the quality of the recruitment must be called into question.

The two English clubs who participated in the Champions League final last season together had a lower amortisation charge than Manchester United, and remember that Rashford, Lingard and McTominay all are academy recruits with no amortisation cost.

Having sacked Jose Mourinho and his entourage during the season, United had to pay off their contracts at a cost of £19.6 million, which took the total cost of getting rid of managers to £40 million since 2013.

A surprise for some fans is that United boosted their profits with player sales that made the club £26 million as Fellaini, Blind and Johnstone left Old Trafford.

Profits

Net profits are calculated as total income less total costs, but before getting to the bottom line Manchester United had trading profits from their day to day operations of £50 million in 2018/19, an increase compared to the previous season but still lower than in 2013.

Every United fan knows that the Glazers borrowed £790 million in 2005 and at the time lenders were very wary about giving the club money so charged interest rates up to 16.25%.

Developing a reputation for making the interest payments on time was essential for United and the club managed to convince the markets it was generating enough cash from its day to day operations to reschedule the loans at lower rates in recent years.

Whilst the annual interest expense has fallen to just £22 million last season the total cost since 2005 has now reached £809 million, exceeding the sum originally borrowed.

Overall taking into account interest and tax costs Manchester United made a profit of just under £19 million, lower than some other clubs who had the benefits of much larger player sale gains the previous season.

Out of those profits £23 million was then paid from the club in the form of dividends to shareholders, United are the only club in the Premier League who make such payments to the Glazer family and hedge funds who own nearly all the shares in the club.

Player trading

Diago Dalot, Fred, Dan James and Aaron Wan-Bissaka arrived at Old Trafford in the year to 30 June 2019 for a total of £135 million, the latter two of course arrived just before the end of United’s year end.

Whilst United have now spent over £1 billion on new signings since Sir Alex retired, the quality of the signings has been questioned as the likes of Di Maria, Lukaku, Sanchez and Bailly have not justified the fees paid for them.

A glance at the footnotes to the accounts shows United have been busy in the transfer market since 30 June 2019 too, spending £99 million on new players and extending some existing player contracts, mainly on Maguire and De Gea.

Romelu Lukaku’s sale post the accounting year end is shown at £67 million, presumably in relation to Romelu Lukaku. This figure seems much lower than the amount quoted in the media but may be net of agents fees on the deal.

Debts due to other clubs on transfers to £188 million at 30 June 2019, although this figure is another which has risen rapidly since Sir Alex retired.

Summary

So, where does this leave Manchester United? There is no doubt that the Glazers and Ed Woodward are unpopular with a large proportion of fans. The lack of trophies in recent years is now perhaps catching up with the club as it no longer shows the incredible growth in sponsorship deal values that took place once upon a time. So perhaps Ed is wrong and playing performance does really have a meaningful impact on the commercial side of the business, and that might worry the owners and investors as it has done the fans in recent times. Whether that will result in an improvement in United’s fortunes on the pitch if the club is driven by the manager instead of the commercial department is an unknown.

Hull City 2018/19: Doppelganger

Too many Florence Nightingales, not enough Robin Hoods

Assem Allam, the Hull City owner, is not a popular man with the fans of the East Riding Championship club.

Last season the club finished 13th in the Championship which was a reasonable if forgettable position.

Losing 8 games out of the first 12 had left Hull at the bottom of the division in October but things improved on the pitch slowly and at one point Hull were in with a chance of making the playoffs.

A look at the club’s accounts reveals a mixed bag too, although the club deserve some credit for (again) being the first of the 92 to publish results for the previous season.

Many fans believe the Allam’s have put their own interests ahead of the club and stunts such as changing the name of the club’s company to Hull City Tigers Limited have not helped the situation.

Income

We need to split a club’s income into three main areas, matchday, broadcasting and commercial, to get a feel for how a club is performing both historically and compared to others in the division.

Earnings from matchday sales last season fell by nearly 15% to £6.1 million, the lowest for six years.

Average attendances fell below 10,000 as fans voted with their feet in terms of the toxic relationship with the owners, as well as a poor start to the season on the pitch.

Relative to other clubs in the division (from 2017/18 figures) Hull’s matchday income is reasonable but doesn’t give the club much of a base to compete for players.

Selling deals to sponsors and commercial partners is challenging for a club such as Hull due to geographical and historical reasons and being in a city that also has two rugby league teams, which helps explain why such income source has decreased by 85% since the club was in the Premier League in 2016/17.

Leeds and other large clubs in the Championship can sell the size of their fanbases to sponsors, but the likes of Hull have to fight over the scraps, resulting in the likes of my all time favourite shirt sponsor Flamingoland being plastered over the shirt a few seasons ago.

In being a member of the Premier League in 2016/17 Hull have had the benefit of two years of parachute payments to help deal with the legacy of large player contracts and outstanding transfer fees from the top tier.

Next/this season (2019/20) Hull will lose parachute payments which are usually given for three seasons but this is reduced to two if a club is promoted and then relegated in the first season in the top flight, as happened in 2016/17.

Going into the EFL broadcasting deal in 2019/20 will mean that Hull’s broadcast income will fall to about £7 million from £40 million, which will result in a major belt tightening exercise.

Every club in the Championship gets about £2.3 million from the EFL’s own deal with Sky as well as a £4.3 million ‘Solidarity’ fee from the Premier League, and a separate fee for each match that is chosen for live broadcast.

Relative to most clubs in the Championship Hull fared very well in terms of broadcast revenue last season but they will drop to close to the bottom of the table in 2019/20.

In the EFL some club owners feel the deal negotiated by the unpopular Shaun Harvey short-changed them but realistically they will struggle to generate significantly more than the existing arrangement, which is split 80% to the Championship, 12% to League One and 8% to League Two clubs.

Even if the Sky deal, which lasts five years, was scrapped, it’s unlikely that a new broadcaster would be willing to pay much more, as armchair fans tend to focus on the elite Premier League teams and the remainder of that division are simply fortunate that collective sale of rights takes place.

Overall Hull’s income dropped to £48 million in 2018/19 but unless the club is promoted expect it to drop to levels similar to those earlier in the decade of about £17-18 million.

No business should be over-reliant on a single income source but Hull had 83% of their coming from broadcasting last season and will suffer a significant hit when this declines.

Total income for Hull last season exceeded that of the likes of Leeds and Derby (or Frank Lampard’s Derby County, to give them their proper name from last season) which will suspect fans of all three clubs we suspect.

Costs

Having to compete in the Championship is expensive and the main reason for this is due to player costs in both wages and transfer fees.

Unlike in League One and League Two, the EFL do not operate a soft wage cap in the Championship and this means that some clubs live beyond their means in terms of what they pay players.

Rollercoaster wage totals are a feature of Hull’s wage bill over the last decade as the impact of promotion, relegation and bonuses is highlighted in the figures above.

Spending less on wages than for the last six years meant that Hull’s squad contained a mixture of players who were reluctant to take a pay cut to leave alongside untried signings and academy step ups.

Despite the 20% decrease in wages we estimate players at Hull were still on about £600,000 for last season, so sympathy is unlikely to be in great supply for them, although expect this figure to fall significantly in 2019/20.

A lot of clubs in the Championship pay more out in wages than they generate in income but Hull are at the bottom of this table but this may change as parachute payments cease.

Year on year over the last decade Hull have had very good wage control by Championship standards, but they have also had the benefit of promotions and the accompanying parachute payments during the period.

A screenshot of a cell phone

Description automatically generated

No other industry than football would tolerate spending more on wages than income but from a fans’ perspective so long as the club is promoted the end is justified by the means.

Intangible asset (transfer fee) amortisation is the other main expense in relation to players where the transfer fee is spread over the life of the contract.

George Long signed for Hull for about £135,000 on a three year contract, so his annual amortisation cost would be £45,000 (£135,000/3).

Hull’s total amortisation cost for the squad last season was £13 million in relation to a squad which at the start of the season cost £36 million.

The amortisation fee in the profit and loss account considers all the squad players signed for fees and reflects the longer-term investment in transfers.

Some Hull fans might be surprised the amortisation charge increased last season but this reflected that relatively few high cost players were sold.

