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)

Burnley 2017/18: I Thought You Were Dead

Seventh position in the Premier League and qualifying for the Europa League was an achievement for Burnley in 2017/18 and the club’s financial results were almost as impressive.

Earnings, wages and player trading profits all hit record levels yet some fans seem bored by life in the Premier League.

Income

All clubs split income into three categories to comply with EPL recommendations, matchday, broadcasting and commercial.

Nowadays most ‘Other 14’ clubs earn a small fraction of their total income from matchday sales and Burnley is no exception as frozen ticket prices and slightly less domestic cup progress meant that this fell by £200k compared to the previous year.

Due to having a relatively small ground capacity and few prawn sandwich eating fans there’s little scope for this income source to grow in the future so Burnley, with a population of 80,000, have to expect to be in the bottom six of matchday earners in this division.

Year on year Burnley’s matchday income fell by 4% last season but has been relatively static during the Premier League seasons.

Contributing just 4% of total revenues means that whilst the club doesn’t take fans for granted its focus will be ensuring Premier League membership and taking a pragmatic approach under Sean Dyche to earning points.

Having to compete with glamourous clubs within a fifty mile radius means that Burnley has to price tickets keenly and has the second lowest matchday income per fan in the Premier League.

Earnings from broadcasting increased by £16.5 million mainly due to higher prize money from the Premier League.

How the Premier League distributes broadcast money from both domestic and international TV deals is a thorny subject and the cause of much argument between club owners.

A half of the broadcast income domestically and all international deals are split evenly between all twenty EPL clubs, whereas a quarter is based on the number of live TV appearances and a further quarter is prize money linked to the final league position.

Seventh position meant that Burnley earned £24.7 million in prize money, which starts off at £1.9million for the team finishing bottom and increases by the same amount for each additional place in the table.

A million pounds is paid to clubs for each live appearance on BT/Sky and clubs are paid for a minimum of ten matches although for Burnley were only chosen for seven despite their strong position in the table.

Premier League broadcast payments are the lifeblood for a club such as Burnley, so it is no surprise to see that it was responsible for over 87% of total income.

Expect broadcast income to be slightly lower this season (2018/19) as Europa League income from the qualifying rounds is unlikely to offset the decrease in Premier League prize money.

Trying to sign up new sponsors and commercial partners is tricky in the present economic environment.

Having a potential global audience watching Burnley works fine when the club is playing Manchester United or Liverpool but doesn’t attract viewers when it’s a small club such as Crystal Palace.

A lot of clubs in the Premier League have gambling companies as their shirt sponsors and Burnley are no exception, with Laba360 replacing Dafabet as the Clarets signed a record deal that helped boost commercial income by 14% in 2017/18.

Manchester United are in a league of their own when it comes to commercial income (neighbours City are fortunate to have owners who have influence over some sponsor deals) but Burnley are in a fairly large group of 8-9 clubs whose income is broadly similar from this source.

Selling the charms of Turf Moor isn’t easy for the commercial team as the location isn’t in London or another large metropolis and sponsors will often try to barter down a price by threatening to take their money to another club of similar stature in the PL.

Total income for the Clarets was up nearly 15% and very dependent upon continued Premier League status which appears to have been achieved until at least 2019/20.

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 Burnley to avoid getting into a relegation fight as there are no guarantees of coming straight back up.

Relative to its peer group Burnley’s total income is towards the top end of those clubs who would be expected to be in the bottom half of the Premier League at the start of the season.

Costs

Costs for a PL football club are focussed on player related expenses, namely amortisation and wages.

Amortisation is the cost of all the transfer fees paid by the club spread over the contract life, so when Burnley signed Chris Wood for £15 million from Leeds on a four-year deal this works out as an amortisation charge of £3.75 million a year (£15m/4).

Life in the Premier League is expensive and Burnley’s amortisation charge increased by over £5 million as Wood, Cork, Wells, Walters etc. came at a total cost of £43 million, offset by not having to amortise Keane and Gray when they departed at the start of 17/18.

Looking at amortisation it can be an indicator of potential relegation as West Brom and Stoke, both established PL clubs, were at the bottom of the table, with Brighton and Huddersfield unsurprisingly below them as they’d both just been promoted to the top flight for the first time.