One additional operating cost that Hull have to pay is rent in relation to the stadium. Under the agreement with the Allam owned Superstadium Management Company Limited Hull appear to have to pay rent that increases by 10% a year. This has resulted in rent increasing nearly doubling from £425,000 to £835,000 since 2014.

Profits/(Losses)

Profits are revenues less costs and Hull just about broke even last season and have made profits in three years out of the last nine, again on the back of Premier League membership.

The only way that clubs can usually reduce these losses is via player sales or owners underwriting them. Hull have had relatively some success in terms of player sales in recent years making profits on player sales of £82 million.

The Allam’s have lent money to Hull but have charged interest on the outstanding loans. Hull have paid out nearly £23 million in loan interest so far this decade although not all of it necessarily relates to the owners.

Player Trading

Last season Hull were relatively quiet in the transfer market by historic standards.

Net transfer income of £2.7 million in 2018/19 was not competitive by Championship standards.

Owner Funding

Club owners can invest money in three ways, loans (which may or may not be interest bearing, share issues or related party transactions such as the stadium sales at Derby, Villa, Sheffield Wednesday and Reading.

Hull repaid the Allam’s about £13 million last season to take the sum down to £50 million, which may or may not be a coincidence of the alleged price the Allams are looking for when selling the club.

Conclusion

Hull financially have done well to break even on a day to day basis last season but that ignores that their main income source is about to dry up.

Unless a speedy resolution to the conflict between the owners and fans takes place the club is going to struggle to compete in the Championship and attendances could fall even further below the present levels.

Some might say the accounts are out extremely early to give the Allams more time to market the club to potential investors before there’s a deterioration in the financial numbers in 2019/20.

Scunthorpe United 2018: The Light Pours Out Of Me

If you think this is do or die try the playoffs

Introduction

Peter Swann, the Scunthorpe United owner, recently claimed “we are probably one of the best-run clubs in the Football League” so it’s time to take a look at the finances of the Lincolnshire team, presently sat at the bottom of League Two.

EFL chairmen may have to decide soon in terms of Bury’s appeal to be reinstated to the league and if so, there will be two rather than one sides relegated to the National League.

The chances of a club in a position similar to that of Scunthorpe voting for reinstatement are remote as it could be the difference between survival or demotion to the National League.

Income

Every football club has three main sources of income, matchday, broadcasting and commercial.

Relying on crowds of just over 4,000 is not going to be sufficient for a club to survive and these have brought in around £1 million per season in recent years.

Some clubs in League One have average attendances three or four times those of Scunthorpe which shows that the club was at a disadvantage in terms of this income source.

We would like to show matchday income for more clubs but sadly many take advantage of a legal loophole for small businesses that allows them to avoid showing many types of income and costs.

A club in the EFL receives two types of broadcast income, solidarity payments from the Premier League (about £900k for a L1 club) and a share of the EFL’s own TV deal with Sky (£500k for a L1 club).

New rules introduced by the Premier League will result in solidarity payments falling as the owners of the elite clubs think they are subsidising smaller clubs too much.

Nervous owners of clubs in League One and Two will also be concerned at the noises coming from some Championship club owners too who want to renegotiate the EFL deal and it’s unlikely these owners will be wanting to give smaller clubs a bigger share of the pie.

How the money is split at present is 80% to Championship, 12% to League One and 8% to League Two so Scunthorpe realistically can expect about £950k this season from broadcasting.

A form of parachute payment is made when clubs are relegated to the National League, where clubs would get 100% of the EFL money in the first season and half of this sum in the second.

Sponsorship, advertising, commercial, hospitality and academy revenue in the admirably detailed Scunthorpe accounts amounted to £1.7 million in 2017/18, more than doubling in the last five years.

A screenshot of a cell phone Description automatically generated

The importance of such income streams is critical to a club the size of Scunthorpe especially with relatively modest attendances so credit should be given to whoever is negotiating sponsor and commercial deals.

Having commercial income as the biggest income contributor, as Scunthorpe have managed recently, does give the club more control issues that the off-field team can’t control, such as broadcast money splits and relegation.

A close up of a logo Description automatically generated

Costs

Regardless of which division it plays in, the main costs for a football club are player related, in the form of wages and transfer fee amortisation.

Every fan wants to see their team have a competitive squad and all the research shows unsurprisingly that there is a positive link between player wages and league position.

Each of the last six years shows that Scunthorpe paid out more in wages than they generated in income, with the total over the period being £19.9 million income and £27.9 million in wages.

Not all clubs publish wage data, which is disappointing but unsurprising given the lack of governance & transparency at the EFL.

In paying just over £3k a week Scunthorpe’s wages are highly competitive with the rest of the division, although noticeably lower than those of clubs recently relegated from the Championship.

Peter Swann has clearly backed managers here in terms of giving them a wage budget that in theory should allow them to recruit players who could help the club challenge for promotion to the Championship.

Paying competitive wages allowed Scunthorpe to make the playoffs in 2017/18 with an impressive fifth place finish.

Losing to Rotherham in the playoffs was a hammer blow and the club struggled the following season.

EFL rules do in theory limit player wages to 60% of income, but if the owner puts money into the club this is also taken into consideration and Peter Swann’s financial commitment allowed Scunthorpe to pay wages that otherwise would have been prohibited.

Scunthorpe’s investment in players has also resulted in the amortisation charge increasing. Amortisation is the transfer fee cost spread over the contract signed by the player. So, if Scunthorpe signed Cameron Burgess from Fulham for (say) £45,000 in 2017 on a three-year deal, this results in an annual amortisation charge of £15,000 (£45,000/3).

One person who has benefitted well at Glanford Park is the highest paid director. Directors were previously unpaid at Scunthorpe but there is now one person who is receiving about £190,000 a year at the club.

Profits/Losses

Profits are income less costs and given that Scunthorpe spend more on wages than they generate in revenue clearly the club is loss making.

Scunthorpe’s losses were magnified in 2017 and 2018 due to a £1.3 million write-down of an asset under construction. What this is isn’t clear from the accounts, but its value fell from just over £1.3 million to just £12,000.

Losses have trebled since 2013/14 as a result of the increased spend on players. Losing nearly £90,000 a week does result in challenges for those running the club. There are a variety of ways to reduce these losses, with player sales being the main ‘football’ approach.

Over the past six years Scunthorpe have generated nearly £1.5 million in profits in player sales, which is some way short of the £18.6 million of losses in the same period.

Scunthorpe have therefore had to rely on the club owner to cover the losses. Part of Peter Swann’s investment has been in the form of loans from his company Coolsilk, but these loans have been interest bearing and the club was paying over £4,000 a week in interest as a result in 2017/18.

With the club losing so much money there is little likelihood of it having to pay corporation tax, which are related to profits. In the last three years Scunthorpe have sold their tax losses to Peter Swann’s Coolsilk which has reduced losses by about £4 million over the period.

This is apparently something to do with a tax avoidance (and therefore totally legitimate) scheme called ‘Group Relief’. I did try to Google what this meant but when I typed it into the search engine is took me to a website called Pornhub, which I suspect is nothing to do with tax, but another three-letter word ending in ‘x’.

As a result of the above shenanigans Scunthorpe’s total losses stand at £15 million at 30 June 2018.

Peter Swann has also supported the club financially by buying shares in Scunthorpe. The advantage of this approach is that shares pay dividends rather than interest, and only if the club has an overall profit (which the above total of £15 million losses suggests is unlikely for some time).

Player Trading

Many clubs in the lower leagues have very tight player recruitment budgets and Scunthorpe are no exception. Over the past six years the club has spent £1.3 million buying players and generated nearly £1.7 million from sales.

Spending just £10,000 on players in 2017/18 meant that Scunthorpe were near the bottom of the recruitment table, perhaps a little more investment would have given the club the extra boost to get closer to promotion and kept Graham Alexander in a job.

Borrowings

As a result of the Coolsilk loans Scunthorpe’s debts have nearly quadruped to over £9 million since 2013.

These loans are not huge by League One/Two standards, but as has been seen in the case of both Bolton and Bury all loans come at a risk. (Note in the table below Bradford have not disclosed their loans as the club’s hierarchy are so contemptuous of the fans that they won’t even reveal the figures).

Summary and conclusion

Scunthorpe have lived beyond their means under Peter Swann since he acquired the club. There is nothing wrong with this, but it does increase risk if for whatever reason he can’t (Stewart Day at Bury, Tony Xia at Villa) or won’t (Steve Day at Bury, Ken Anderson at Bolton, Ellis Short at Sunderland) underwrite the losses.

Peter Swann has been generous to the club and should be given credit for that, but unlike many other owners who have lent their clubs money interest free (Coates family at Stoke, Matthew Benham at Brentford, Tony Bloom at Brighton, Dean Hoyle at Huddersfield etc.) has charged interest. The transfer of tax losses makes sense but also leaves a slightly uneasy taste in the mouth as to what is driving the investment.

Back to back playoff appearances are a testament to how a generous owner can elevate a club up the table, but unfortunately Scunthorpe didn’t get over the line.

Does the above analysis suggest that Peter Swann’s support his “we are probably one of the best-run clubs in the Football League” comment? That’s for others to decide rather than us.

Sheffield Wednesday 2017/18: When the sun goes down

If I stay I can eat my weight in tuna every year? It’s tempting.

Championship football may be the most unpredictable and exciting in the country, but it comes at a price, and Sheffield Wednesday’s very delayed 2017/18 accounts are no exception.

Huge losses are run up in the division as chairmen leave common sense behind and twist on 18 in the hope of achieving promotion to ‘the promised land’ of 8pm kickoff on a Monday night at home to Watford.

Accountants can now be as valuable as strikers if they can come up with schemes that Baldrick from Blackadder would call ‘cunning’ and help clubs avoid the laughably called Profitability and Sustainability (P&S) points deductions of up to 12 points.

No club apart from Birmingham City has suffered a points deduction to date though but have Sheffield Wednesday pushed the rules to the limit in their accounts covering 14 months to 31 July 2018?

Income

Sheffield Wednesday should ideally show three types of income in their accounts, matchday, broadcast and commercial, but for reasons best known to owner Dejphon Chansiri they combine the first two, so some assumptions have been made.

Income from matchday sales decreased by 4% on the back of Wednesday having a forgettable season and finishing 15th compared to 4th in 2016/17 and average attendances dropped by 1,400 per home match.

Relative to other clubs in the division Wednesday have reasonably good attendances and had the fourth highest matchday income in 2017/18, although they did have 14 months instead of 12 when they were generating this sum, much of it out of season.

Income from broadcasting is mainly generated by solidarity payments from the Premier League (about £4.3 million) and the EFL deal with Sky (about £2.3 million plus appearance fees of £100-140,000 per home match).

If a club has been relegated from the Premier League in the last 2-3 years though it also receives parachute payments of £14-41 million.

Not receiving parachute payments puts the remaining Championship clubs at a significant disadvantage, although the Premier League argues such a system helps reduce the possibility of relegated clubs going out of business.

There are a few Championship owners who think they are short-changed with the present EFL TV deal but realistically they will struggle to generate significantly more than the existing arrangement, which is split 80% to the Championship, 12% to League One and 8% to League Two clubs.

Even if the Sky deal, which lasts five years, was scrapped, it’s unlikely that a new broadcaster would be willing to pay much more, as armchair fans tend to focus on the elite Premier League teams and the remainder of that division are simply fortunate that collective sale of rights takes place.

Revenue from commercial deals and sponsors was up 17% for Wednesday in 2017/18 to £7.1 million, although most of this was due to the additional two months of trading.

For clubs in the Championship it is a cut throat market trying to persuade sponsors to sign deals, but Wednesday have an advantage to a degree in that their shirts bear the owner’s name and there are other deals with Elev8 drink and sportswear and a local taxi company that appears to have no taxis, both of which are owned by the club owner which generated about £1.2 million.

Even taking into account the above issues Wednesday are at best mid table in terms of commercial income, reflecting the club being in the doldrums for so long in terms of national and global profile.

Relative to the period prior to Chansiri’s involvement with Wednesday, the club is now earning about £10 million a year more, but this is chicken feed compared to those in the Premier League or receiving parachute payments.

Costs

Every fan knows that the biggest costs for a football club relates to players and the Owls’ accounts illustrate this clearly.

Sheffield Wednesday’s wage bill increased by over a half to £42 million in 2017/18 as the owner backed the manager in the transfer market and also the full year cost of new contracts for the likes of Forestieri.

Wages in the Championship average £15,000 a week, and Wednesday are in the top half of this table at £20,300.

A screenshot of a cell phone

Description automatically generated

Increased rewards for promotion to the Premier League have resulted in Championship clubs paying higher and higher amounts in trying to get there.

The average wage paid by Wednesday has increased by 418% over the last decade, but most noticeably is how wages have nearly tripled in the last three years under Chansiri.

High player remuneration in the last three years has meant that Wednesday were paying £168 in wages for every £100 of income meaning the club is automatically making sizeable losses before any of the day to day running costs are incurred.

Getting wages under control was in theory one of the aims of Financial Fair Play, now called Profitability and Sustainability (P&S) rules but this would appear to have failed in the Championship as wages are now the highest ever compared to income.

A screenshot of a cell phone

Description automatically generated A screenshot of a cell phone

Description automatically generated

Only in football would spending more money on wages than generated through revenue be applauded by many, but from a fans’ perspective so long as the club is promoted the end is justified by the means.

Amortisation is the other main expense in relation to players where the transfer fee is spread over the life of the contract such as Wednesday signing Jordan Rhodes for £8 million on a three-year contract this works out as £2.67 million amortisation a year.

The amortisation fee in the profit and loss account takes into account all the squad players signed for fees and reflects the longer term investment in transfers.

A close up of a map

Description automatically generated

Sheffield Wednesday have spent substantial sums in the transfer market since Chansiri by their previous standards and this is reflected in the amortisation charge increasing by a factor of ten.

Profits/(Losses)

Profits are revenues less costs and the consequences of Wednesday’s recent splurge on player spending has meant that day to day losses increased rapidly and have averaged £420,000 a week under Chansiri.

A screenshot of a cell phone

Description automatically generated

Even though Wednesday’s losses last season were the largest in their history, they were still exceeded by seven other clubs in the Championship in 2017/18.

A close up of text on a white background

Description automatically generated

The only way that clubs can usually reduce these losses is via player sales or owners underwriting them. Wednesday have had relatively little success in terms of player sales in recent years though.

A screenshot of a cell phone

Description automatically generated

This unwillingness or inability to sell players for large fees isn’t unique to Wednesday, but some other clubs have been able to generate huge sums which are used to ensure P&S compliance.

A screenshot of a cell phone

Description automatically generated

Wednesday therefore took extreme measures to reduce the losses in selling Hillsborough. The agreed fee appears to be £60 million, as the stadium had a value in the accounts of £22m and so booked the difference of £38m as profit.

This transaction has been contentious in a number of ways. Under the old version of FFP profits on asset sales used to be disallowed and so there was no incentive for clubs to make disposals.

However, when the rules were brought into line with the Premier League in 2016, Shaun Harvey, the Mr Bean of football regulators, and co ignored a change which allowed asset sales to be included.

Derby County’s accountants were the first to spot this anomaly and ‘sold’ Pride Park for £80 million in their 2017/18 accounts to another company owned by chairman Mel Morris-Obe, helping to reduce a trading loss of £47 million. Aston Villa have done similar with Villa Park in the present season, which allowed them to keep Jack Grealish and be promoted on the back of his sublime skills, whilst transferring the stadium from the left to the right hands of the new owners after running up operating losses of £95 million in the first two years following relegation.

Wednesday have done the same, but the way they’ve gone about the sale of the ground has won them no favours. The ‘sale’ of the stadium is to a related party of Chansiri, was revealed in the footnotes to the accounts, but he clearly thinks that the fans have no right to know about such significant transactions.

There’s no indication as to the date of the sale or to which of Chansiri’s other companies the sale has been made. In the debtors note to the accounts there is a disclosure that indicates the sale proceeds are being spread over eight years.