Everyone has an opinion on football player wages but Burnley seem to have a fairly tight policy where all players are paid within a narrow range and this has an impact upon the nature of who they recruit and let go.

Driven by prize money bonuses for finishing 7th, Burnley’s total wage bill increased by 33% to over £81 million, over five times the level when the club was in the Championship and receiving parachute payments.

Burnley’s wage bill however was still the third lowest in the division despite the large increase in the year and based on our (somewhat crude) calculations work out at about £39,000 a week.

In letting Michael Keane go to Everton for three times that wage level Burnley seem to have a strategy that is appealing to players who want to further their career and see the club as a stepping stone to a ‘bigger’ club should they perform well at Turf Moor.

Getting the balance right between player costs (amortisation and wages) and sporting success on the pitch is challenging but Burnley have done supremely well in 2017/18 in paying out £79 in player costs for every £100 earned, leaving plenty to pay the other day to day overheads of running the club.

Profit

Defining profit is always tricky as there are many variants, but most simply put profit is income less costs although that contains lots of layers and distractions.

A lot of clubs cherry pick one of the many different profit figures available and Burnley have partially done this on their website by announcing a record net profit of £36.6 million.

Various alternative figures could have been used though and we will look at these in some detail.

Everyday profits arising from income less all the running costs of the club except loan interest are often referred to as ‘operating profits’. This a ‘dirty’ measure in that it includes one-off non-recurring costs such as redundancy when a manager is sacked or volatile gains arising from player sales that are best eliminated when trying to work out long term sustainable profitability.

Burnley’s operating profit was even more impressive than the figure quoted in the club website at a £45 million, higher than that of Manchester United.

A big driver of Burnley’s profits for 17/18 was profits from player sales. The sales of Keane and Gray generated a profit of over £30 million, compared to just over £1 million the previous season.

Stripping out player sale profits and other non-recurring items (redundancies, legal cases, debt write offs etc.) gives a more constant profit measure called EBIT (Earnings Before Interest and Tax).

Burnley’s EBIT profits are still impressive but lower than the two previous seasons in the Premier League when the club’s wage bill was far lower.

The Premier League EBIT table shows just how dependent clubs are on player sales in making the books balance. 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.

If non-cash 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.

Burnley’s EBITDA profit was £44 million which shows that the club is generating cash from its day to day activities which can then be reinvested into the playing budget when Sean Dyche is looking to recruit players.

Once trading costs have been paid, many clubs also have to pay interest on their borrowings, which in Burnley’s case was nothing, and tax on profits, which came to £8.5 million. Adusting for these two figures gives pre and post-tax profits, which takes us to the record profit figure quoted by the club itself of £36.6 million.

Player Trading

Burnley spent £43.5 million on new players in the year to 30 June 2018 as the club strengthened its squad, note that the sum committed was broadly similar to the EBITDA profit from the previous season.

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.

Burnley had a net spend of only £7 million in 2017/18 so to achieve their final legal position on such as modest outlay is a testament to the management, coaching team and commitment of the players.

Funding

Clubs can obtain funding in three ways, bank lending, owner loans (which may be interest free) or issuing shares to investors. Historically Burnley have run a very tight ship and used the money generated through on the field, especially broadcast income and parachute payments to fund player purchases and this continued in 2017/18. The club owners have not had to dip their hands in their pockets for many years.

Key Financial Highlights for year ended 30 June 2018

Turnover £139 million (up 15%)

Wages £82 million (up 33%)

Pre-player sale profits £14.4 million (down 45%)

Player sale profits £30.7 million (up from £1.3 million)

Player signings £44 million (up from £43 million)

Summary

Burnley achieved a miracle in 2017/18 that went relatively unheralded. Unloved by broadcasters, too workmanlike for the pundits to get excited about, they went about their business and the players were drilled repeatedly to get results.

The Europa League at the start of 2018/19 was a step too far and it was a blessing in disguise they were eliminated so early as it allowed Sean Dyche to get back to what he does best, training players hard for five days for the next fixture.

Barring a miracle they will be in the Premier League in 2019/20 where once again they will fly under the radar, accumulating points but getting little credit for doing this without handouts from owners.

Bournemouth 2017/18: Boom Boom Ba-Ba Boom

Introduction:

Establishing yourself as a Premier League club, especially with only an 11,000 capacity stadium, is as much as a challenge as promotion from the Championship in the first place.