If this is the case then presumably Wednesday should be able to charge interest on the outstanding payments. The price of £60 million has been queried in some circles, but presumably it has been assessed by an independent surveyor (appointed and paid for by Chansiri) and ticked off by the independent auditors (also appointed and paid for by Chansiri).

With the sale of the stadium it looks as if Wednesday would have made a P&S loss of just over £19 million in the three year assessment period. If the old FFP rules had still applied then the loss would have been £57 million and a likely 12 point penalty would have applied.

Player Trading

Under the previous regime Wednesday were cautious in the transfer market but Chansiri has allowed managers to recruit in order to try to achieve promotion.

A net spend of £10.7 million in 2017/18 was certainly competitive for last season but not excessive by Championship standards.

Owner Funding

Club owners can invest money in three ways, loans (which may or may not be interest bearing, share issues or related party transactions such as the stadium sale.

Since arriving at Hillsborough Chansiri has lent the club £65 million, and in September 2018 put in another £21 million via a new share issue.

Conclusion

Football should be about goal, chances, signings, red cards and abusing Mike Dean. If there are to be financial rules and regulations they should be robust and transparent.

The EFL’s P&S rules have proven to be weak and allowed rich owners to use expensive and creative accountants to devise schemes that achieve ‘compliance’ but having nothing to do with either Profitability or Sustainability.

In doing so the game is reduced to a rich man’s plaything and theres a lot of evidence that rich men think that rules don’t apply to them, as they can be ignored, bought or circumnavigated.

It’s no surprise that the three clubs who have applied the stadium sale and leaseback loophole are .owned by very wealthy people who consider themselves to be above the principles that FFP was supposed to be about, of preventing clubs ‘buying’ promotion or success by injecting as much money as was required to achieve their objectives. 

Villa were promoted to the Premier League on the back of such  behaviour, Derby made the playoff finals, suggesting that the concepts of sporting integrity that many hold dear are sneered at by the billionaires, multi-millionaires, weasel accountants and lawyers in their slick haircuts and sharp suits who wriggle their way through the small print and champion loopholes rather than football skill and prowess. 

Wednesday have ended up with a soft transfer embargo due to Chansiri’s stubbornness in refusing to send in the accounts to the EFL by the due deadline. This has resulted in the club being unable to deal in the transfer market as easily as the manager would like. 

The fans are left in the dark, they are lucky in a way to have an owner who is willing to empty his pockets (or rather those of his successful family) into Wednesday but at the same time his lack of football knowledge means he’s open to be taken advantage of by those who see the game purely as a commission making vehicle and a lot of money ( admittedly his) is wasted in the process. 

If such benevolence results in promotion then no one cares, but if not then there’s little to cheer about if you’re an Owl, as you’re the person who invests emotionally every week in the club, when you renew your season ticket and when you travel 400 miles on a Tuesday night for an abysmal away performance out of loyalty and love for your club. 

Ultimately it’s his club to do with as he sees fit, but having a soft transfer embargo as a result of some of his actions offsets the generosity he’s shown to players and managers over the last few years. It’s a shame because as an away fan a trip to Wednesday is a great day out. 

So long as the money keeps coming in then fans can be happy as they have someone willing to fund transfers and wages. Speak to fans of Liverpool under Hicks and Gillett,  Blackpool under the Oystons, Villa under Tony Xia,  Birmingham under Carson Yeung, Bolton under Ken Anderson and Bury under the last two owners (as well as many others who I’ve not mentioned) and the issues of club governance and owner motives do give cause for concern. 

 

Leeds 2018: Heartland

In the failing failing failing, Heartland make the places mine

Overview

Standing on the brink of promotion to the Premier League, playing exciting football and with a cult hero as a manager, Leeds United are cool to like again.

The club’s recently published accounts show that this success hasn’t come free but by the standards of the Championship Leeds have been a model of restraint compared to other owners who have gambled with the existence of their clubs.

Elland Road regulars have plenty of experience of improper owners and at present they seem to be operating with a competitive budget without going overboard.

Very few clubs get promoted making a profit and whilst Leeds are unlikely to do so themselves at least the level of losses incurred will be modest compared to other clubs who have gone up recently.

Revenue

EFL rules encourage clubs to split their revenue into at least three categories, matchday, broadcast and commercial.

Every club is trying to maximise all revenue sources at present due to rapidly rising wages, but Leeds were one of the very few who have been in the Championship for a few years to increase all type.

Various other revenue streams are also shown by some clubs (Leeds separate out catering and merchandise for example) but for the purposes of consistency they are all added to the ‘commercial’ heading.

Average attendances at Elland Road were 31,521 in 2017/18, up nearly 4,000 from the previous season, which contributed to a 10.6% increase in matchday income.

Nearly all the additional matchday income came from higher attendances as average revenue per fan has been broadly static for the last five seasons, with 2012/13 being higher partly due to good cup runs that season.

Sunderland, Sheffield Wednesday and Bolton haven’t published their results for 2017/18 yet (all three have reasons to hide the numbers) but for a team that finished 13th in the Championship last to have the second highest matchday income in the division is a sign of the club’s potential.

Income from broadcasting is a thorny subject for Leeds fans as whilst they are regularly chosen for live matches on TV this causes maximum disruption for fans planning their weekends and minimal extra income for the club.

Sky pay £100,000-£140,000 for home Championship matches (and £10,000 for away matches) but compared to parachute payments for those clubs relegated from the Premier League this is miniscule.

Non-parachute payment receiving clubs such as Leeds start each season in the Championship at a huge disadvantage, with research showing that those clubs recently relegated have a seven-point head start due to their extra PL funding.

On the other hand, some sides recently such as Sunderland and Wolves have dropped straight out of the Championship into League One despite receiving parachute payments, mainly due to having disaffected players on huge contracts refusing to move on due to the money they are earning.

The revenue generated from commercial deals and sponsors is where Leeds had the most impressive growth in 2017/18, with an increase of 33% compared to the previous season.

First in the commercial income table by a street is an impressive performance by Leeds as the club leveraged on the goodwill towards the new owner and made the most of being a big single club city.

Income from commercial sources in the Championship included catering (up by £1 million) merchandising (up £1 million) and general sponsorship (up £3 million) but overall Leeds success here helped give additional funds to be reinvested into the playing squad.

The fact that Leeds had more commercial income than half the clubs in the Premier League shows that the potential here is significant if the club is promoted.

Total income over £40 million is very impressive for a club not in receipt of parachute payments and should ensure Leeds are competitive at the top of the division regardless of whether they go up.

Costs

Overall costs for Leeds increased significantly in 2018 and it will come as no surprise to fans that this was driven mainly by a rise in player costs.

Staff costs rose by over £10 million in 2017/18 although this would include redundancy payoffs for Thomas Christiansen and Paul Heckingbottom (along with their coaching staff).

Nevertheless, despite this increase Leeds were only about mid-table in the Championship wage table last season, as the clubs with parachute payments were able to afford higher sums to players and management.

In terms of wage control Leeds, despite the increase in costs, only paid out £77 in wages for every £100 of revenue, compared to a Championship average of £108.

For any club in the Championship it is a constant battle between gambling on player investment to increase the chances of promotion which if unsuccessful could put the whole future of the club in the balance.

Financial Fair Play (FFP) in theory was introduced to try to prevent this but doesn’t seem to have worked in the Championship to date, with last minute rescues of the likes of Villa and Bolton being the only reason these clubs haven’t gone into administration or worse.

Birmingham being fined 9 points is hardly surprising given that the club spent more than twice their revenue on wages, what is surprising is that other clubs have not been subject to a similar fate.

In terms of transfer fees, these are spread over the life of the contracts signed by players in what are referred to as amortisation costs.

Ezgjan Alioski was signed by Leeds for £2.2m from Lugano in August 2017 on a four-year deal, so that would normally work out at £550,000 (£2.2/4) a year in amortisation costs.

Leeds total amortisation cost, which is the figure that represents all transfers, increased by 50% in 2017/18 as the club invested in Forshaw, Jansson, Saiz, Roberts, Alioski and others for million pound plus transfer fees.

Spreading transfer fees via amortisation reduces the volatility of the cost of transfer fees in a single season and reflects a club’s long-term spending on players.