Down at the Vitality stadium Bournemouth can look forward to their fifth consecutive season in the top flight in 2019/20 although financial results are not as impressive as those on the pitch.

Detailed accounts have just been published which show that the price of recruiting the likes of Ake, Begovic and Defoe came at a significant price and the club made a loss in 2017/18.

Investing in the squad wasn’t enough to prevent the Cherries falling from 9th to 12th in the Premier League, although this was still an impressive performance for a club that spent nearly all its time in the lower leagues.

Eddie Howe’s management has enabled the club to compete with most of the ‘Other Fourteen’ clubs on the pitch and his biggest problem will be preventing some of the star names leaving as players such as Wilson and Brooks attract admiration from wealthier rivals.

Having an accounting period of eleven months in 2016/17 does make some comparisons tricky so bear this in mind when looking at the figures.

Key financial figures for year to 30 June 2018: AFC Bournemouth Limited

Income £135 million (down 1%).

Wages £102 million (up 42%) .

Operating loss before player sales £13 million (previous season profit £15.2 million)

Player signings £56 million (previous season £9 million but distorted by moving year end from 31 July to 30 June)

Player sales £9 million (previous season £3 million)

Owner loans £70 million (up £17 million)

Income:

Overall income for Bournemouth decreased slightly, mainly due to lower prize money from the Premier League.

With a ground capacity a fraction of that of other clubs in the division it was no surprise that Bournemouth had the second lowest matchday income of any club in the Premier League in 2017/18.

Earning so little money from this source does give the club a financial disadvantage and it would benefit significantly from moving to a bigger venue.

Realistically the club cannot generate any more money from matchday unless it increases prices (not popular with fans) the number of matchday events (only likely if get a Europa Cup place) or the number of seats (not feasible at the Vitality).

Everyone knows that the Premier League is a success due to its popularity with TV audiences and this is reflected in the large sums distributed to clubs.

Selling Premier League rights at a loss overseas in the initial years of the division have proven to be a masterstroke and these now bring in about £1.3 billion a year compared to about £1.7 billion for the domestic rights.

Every club has historically received an equal share of the overseas rights but this is set to change after the ‘Big Six’ (Spurs, Arsenal, Chelsea, Liverpool, Manchester United and City) threatened to join a European SuperLeague unless they receive more money from this source in future years.

Many fans will see this as fair because overseas viewers are more likely to tune into matches featuring the Big Six but the relatively democratic way that TV money is distributed in the Premier League.

Broadcast income represents over 88% of Bournemouth’s total and shows just how essential continued existence in the Premier League is to the club.

Lower broadcast income was a result of Bournemouth finishing three places lower in the table than in 2016/17 (each position is worth an additional £1.9 million) and two fewer live TV appearances (each is worth about £1 million).

Earnings from commercial sponsors increased by 45% to over £10 million for Bournemouth but this was still the lowest in the division as the constraints of operating from such a small stadium reduce opportunities to generate money from this area.

Sponsor and commercial income include things such as retail sales, so a move to a new stadium would allow Bournemouth to address this issue.

A club such as Bournemouth has to be realistic in terms of attracting commercial partners as it does not have the global fanbase of the Big Six but a longer period in the Premier League and the attractive football it plays will increase its popularity with these providers of money.

Costs

The main costs for clubs are those relating to players, in the form of wages and transfer fee amortisation.

Having a 42% increase in wages when income decreased appears surprising, but the main players recruited came from Premier League clubs on large salaries.

Unlike the previous season, where Bournemouth lost Matt Ritchie to Newcastle due to a better wage offer despite being in a lower division, existing squad members were offered substantially improved terms of their deals.

Nevertheless, to see any established business’s wage costs rise by 738% in five years in astounding and a testament to the pulling power of the Premier League in attracting viewers.

Despite joining the £100 million a year wage bill club Bournemouth’s average weekly wage (and we fully accept that these are rough and ready figures) of £49,000 a week is slightly below the Premier League average.

Ensuring that Bournemouth’s best players continue to play for the club comes as a price and the club paid out £76 in wages last season for every £100 of income, above UEFA’s recommended benchmark of 70%.

Reversing this upward trend is important if the club wants to break even, although there’s no sign that owner Maxim Demin is concerned about the wage costs and compared to the years before the club joined the Premier League the figures are low.

Being second only to Everton, who spent money wildly on players in 2017/18 in the wage control table is a cause for concern although Bournemouth are not alone in being above the 70% UEFA danger sign.

It is not just players who have benefitted from the generosity of the owner, the highest paid director saw their income rise by 8% to £1,356,000, which puts the club into the top half of the table by Premier League standards.

Rather than show the full transfer fee of a player in the year he signs as a single expense that year, football clubs use an accounting method called amortisation.

Dividing the transfer fee cost over the contract length gives the annual amortisation charge, so when Bournemouth signed Nathan Ake from Chelsea for £20 million on a five year contract this works out as an annual amortisation cost of £4 million (£20m/5).

Premier League clubs spend a lot of money on players and this is reflected in high amortisation charges as evidenced by Bournemouth’s total increasing from £1m when in League One to £27m in the EPL.

If the cost of player purchases is spread over the life of a contract you might intuitively expect similar from player sales, but this is not the case.

Large profits on player disposals arise when they are sold because this is calculated as the sale price less the accounting value (cost less total amortisation) and all of this sum is shown in the year of sale.

Over a period of years profits on sales even out but they can be very volatile in a single season, often dependent on whether the player was sold a few days before or after the club year end.

The strategy of Bournemouth appears to be one of trying to hold onto their players and this has resulted in relatively modest profits and losses on disposals in recent years.

The large profit in 2015/16 relates to Matt Ritchie who was sold in July 2016 and as Bournemouth used to have a 31 July year end this appeared in the 2015/16 accounts.

In addition to profits on player sales Bournemouth made over £5 million from loan fees in respect of players given to other clubs.

Clubs with significant borrowings such as Bournemouth may have significant finance costs but all of the sums lent are from the owners and are interest free.

Profits and Losses

Profit, if you ask the right accountant, is what you want it to be, and there are as many types of profit as there are types of Brexit.

A simple definition is that profit is income less costs, and if this figure is negative it is called a loss.

The headline figure for Bournemouth was a loss of £9.1 million before taking into consideration finance costs and tax. Taking such a profit figure as a measure of success is okay, but it includes some items which are volatile (such as player sales gains, redundancy costs and player write-downs).

Stripping out the above distortions gives something called normalised EBIT (earnings before interest and tax) profit, which is a better measure of profits generated by day to day activities excluding the non-recurring transactions.

Bournemouth’s EBIT is lower than the operating profit for two reasons. There was a small profit on player sales and income of £2.9 million due to the EFL reducing the FFP fine relating to 2014/15 from £7.6m to £4.5m. Bournemouth says this is due to the EFL agreeing that ‘there was no wrong doing by the club’ but surely if this is the case then the fine would have been wiped out altogether?

The club’s share of Richard Scudamore’s leaving present from the EPL is also shown as a non-recurring fee, which seems a bit strange as this is being paid over three years and there is no guarantee that Bournemouth will be in this division for all of them.

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Bournemouth’s EBIT losses worked out at £240,000 a week in 2017/18 and they are modest by Premier League standards.

If non-cash costs such as player amortisation are stripped out, the position however improves, and Bournemouth have an EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) profit of £15 million.

EBITDA is an important profit measure as it is the closest to a ‘cash’ profit that analysts use to assess a business and shows how much the club has to invest in player acquisitions from its day to day activities. Bournemouth were failing to break even in the lower leagues using this measure but since promotion have generated £60 million to use in player trading.

Player trading:

Bournemouth had a significant 2017/18 in terms of player purchases as Ake and Begovic were the main recruits, but not too much should be read into 2016/17 as the finances ran from 1 August 2016 to 30 June 2017 and so did not include the traditionally busy transfer month of July.

At 30 June 2018 the total squad cost was £126 million which is far lower than their market value.

Summary of figures

Compared to their peer group, Bournemouth’s spending is very modest.

Funding the club

Clubs usually have a choice between third party loans (which attract interest payments) owner loans (which may or may not charge interest) and shares (which occasionally pay dividends).