Amortisation and wages together as a proportion of revenue was 97%, which meant that Leeds had little left to pay for the other day to day running costs of the club, such as rent (£2.2 million) depreciation (£1.6 million) and so on, with ‘other costs’ in total coming to over £17 million.

Profits and losses

Subtracting costs from revenue gives a profit or loss figure for the year and Leeds had an operating loss from day to day transactions of just under £20 million for 2017/18.

Big losses are incurred in the Championship by nearly every club as owners commit to pay the wages and transfer fees on signings that they hope will result in promotion.

In the Championship losses were £505 million last season (and that is without Sunderland, Sheffield United and Bolton) which shows the extreme pressures of trying to compete in the division.

Championship clubs all made operating losses last season and the only way for these to be financed is via player sales or owners investing money via loans or shares.

Yearly profits from player sales have been beneficial for Leeds recently, and Liam Bridcutt’s and Chris Woods’ departures, along with some sell on clauses on previous disposals, were the main drivers of the £18 million profit on player sales last season that absorbed most of the operating losses.

Championship clubs managed to recoup over £210 million of the losses via player sale profits but this still leaves a big gap to be plugged by owners.

Letting players go does generate cash but also has a detrimental impact on the quality of the remaining squad but is a financial necessity at times, fortunately for Leeds good cheap recruitment and an impressive academy scheme have improved the quality of football this season.

Excluding costs such as amortisation and depreciation (depreciation is the same as amortisation except this is how a club expenses other long-term asset such as office equipment and properties over time) then another profit figure called EBITDA (Earnings Before Income Tax, Depreciation and Amortisation) is created. This is liked by professional analysts as it is the nearest thing to a cash profit figure.

Struggling to generate cash from operations is common in the Championship but is does mean that clubs must increasingly hope that owners will make up the deficit.

EFL rules allow clubs to lose for FFP purposes (officially called Profitability and Sustainability in the Championship) £39 million over three seasons, but some costs (infrastructure, academy, women’s football and community schemes) are excluded from the calculations.

An estimated P&S profit of £1.6 million over the last three seasons suggest Leeds, even if they are not successful this season, are well within the limits and would not need a fire sale of players during the summer of 2019.

The actual details of P&S calculations for EFL Championship clubs are unknown, prompting much speculation and anger amongst fans who are unsure whether or not their club is subject to ‘soft’ sanctions, which are not publicised, but Leeds are almost certainly not being punished for these given the relatively prudent way the club is run.

Player Trading

Leeds spent £28 million on new signings in 2017/18 on many signings as the two new managers tried to mould squads. The sale of Chris Wood offset a large proportion of these player purchases.

The large spend on players is why the amortisation charge in the profit and loss account is so high. Fans often point out that clubs also sell players and that net spend is a better measure of a club’s investment in talent but again Leeds here have been relatively modest by the standards of the division.

Leeds have been building up the squad in recent seasons, which had a total cost of £37 million at then end of 2017/18. The appointment of Bielsa as coach in the summer of 2018 resulted in a further estimated net spend, mainly on Patrick Bamford, of about £4 million.

Funding

Clubs can obtain funding in three ways, bank lending, owner loans (which may be interest free) or issuing shares to investors. The tie up with SF49’ers brought in share investment of £11 million and there was net borrowing of about £2.5 million in 2017/18.

Summary

Leeds had a hit and miss season in 2017/18 on the field, but the club’s strong revenue growth meant that it was in a strong position from an FFP perspective at the start of the current campaign.

It’s on a knife edge at present whether the club will go up automatically, but a playoff position is guaranteed. Promotion to the Premier League would see revenues rise by at least £100 million and the club is in a strong position given the size of the city and its history to sign some lucrative deals.

Leeds are certainly one of the best three teams in the division this season, but their biggest problem might arise is if they have a chance and fail to make automatic promotion on the last day of the season if the playoff positions are already finalised, as their potential opponents could rest the squad for the final fixture.

Promotion this season will be great for fans, but even if they fail to do so the club is in a strong position financially both in the short and medium term from the figures it has published.

Date Summary

Newcastle United 2017/18: Apply Some Pressure

Introduction

Mike Ashley, Newcastle United’s unloved owner, has finally submitted the accounts for the year ended 30 June 2018 for public scrutiny as The Toon became the final Premier League one to produce results for 2017/18.

In the club’s first season back in the Premier League after winning the Championship Newcastle reversed the big losses and managed to reduce wages from 2016/17, the latter of which is a first for a promoted club.

Kind words are in short supply in Tyneside for Ashley, who bought the club in May 2007 and has overseen two relegations since then.

Easy to criticise, and hard to love, but is Ashley as bad as some make out, given that he has lent the club over £140 million interest free, and invested a similar sum in buying shares in the club too?

A deeper look at the numbers is required to give a broader assessment of Ashley’s stewardship of the club, is he the Freddie Kreuger of football owners or is there some method to the apparent madness of his period at the club?

Revenue

Starting at the top of the profit and loss account, Newcastle’s total revenue doubled to £179 million but is over £200 million lower than that of Spurs, it was only £16 million less when Ashley took over.

Having money is one thing, and Newcastle have now generated revenue of over £1 billion under Ashley’s ownership, whether that money has been spent wisely is another matter.

Looking at total revenue for 2017/18, Newcastle had the 8th highest in the Premier League, although there is an element of chicken and egg as prize money is linked to the final position in the table.

Easily the biggest revenue stream last season was broadcasting, which generated over £126 million for Newcastle, partly due to promotion, partly due to prize money (each additional place in the Premier League is worth an extra £1.9 million) and partly due to the club being popular with broadcasters (each club is paid for ten matches in the basic fee and every additional match shown live is worth an extra £1 million, and Newcastle were shown live 18 times in 17/18).

Year by year volatility for broadcast revenue is also due to combination of which division the club is in and the renewal date for broadcasting deals (the present one kicked in in 2016/17) with Newcastle earning £652 million in total during the Ashley era.

Income from broadcasting in the Championship for non-parachute payment clubs is a basic of about £6.5 million a year, plus £100-£140,000 for every home match shown live on Sky, which shows the importance of being back in the top flight.

Some Premier League clubs generate additional broadcast income by being in UEFA competitions which are worth up to £80 million for winning the Champions League, but other than that the distribution of broadcast income is relatively democratic.

A huge gap therefore exists between those clubs who are in the Champions/Europa League and those that do not, although if Newcastle does qualify for the latter Thursday night trips to the Balkans and Malta are for the dedicated and/or insane only.

Commercial income for 2017/18 nearly doubled to £28 million, but critics of Mike Ashley identify this area as his biggest failing at the club as this has hardly increased since he first walked into the club.

Over at Spurs, commercial income has exceeded the £100 million a season mark on the back of a year at Wembley and Champions League participation.

Commercial income is the one area that clubs can independently grow and in doing so increase the budget for the manager.

Knockers of Ashley will point out he uses St James Park as an advertising vehicle for his Sports Direct cheap and cheerful sports emporium, and he should be generating more commercial income than any other club in the division.

Just £385,000 was earned by Newcastle from Sports Direct last season for this advertising but the club also spent nearly £1.5 million itself buying goods back from SD .

Until the club is sold to a new owner it will be difficult to tell if Ashley has missed a trick in terms of commercial sales but looking at the table overall (and Everton’s is inflated by some unusual naming rights for the training ground) Newcastle are broadly where you would expect them to be for a non ‘Big Six’ club.

Getting fans to turn up at St James’ Park for every match is relatively easy given the loyalty of the locals but getting more money out of them is more of an issue.

Gallowgate end regulars haven’t had to pay more for season tickets following a long term price freeze by Mike Ashley some years ago which explains why the revenue per fan barely changed last season, although individual matchday tickets, which are as difficult to find as a virgin in the Bigg Market on a Saturday night, did go up in price.

Lack of UEFA competition participation and the high prices that can be charged when facing glamourous European opponents is the main reason why Newcastle are so far behind the ‘Big Six’ in terms of matchday revenue, along with having fewer football tourists visiting the North East.