In the case of Bournemouth, the club have focussed on owner loans. Bournemouth borrowed a net £3 million in the year and at 30 June 2018 owed Maxim Demin controlled AFCB Enterprises in the British Virgin Islands tax haven’t £46 million and the American Peak6 Football Holdings a further £24 million.

Since the year end Peak6 have sold their investment to Maxim Demin.

Conclusion

Bournemouth continue to defy the odds in terms of reasonable finishes in the Premier League, an attractive style of play and developing good young players.

The level of investment in the squad in 2017/18, especially in terms of player wages, is not sustainable at the present rate of growth and could result in a breach of FFP rules.

An overreliance on broadcast income is only a genuine problem if the club is relegated and there appears to be little chance of that happening provided the club holds onto its best players.

Aston Villa 2017/18 Finances and FFP: Devil in the Detail

Introduction

Down at Villa Park fans are hopeful that the recent return to the first team of Jack Grealish can cement the club’s playoff position as they have the benefits of the final year of parachute payments.

Over the other side of the city rivals Birmingham City have just been docked 9 points as a punishment for a breach of the EFL’s Profitability and Sustainability rules.

Championship football is challenging as the clash between those with parachute payments, stalwarts of the division and recently promoted League One teams means that there is a lack of a level playing field between the 24 competing clubs.

The reign of Doctor Tony Xia, the flamboyant club owner until the summer of 2018 nearly took the club into liquidation but there appears to be some greater financial stability since his departure.

Income

Overall total income for clubs is split into three categories to comply with EFL League recommendations, matchday, broadcasting and commercial.

Relying on fans to turn up and watch a team is more important in the Championship than the Premier League due to the lower sums earned from broadcasting.

Throughout the last decade Villa had a big decrease in matchday income in 2011/12 when the club finished 16th under Alex Mcleish and began a period in the lower half of the Premier League prior to relegation in 2015/16.

Of the £11.8 million of matchday income for 2017/18 about £1m came from the playoff final as it is custom for the side promoted to forego its share of the Wembley receipts as it is about to receive a large cash injection upon joining the Premier League.

Nevertheless, Villa still generated more matchday income than any other club in the division, although Leeds are yet to publish their 2017/18 accounts and may run Villa close.

Year on year Villa’s matchday income increased by 10% in 2017/18.

Getting an average attendance of over 32,000 last season was an achievement and this year the figure has increased to over 35,000 as fans bought into the commitments of the new owners.

In terms of broadcast income Villa saw a drop of 16% to just over £40 million as the second year of parachute payments results in a fall from £41m to £34 million with the remainder of the money being from the EFL deal with Sky Sports.

Villa will see a further drop in broadcast income of about £20 million this season due to a further cut in parachute payments to about £14 million.

EFL clubs earn about £2.5 million from the broadcast contract plus £100-140,000 for a home match that takes place before the cameras and £10,000 for an away match.

Some clubs feel this deal undervalues the Championship and there are rumours of a breakaway to try to negotiate better terms although as yet there is nothing concrete.

Sponsorship and commercial income are therefore essential for Championship sides and here Villa posted a 9% increase mainly due to the training ground being sponsored.

The problem with the Championship is that because it is seen in less countries than the Premier League in terms of a TV audience commercial partners are not willing to pay the same levels for deals and that is why Villa’s income has halved since 2016.

Every club in the Championship (with the possible exception of Dirty Leeds) would like to be in Villa’s position in terms of commercial income as the benefits of a being a big city club and a legacy of the time spend in the Premier League make it attractive compared to much of the competition.

Villa’s overall income was therefore a division leading £68.6 million which explains the paradox of the club’s financial performance as it was also the lowest generated at Villa Park for over a decade.

Earnings in the Championship as a whole are split between into three broad tiers, with those in receipt of parachute payments at the top followed by Championship regulars such as Leeds and Forest and finally clubs who have been bobbing up and down between the division and League One.

Costs

Player costs

Being so close to the Premier League and its riches has meant that clubs often overspend on player costs as they gamble to get promoted.

Running up huge wage costs was one of the reasons why Tony Xia nearly destroyed Villa as the club was effectively paying out Premier League salaries whilst in its second season in the Championship by recruiting the likes of John Terry and Robert Snodgrass on loan as well as the legacy of previous disastrous purchases such as Scott Hogan on lucrative contracts which meant they could not be moved on.