Costs

In the history of the Premier League, no club has ever had a reduction in the wage cost following promotion from the Championship…until Newcastle United in 2017/18.

Newcastle’s wage total fell by sixth last season, although it could be argued that the figures from 2016/17 were distorted by large promotion bonuses and the club accelerating some wages from future years into the Championship accounts via some eyebrow raising accounting that increased wages by £22 million in 2016/17 and decreased the total by £10 million the following season.

Getting wages under control has been one of Mike Ashley’s main ambitions since acquiring the club and with the club paying out just £52 in wages for every £100 of revenue this was easily achieved in 2017/18.

The danger level for wages according to UEFA for a top division club is 70% of revenue and if Newcastle had been at this level then wages would have been £125 million, placing The Toon between Leicester and Everton in the wage table.

Having a bottom half of the table wage bill means that last season’s tenth place finish was impressive, but fans feel that investing more in the squad would give Benitez an opportunity to compete for a European slot.

Unless there is a change in ownership though it is unlikely that this strategy will change as Premier League existence, rather than competing for trophies, appears to the limit of Ashley’s ambition.

Newcastle’s other main expense in relation to players is transfer fee amortisation, which is a non-cash expense, but all clubs show it in the accounts.

Dividing a transfer fee by the contract length is how amortisation is calculated, so when Newcastle signed Jacob Murphy for £10 million on a four-year deal in July 2017 this works out as an annual amortisation cost of £2.5 million (£10m/4).

Every Newcastle fan will point out that historically Mike Ashley has been reluctant to spend money on players and this certainly held true in the early years of his reign but the club’s mid-table position in the amortisation table suggests that in the last 2-3 years he has relaxed the policy to a degree.

Reducing costs to a minimum is a hallmark of how Mike Ashley runs all his businesses and it is impressive that the ‘other costs’ of Newcastle, which covers all the overheads such as marketing, HR, maintenance, insurance and so on are still lower than those of the first season in which he had control of the club over a decade ago.

Profits

Costs subtracted from income gives profit and Newcastle announced an £18 million profit in a press release compared to a £91 million loss for the previous season.

Understanding profit is a tricky issue though, as there are many variants so care must be taken and it is unwise to rely on just a single profit figure, especially one produced by a marketing department which may want to promote a particular message to either fans or potential buyers of the club.

Newcastle’s turnaround compared to the previous year, however expressed, is spectacular and reflects the additional income from being in the Premier League and cost control in terms of player wages in a division that is less profitable than many perceive.

The early years of Ashley’s reign were loss making and the only way these losses can be funded is through player sales or the owner injecting money.

Total operating losses under Ashley since 2008 come to £140 million but player sales profits more than cover this at £184 million, so this shows the approach taken by the owner.

If you strip out the one-off transactions and amortisation (as it is a non-cash expense) we get to a profit measure called EBITDA (Earnings Before Interest Tax Depreciation and Amortisation). This is the figure most focussed on by city analysts and valuers, at it is a sustainable cash proxy for profit. This was a record £61 million in 2017/18 which meant that the club was generating over £1 million a week in cash from its day to day activities.

Player trading

Mike Ashley’s reluctance to spend money in the transfer market is legendary. In the period since he bought the club, he has spent £382 million on players and generated player sales income of £272 million.

This gives a net spend of just £110 million over the period, although this is distorted by £94 million of this arising in 2015/16 during Steve McLaren’s disastrous spell at the club.

Compared to the rest of the division Newcastle’s recruitment in 2017/18 was low and this was part of the reason why fans were so hostile towards the owner, fearing his reluctance to spend was increasing the chances of relegation.

Debts

Mike Ashley lent the club a further £10 million during the 2017/18, but was repaid this later in the season, meaning his total interest free loans stayed at £144 million. The club also had an overdraft at 30 June 2017, presumably used to pay the promotion bonuses, but this was wiped out when the Premier League broadcast income for 2017/18 started to flow to the club and by the end of the season Newcastle had £34 million in the bank.

Since the year end Ashley has been repaid a further £33 million taking his loan down to £111 million, which apparently won’t be repaid until the club is sold.

In addition to the loans Ashley has invested a further £134 million in shares in the club, taking his total investment to £278 million. Rumour is he is trying to sell if for £300-350 million.

Conclusion

Newcastle did take a gamble in not investing in players in 2017/18 and the risk of relegation was significant until the last third of the season when results improved.

Mike Ashley’s financial strategy appears to have been one of careful cost control to impress potential buyers. This is borne out when plugging in Newcastle’s financial figures into the Markham Multivariate Model used to value Premier League clubs, which churned out an eyebrow raising figure of £442 million, mainly due to excellent wage control, significant prize money on the back of Benitez’s management and a sold-out St. James’ Park for every match. This feels too high a figure but does show the potential of the club to an owner willing to take more risks than the present one. Adjusting for the wages provision reduces the value by about £40 million.

The club’s unusual accounting in relation to wages suggests that, a bit like some of Ashley’s recently acquired retail stores, it has been subject to some window dressing to make things look better than they are.

Data Summary

Derby County 2017/18: Say You’ll Be There

What I really really want? Promotion!

Making sense of Derby County’s 2018 accounts is a challenging task as the club’s structure has been changed nearly as often as the line-up of the Sugababes.

Enigmatic is the politest word that could be used to describe way that a myriad of different companies that are now running different elements of Derby which was further complicated by a new holding company Gelaw NewCo 203, taking over on 28 June 2018.

Is this 4-4-2 or 4-1-3-2?

Legally such a structure is perfectly valid and is common in other industries, whereas previously all of the club’s activities went through Derby County Football Club Limited the new set up arose after Mel Morris CBE took control of the club.

Income

Matchday, broadcast and commercial income are the three standard income categories used to comply with EFL League recommendations.

Obviously, clubs recently relegated from the Premier League have parachute payments too to increase their income and research indicates this is worth about seven extra points in the first season back in the Championship.

Runs in the cup that are televised and live appearances on Sky can increase the broadcast income slightly, with payments of £100-£140,000 for home Championship matches (and £10,000 for away matches).

Relative to other non-parachute payment receiving club Derby do fairly well as they have generated decent TV audiences, but the extra sums received are miniscule compared to those clubs recently relegated.

Income for clubs in the Championship from matchday is (number of matches x average price per ticket x average attendance) so with a ground that is practically sold out every home match there’s not a lot of scope to increase revenues unless prices go up.

Sponsorship and commercial income are an area where there is growth potential but there are 23 other clubs in the Championship also competing in this area but Derby have done well by divisional standards.

Some cynical fans might take the view that the big increase in commercial and hospitality income that commenced in 2017 may have come from companies related to Mel Morris CBE but there’s no evidence to support this theory although seeing with the fourth highest commercial income in that division and also earn more than quite a few Premier League clubs too does cause eyebrows to raise.

For a club the size of Derby to have the second highest non-parachute payment income in the division is an achievement, and surprising that they’ve outperformed the likes of Villa and Wolves in this regard too.

A breakdown of Derby’s overall income shows a fairly even split between the sources. Some clubs in the Premier League have nearly 90% of their income from broadcasting.

Costs

Very many fans get angry when the subject of players’ earnings are discussed, and Derby’s wage bill seems to have taken a big jump in 2017/18.

Overall wages for parent SevCo 5112 were nearly £47 million, an effective increase of 18% (SevCo’s actual wages for 2016/17 were £33.1 million but only covered a period of 10 months instead of 12) which meant that wages were £157 for every £100 of income, part of the increase could be attributed to commercial staff numbers increasing by 39 but the majority relates to players.

Unless players receive a competitive wage, they’re likely to go elsewhere and as owners and fans want promotion so clubs such as Derby with no parachute payments have to pay accordingly.

Relative to clubs in receipt of parachute payment Derby were not far behind other clubs last season (apart from Villa) but were high payers compared to other clubs, especially if the promotion bonuses paid to Fulham, Wolves and Cardiff are stripped out.

In terms of transfer fees, these are spread over the life of the contracts signed by players in what are referred to as amortisation costs.

Tom Lawrence cost Derby an estimated £5 million when he signed from Leicester in August 2017 on a five-year deal, so that would normally work out at £1 million (£5m/5) a year in amortisation costs.