Usually relegated clubs reduce wages in the second season following relegation from the Premier League but Villa’s increased by 19% to £73 million.

Compared to other Championship clubs Villa had by far the biggest wage bill in the division paying more than the bottom five clubs combined with an average player salary of £1.8 million a year.

Earning so much from parachute payments meant that Villa ‘only’ paid out £107 in wages from every £100 of income last season, which is low by Championship standards, although this could rise substantially this season and even more so in 2019/20 should they fail to be promoted unless there is a major clear out of highly paid players.

Having a big wage bill is only part of the player costs for a club, as there is also transfer fee amortisation to consider too.

Amortisation works by spreading the cost of transfers over their contract life, so when Villa signed Scott Hogan in January 2017 for £12 million on a four year deal this results in an annual cost of £3 million in the profit and loss account over that period.

Normally a club relegated from the Premier League would have a reduced amortisation charge but the huge spending in 2016/17 on player of £88 million sanctioned by Tony Xia meant there was an increase that season of nearly half and a legacy cost of the same sum the following season.

Doubters of Villa’s modest transfer spend in 2017/18 should not the club was second to ‘Boro in the Championship amortisation table and Villa’s total player investment cost worked out at £141 in wages and amortisation for every £100 of income, meaning the club was dependent upon Xia to pay for the excess as well as all the other club running costs.

Profit

Jumping over other expenses and looking at profit, which is income less costs and Villa, like all clubs show a variety of profit measures in their accounts, so they need a bit of explanation.

Operating profit is income less all the running costs of the club except loan interest. It is a ‘dirty’ profit measure in that it includes one-off non-recurring costs such as redundancy, write downs and gains on player sales that distort the underlying figures when trying to work out long term sustainable profitability.

Both Randy Lerner and Tony Xia oversaw a club that had operating losses every single year during the last decade despite the benefits of Premier League membership and parachute payments.

Stripping out the volatile impact of player sale profits and other one off events, which are unpredictable and not part of the clubs’ day to day trading, gives a profit measure called EBIT (Earnings Before Interest and Tax) which gives even more depressing news for Villa fans.

In the case of Villa, the club had non-recurring income of £3 million from ‘Income from compensation deed relating to freehold land’ which appears to compensation for part of Villa’s training facilities being used the for HS2 rail project.

Villa’s EBIT losses average £790,000 a week over the last decade and the only way these can be covered is by selling players, borrowing money or having the owner invest by buying more shares. Villa made a profit of £16 million on player sales in 2017/18 and may need to sell more players if they fail to be promoted this season.

Total losses in the Championship from the 17 clubs who have reported to date are £366 million and could easily be increased by at least £100 million more once the likes of Sheffield Wednesday, Derby and Sunderland have reported their figures.

If non-cash 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.

Villa’s EBITDA loss was still more than £500,000 a week and it has had losses in nine years out of the last ten which shows that is has failed to generate cash from its day to day activities.

Profitability and Sustainability/FFP issues

The present incarnation of Financial Fair Play is called Profitability and Sustainability. Clubs are assessed over a three year period and allowed to lose a maximum of £35 million before tax for each year in the Premier League and £13 million in the Championship. Therefore, for Villa in 2017/18 the allowable loss was £61 million.

Some expenses are excluded for FFP purposes, namely promotion bonuses, academy, infrastructure, women’s football and community schemes.

In 2016 Villa wrote down property values by nearly £45 million when the club was relegated from the Premier League.

The above calculation suggests that Villa were within the FFP limits by £2.6 million in 2017/18, with the HS2 land sale being just enough to keep the right side of the limit.

Being so close to the limit does also mean that Villa (and other clubs which are too close to the FFP naughty step for comfort) will have had to submit regular monthly financial reports to the EFL to ensure they are compliant with P&S rules for the present season.

Player Trading

Villa spent just £1.8 million on new players in the year to 30 June 2018 as the club had a hangover from the previous season when purchases were £88 million.

The large spend on players in previous years 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.

Funding

Clubs can obtain funding in three ways, bank lending, owner loans (which may be interest free) or issuing shares to investors. In the year ended 31 May 2018 Villa issued nearly £70 million in shares to investors as Tony Xia stuck money into the club for a period of time. However, when Xia’s money ran out the club was unable to continue to pay the bills, leading to the crisis that nearly destroyed it.

Nassef Sawiris and Wes Edens acquired control of the club in the summer of 2018 and injected the cash needed to continue trading.

Summary

Key Financial Highlights for year ended 31 May 2018

Turnover £68.6 million (down 7%)

Wages £73.1 million (up 19%)

Pre-player sale losses £54.0 million (up from £41.1 million)

Player sale profits £15.9 million (down from £26.6 million)

Player signings £1.8 million (down from £87.9 million)

Villa gambled and lost under Tony Xia in the last two seasons trying to return to the Premier League. The failure to achieve this meant that it came close to ceasing to exist. If the club is not promoted this season there will be a tough challenge ahead as income will fall again leaving the club with high running costs and a likely player exodus to balance the books as the FFP limit falls from £61m to £39 million.

Middlesbrough 2017/18: Babylon’s Burning

Does this man manscape?

To attempt promotion to the Premier League is an expensive business as revealed when Middlesbrough submit their accounts to the government registrar for the 2017/18 season and reported a £20.2 million operating loss

Only the receipt of parachute payments and some player sales prevented these losses from being too damaging for Boro, who are fortunate to have a benevolent owner in Steve Gibson to fund the club’s operations.

Key Financial Highlights for year ended 30 June 2018

Turnover £62 million (down 49%)

Wages £49 million (down 25%)

Pre-player sale losses £20.2 million (2016/17 profit £10.3 million)

Player sale profits £15.3 million (up from £11.3 million)

Player signings £66 million (up from £48 million)

Income

Nearly every club in its accounts splits income into three categories to comply with EFL League recommendations, matchday, broadcasting and commercial.

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Year on year Middlesbrough’s matchday income fell by 18% last season to £7.1 million.

Premier League attendances averaged 30,499 and this fell to 25,544 in the Championship despite Boro having a relatively successful season and reaching the playoffs before losing to Villa.

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Until parachute payments run out Middlesbrough are not hugely dependent upon matchday as an income source, as it only represents one pound out of every nine generated by the club last season.

Losing its Premier League status was a blow for the club and the town last season and being relegated in the first season after promotion means that Boro only are entitled to parachute payments for two seasons instead of three as would have been the case had they avoided relegation.

Income for clubs in the Championship from matchday varies depending upon ticket prices, attendances and the number of corporate seats each club is able to sell, with the likes of Villa and Leeds having an advantage in the latter two categories.

Such is the magnitude of the Premier League TV deal that Middlesbrough received over £41 million from parachute payments out of total broadcast income of £46.3 million in 2017/18.

Having another parachute payment this season will generate about £35 million, but Boro are promoted they will then revert to the EFL deal with Sky, which is worth about £2.3 million a year plus a £4.3 million ‘solidarity’ payment from the Premier League, this can then be topped up by £100,000 for each home fixture and £10,000 if the club are playing away if chosen for live broadcast.

A lot of clubs in the Premier League are reliant on the BT/Sky deal for the majority of their income and Boro are no exception, even in 2017/18 TV was still providing three-quarters of their revenue.

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So, looking at the Championship as a whole it appears that parachute payments have created a two or three tier division, with those clubs who have just come down earning the most and then this tapers for those who have been relegated for two or three seasons.

Getting commercial partners to sign up for deals is more difficult in the Championship than the Premier League as sponsors prefer to see the names of their products when a team is playing Liverpool or Manchester United compared to Barnsley or Burton.

In Boro’s case commercial income fell nearly 30% to £8.6 million, which is less than two seasons previously when the club was promoted to the Premier League, although there may have been promotion bonuses paid that season.

Nevertheless, commercial deals can be significant and Boro are earning over £170,000 a week from such arrangements, which puts them into the top half of the table in the Championship sponsor-wise.

Growing commercial income is the best way for a club to increase overall income as broadcast income is negotiated centrally and matchday income can only go up if prices are raised (not popular with fans) or ground capacity increased (time consuming and expensive).

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Earnings overall halved last season to £62 million and will fall by about a further £10 million in 2018/19 as parachute payments decrease, before returning to the £20m a year level unless ‘Boro are successful in being promoted by May.

Costs

Player costs

Running a football club is an expensive business and Middlesbrough’s main costs, like those of nearly all clubs, were in relation to players, in two forms, wages and amortisation.