Experienced Rams’ fans may know that their club is unique in the way it treats amortisation though which has the effect of reducing the expense in the accounts in what is best known as ‘Melenomics’ and no other clubs in England use such an approach.

Spreading the cost of transfers the ‘Derby Way’ resulted in the club being sandwiched between Brentford and Bristol City in the Championship amortisation table for last season which seems very low given that Derby’s wage bill is the same as both clubs combined.

Putting wages and amortisation together gives a total cost of £53.3 million which vastly exceeds revenues of £29.1 million, Derby had an expense of £183 in this area for every £100 of revenue but this was still far from the highest in the Championship last season.

Identifying the other costs incurred by the club is tricky as they are grouped together as ‘other costs and these increased by , depreciation increased by £1 million, rents paid doubled to £325,000 but ‘other costs’ overall increased alarmingly to nearly £19 million with no explanation in the accounts.

Costs therefore totalled £76 million which led to the sale of Pride Park to another part of Mel Morris CBE’s business empire which generated a profit of £40 million in order to ensure the club did not breach Profitability and Sustainability (FFP) limits and risk sanctions such as the points deduction suffered by Birmingham City.

Exceptional transactions such as the sale of the stadium appear to blow a hole in the principles of FFP but if allowed by the EFL as the club seems to imply then fans needn’t worry too much.

Getting away with such behaviour (and it looks as if Sheffield Wednesday may have done similar with Hillsborough) gives further support to the view that the only winners from FFP are the creative accountants and slippery lawyers who devise such transactions.

Profit

In the press release on the Derby website it said the club had made a profit of £14.8 million, but this applies to Derby County Football Club Limited and conveniently ignores the costs incurred by the commercial department, academy and stadium running costs which form the other subsidiaries of SevCo 5112.

Reading the SevCo 5112 accounts is more depressing as there was an operating loss, which represents revenue less day to day running costs, of £46.8 million.

Losses before disposals for the Championship total over half a billion pounds for 2017/18 and that is excluding results from Sunderland, Sheffield Wednesday and Bolton as many clubs gamble on being one of the three teams that win the golden ticket to the Premier League.

Incurring losses of this magnitude means that clubs are reliant on asset sales (usually players) and owner investment to cover the losses.

Stripping out costs such as amortisation and depreciation (depreciation is the same as amortisation except this is how a club expenses other long-term asset such as office equipment and properties over time) then another profit figure called EBITDA (Earnings Before Income Tax, Depreciation and Amortisation) is created. This is liked by professional analysts as it is the nearest thing to a cash profit figure.

Making cash losses of over £700,000 a week last season explains why Derby needed to sell Pride Park although selling it back to Mel Morris CBE is equivalent of transferring money you already have from the left hand to the right hand.

EFL rules allow clubs to lose £39 million over three seasons, but some costs (infrastructure, academy, women’s football and community schemes) are excluded from the FFP calculations.

Losses for Profitability & Sustainability purposes were, based on our calculations, £53 million over the three years, which, based on the publication of the Birmingham City ruling, equivalent to an eleven point deduction.

Chopping eleven points off Derby’s total for this season would have sent the club spiralling out of contention for a playoff scheme, so whoever came up with the idea of the sale and leaseback of Pride Park should perhaps win the player of the season award.

Other clubs such as Villa, Sheffield Wednesday, Reading and potentially Birmingham have followed the Derby approach but not have sold their stadia for as high a price.

Bringing the stadium sale into consideration doesn’t just ensure that Derby have complied with the P&S rules, it also means that if the club is not promoted this season it should be able to compete in the summer transfer market as the cumulative P&S total shows a substantial profit.

EFL critics will be up in arms if this type of transaction is allowed, but it is the club owners who vote for the rules, they are not imposed by the league itself independently.

One consequence of the sale and leaseback deal is that it looks as if Derby will be paying rent of about £1.1 million a year for the use of the stadium.

Player Trading

Derby spent £15 million on new signings in 2017/18 on Lawrence, Wisdom, Huddlestone and Jerome and had sales of £4.3 million mainly in relation to Cyrus Christie. The sales of Will Hughes and Tom Ince which took place in the summer of 2017 were included in the accounts for the year ended 30 June 2017.

The large spend on players is why the amortisation charge in the profit and loss account is so high. Fans often point out that clubs also sell players and that net spend is a better measure of a club’s investment in talent.

Mel Morris CBE’s commitment to getting the club promoted is evident from the above graph as prior to that Derby were not serious players in the Championship transfer market.

The total cost of Derby’s squad at 30 June 2018 was £62 million which puts the club at the top end of the division which again puts it at odds with the relatively low amortisation charge.

Funding

Clubs can obtain funding in three ways, bank lending, owner loans (which may be interest free) or issuing shares to investors. Mel Morris CBE had put over £95 million into Derby in 2016 and 2017, his approach for 2017/18 came in the form of the stadium purchase for £81 million.

Summary

Derby went for broke in 2017/18 in trying to achieve promotion to the Premier League. To achieve this the club had to indulge in some eyebrow raising accounting transactions which appear to be at odds with the spirit, if not the letter, of P&S rules.

Promotion this season will be great for fans, but the legacy of the stadium sale income should ensure that even if the club doesn’t go up then Frank Lampard still has some leeway in recruiting players this summer and there is no need for a fire sale.

Incurring losses of this magnitude means that clubs are reliant on asset sales (usually players) and owner investment to cover the losses and Derby took an unusual approach here.

Relying on owners to keep putting money into clubs, especially when so many are abused by some financially illiterate fans for ‘lacking ambition’ does increase the risk of clubs going into administration or worse if the owner decides they have had enough grief.

Letting players go does generate cash but also has a detrimental impact on the quality of the remaining squad but is a financial necessity at times as was seen in 2016/17 when Derby sold Ince, Hughes and Hendrick to generate over £16 million profit.

If the EFL is going to allow owners to sell stadia to themselves to comply with P&S, then it would make sense the rules to be scrapped. At present the nature of the rules simply results in very expensive accountants and lawyers to devise schemes and fans would rather money be spent on the game instead of school fees and Ranger Rovers for bean counters.

Crystal Palace 2017/18: I Just Can’t Be Happy Today

Six Year in the Premier League? Neat, Neat, Neat.

Surviving in the Premier League is even tougher than getting there and an eleventh place position is testament to Roy Hodgson in guiding the club to another season at the top table.

Usually Palace start the season poorly and improve in the second half of the season and 2017/18 was no exception after the De Boer experiment was quickly jettisoned.

Sustainability from a financial perspective wasn’t achieved however as the club, despite record revenues, lost £750,000 a week from day to day operations and was reliant upon the club owners to finance the gap.

An increased capacity Selhurst Park is part of the club’s strategy to improve the finances in the long term and this should improve the financial performance in the Premier League.

Income

Nowadays all clubs split income into at least three categories to comply with EPL recommendations, matchday, broadcasting and commercial.

Nearly all ‘Other 14’ clubs are very dependent upon broadcast income for the lion’s share of their earnings and Palace are no exception.

A new TV deal in 2016/17 was the driver of the big increase that season, but Palace’s 11th place finish earned them an extra £6 million in prize money in 2017/18 to £121 million, slightly offset by being chosen for live broadcasts two fewer times than the previous season.

Having a reliance on broadcast income is fine so long as the rules don’t change, and it’s sad to see the greed of the ‘Big Six’ force through a new method for distributing money from TV so that the rich get richer from Premier League International Rights.

Relating broadcast income to live appearances and final league position has a lot of merit but the existing formula has worked successfully for years and allowed clubs such as Palace to retain their best players, making the Premier League more competitive and unpredictable.

Europa and Champions League participation by the regulars ensures they have more broadcast income from UEFA than the remainder of the Premier League, so it is nothing but naked greed from foreign owners that has driven the new distribution model from 2019/20.

Income from matchday for Palace has been relatively static due to ground capacity constraints and the club has been reliant on cup runs to boost totals as price freezes and sold out matches mean this figure can’t be increased in the short term.

Diving into the footnotes of the accounts there was an ominous comment from chairman Steve Parish “with strong demand and a low relative cost to other Premier League London football ticket pricing will be further reviewed for the 2019/20 season” and Palace season ticket holders already know the consequences of this.

Palace’s matchday income is okay by Premier League levels but the board see scope for growth, especially in terms of hospitality consumers who are put off by the prices elsewhere in London and a revamped Selhurst could give the club an extra £5-10 million per season.

Eagles’ fans may not like the garish logo on the club shirts of new sponsor ManBetX but this has been a major contributor to the 20% increase in commercial income.

Getting new sponsors and commercial partners for a club isn’t easy unless you are one of the global brands with tourist fans, so Palace have done well here to keep growing this income stream.

Selling the club to sponsors is made slightly easier by being in London and the continued existence in the Premier League has increased the appeal of the club too.

Some clubs such as Manchester City, Everton and Stoke have the benefit of connected parties being willing to pay generously for commercial deals but Palace have had to do it the hard way.

Total income increased by 5% to £150 million which is more than ten times the money generated when Palace were in the Championship and total Premier League income since then is £590 million.

Even monied clubs such as Stoke, Swansea, Hull and Sunderland have been relegated in the last two seasons and struggled to make much of an impact in the Championship, which highlights just how important it is for Palace to avoid getting into a relegation fight as there are no guarantees of coming straight back up.

Very few clubs bounce back straight away in the Championship as has been seen in the present season where the three teams challenging for promotion in Sheffield United, Leeds and Norwich finishing last season 10th, 13th and 14th respectively.

Costs

Every fan knows that the main costs for a PL football club are focussed on player related expenses relating to player wages and transfers.

Player costs have accelerated in 2017/18 for nearly all clubs despite broadcasting income being flat overall as Sky/BT are in the second year of a fixed three year contact.

Amortisation is the cost of all the transfer fees paid by the club spread over the contract life, so when Palace signed Mamadou Sakho for £26 million from Liverpool on a five-year deal this works out as an amortisation charge of £5.2 million a year (£26m/5).

Rapid increases in amortisation are common in the Premier League if a club is promoted and stays in the division due to legacy players from the Championship being replaced by more expensive signings in the top flight over a number of years.

In signing Sakho, Riedewald, Sorloth and Jach Palace instantly increased the overall squad cost to nearly £200 million and the amortisation expense rose in line with this especially as the previous season saw Schlupp, van Aanholt and Milivojevic all arrive in January 2017 with only had a half year of amortisation on their transfers.

Spending more on transfer fee amortisation than London rivals Spurs and West Ham might surprise some Palace fans, but the club has been very active in the transfer market especially given the rapid turnover of managers at the club who want different players and styles.

Having spent money on transfers it’s no surprise that Palace’s wage bill grew last season, albeit by a relatively modest 5% to £117 million but that still put the club 9th in the wage table.

With such high wages and amortisation charges it is of little surprise that these costs absorb all of Palace’s income, representing £109 of costs for every £100 of revenue, meaning that the excess and all other overheads have to be paid for by either player sales or the owners underwriting the costs.

If Palace maintain their Premier League status for a few more seasons this is fine provided the owners continue to bankroll the club, but if not the club is at risk of major cutbacks as has been seen at Swansea in recent months.

The average wage at Palace is £56,000 a week but by all accounts some players are on about twice that sum which is usually accepted if the player is delivering (such as Zaha) but causes resentment when he is not (such as Benteke).

Having a wages to income spend at a constant in theory is a sign of good cost control but Palace do have a problem here in that UEFA recommend clubs should aim to spend no more than £70 in wages for every £100 of income and Palace have been above that benchmark in the last three seasons.

Profit

Agreeing what is meant by profit is always tricky as there are many variants, but the simplest definition is that it represents income less costs although deciding what is included in income and costs can muddy the waters.

Subtracting total costs from income gives what is called net profit and here Palace have a negative figure in the form of a net loss of £35.9 million.

This was perhaps bigger than expected although the rescue plan in recruiting a new manager and players after the De Boer experiment failed was expensive to repair.

Reports in the media recently have focussed on net profits especially with Spurs and Liverpool announcing ‘world record’ sums but the Premier League as a whole made a £286 million net profit in 2017/18 with those two clubs being responsible for three-quarters of the total.

A lot of the net profit can come from one off transactions, such as high tax charges (Manchester United’s was £63 million) or profits on player sales (Liverpool’s was £124 million, mainly through Coutinho going to Barcelona).

Profit from operations is perhaps a better measure as it ignores the distortions caused by tax and finance costs (some clubs pay interest on loans, others have interest free deals with owners) and concentrates on the money made just from regular business activities.

Operating profits for Palace are however little different to net profit as the club had a tax rebate that effectively offset the £35,000 a week in interest that was charged.

Nerds may be familiar with a profit measure called EBIT (Earnings before interest and tax) which strips out one off transactions, such as player sales gains and other irregular expenses and income.

Crystal Palace benefitted from these substantially in 2016/17 due to the sale of Bolasie to Everton which helped generate a £35m profit on player sales plus £4 million from the repulsive Tony Pulis in a court case where the club successfully recovered a bonus that he had claimed but to which he was not entitled.

A lot of clubs in the Premier League are dependent upon player sales to make ends meet, despite the benefits of broadcast income, as can be seen by EBIT losses being £184 million overall compared to net profits being a positive of £286 million.

Liverpool, for example, saw their profits fall from the world record £131 million quoted in the press to just £7m once the Coutinho profit (which won’t arise every year) was removed but Palace’s numbers barely changed as player profit sales were just £2 million.

Leaving out the amortisation cost (which is an accounting expense rather than a cash one) and depreciation (the same) gives something called EBITDA (Earnings Before Interest Tax, Depreciation and Amortisation) and the good news for Palace is that this is a positive figure.

Earnings analysts like EBITDA because it is the nearest thing to a cash profit figure that can be easily calculated as it removes all the accounting nonsense which can be manipulated by unscrupulous businesses (Palace have NOT done this though as far as we can tell).

Player Trading

Delving into the footnotes of the accounts shows that Palace £54 million on new players in the year to 30 June 2018 but sales were much lower at just under £4 million.

Large investments in players, as has been already seen, led to the rise in the amortisation charge in the profit and loss account.

In each year in the Premier League Palace have spent more on player than they’ve generated in sales, which shows the board has backed the managers even if some fans think they should have spent more.

The total net spend by Palace since promotion in 2013 has been £184 million.

The Premier League pays inflated prices for many players, but the total net spend last season was over £1,240 million, with the usual suspects at the top of the spending table.

Liabilities for player signings can arise if clubs make signings on credit and agree to pay over a number of years via instalments and here there is cause for concern as Palace owed £49 million to other clubs at 30 June 2018.

Funding

Every club can obtain funding in three ways, bank lending, owner loans (which may be interest free) or issuing shares to investors and Palace have borrowed in recent years as new owners have put money into the club to underwrite its losses.

Palace benefitted from £38 million of interest free loans in 2017/18 and the owners have stuck in a further £24 million since June 2018 and this is before the stadium expansion project is implemented which will involve cash going out before it generates revenues.

It’s likely that similar investment will have to be made unless Palace cash in on the crown jewels in their squad this summer as underperforming players on big contracts may be reluctant to take the pay cut their talents perhaps deserve.

Summary

Every year Palace defy a poor season start and end up mid table and 2018/19 looks likely to repeat the formula, which is crucial as the club is vulnerable should relegation occur due to its disproportionately high player costs.

Relying on two or three star players to earn enough points to keep Premier League membership and paying them handsomely has worked to date and it would be foolhardy to change what has worked to date.

Sorting out the infrastructure cannot come fast enough if Steve Parish’s aim of establishing Palace as a top ten team in the Premier League as the relative lack of matchday revenue will hold the club back in what is becoming an increasingly important income source with broadcast deals unlikely to repeat their quantum leaps of the recent past.

Key Financial Highlights for year ended 30 June 2018

Turnover £150 million (up 5%)

Wages £117 million (up 5%)

Pre-player sale losses £38.9 million (up 50%)

Player sale profits £2.4 million (down from £34.7 million)

Player signings £54 million (down from £104 million)