Paying players a competitive wage is a challenge as owners and fans want promotion and to achieve that means acquiring top talent in an industry where small improvements in the quality of players doesn’t come cheap.

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Usually when clubs are promoted they give players improved contracts with relegation clauses should the worse happen and Middlesbrough appear to have applied this principle to a degree as wages fell by a quarter in 2017/18.

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Boro players still earned an average of £23,000 a week from our formula (we have no inside knowledge so this is an educated guess) as the club invested heavily in new signings as owner Steve Gibson tried to recruit players to help the club bounce straight back to the Premier League.

Earning so much from parachute payments meant that Middlesbrough ‘only’ paid out £79 in wages from every £100 of income last season, which is low by Championship standards, although this could rise substantially in 2019/20 should they fail to be promoted, unless there is a major clear out of highly paid players.

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Sanity is in short supply in the Championship when it comes to wage control, with the division overall paying out £101 in wages for every £100 of income and Birmingham last season under I’m A Celebrity favourite Harry Redknapp somehow paying out twice that sum.

Player Amortisation

This is how a club deals with player transfers in the profit and loss account by spreading the cost over the contract period. For example, when Middlesbrough signed Britt Assombalonga from Forest in the summer of 2017 for £15 million on a four-year deal, this works out as an annual amortisation cost of £3.75 million (£15m/4). The amortisation cost in the profit and loss account represents the total for all players signed for fees in previous seasons.

Middlesbrough’s total amortisation surprisingly increased in 2017/18 compared to their season in the Premier League due to the club investing heavily in buying players in a bid to achieve owner Steve Gibson’s desire to ‘smash the league’ and ‘go up as champions’.

Consequently ‘Boro have the highest amortisation total of any club in the Championship for last season, although this could be overtaken when Villa eventually publish their results. Even so it is clear that Gibson has backed his managers in the transfer market.

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Adding amortisation and depreciation together gives total player costs for Boro of £118 for every £100 of income.

Profit

Profit is income less costs, but it contains lots of layers and estimated figures. Middlesbrough, like all clubs, show a variety of profit measures in their accounts, so they need a bit of explanation.

Operating profit is income less all the running costs of the club except loan interest. It is a ‘dirty’ profit measure in that it includes one-off non-recurring costs that are a bit bobbins when trying to work out long term sustainable profitability.

Despite the benefits of parachute payments Middlesbrough lost nearly £100,000 a week last season using this measure, although it is far lower than when the club previously was in the Championship.

Total operating losses in the Championship in 2016/17 were £260 million, so Middlesbrough’s finances appear to be far healthier than those of their competitors.

If these profits were invested wisely in the playing squad then the club should have been in a strong position to compete this season, but this does not appear to be the case.

A bit driver of Middlesbrough’s financial success here is profits from player sales. The likes of de Roon, Rhodes and Ramirez were sold and this helped to reduce the losses to tolerable levels for Steve Gibson.

Stripping out player sale profits and other non-recurring items (redundancies, legal cases, debt write offs etc.) gives a more valid profit measure called EBIT (Earnings Before Interest and Tax).

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For Middlesbrough this was a loss of nearly £400,000 a week in 2017/18, despite the benefits of parachute payments.

Nearly every club in the Championship has significant EBIT losses, which were £392 million in 2017, as many owners gambled on spending big to try to secure promotion to ‘the promised land’ of the Premier League, which in reality is a series of severe spankings by big clubs interspersed with celebrating like a loon when beating the likes of Swansea and Bournemouth.

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If non-cash 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.

Middlesbrough’s EBITDA profit was £7.1 million which shows that the club is generating cash from its day to day activities, although as said before, this is mainly driven by parachute payments. This suggests the club was making money which could then be invested in player transfers.

Once trading costs have been paid, many clubs also have to pay interest on their borrowings, which cost Boro £30,000 a week in 2017/18.

Player Trading

Middlesbrough spent £66 million on new players in the year to 30 June 2018 as the club recruited Assombalonga, Braithwaite, Fletcher, Howson, Randolph, Shotton, Christie and Johnson in multi-million pound deals.

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.

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Steve Gibson did bankroll a net spend of over £20 million which showed his faith in the managers, although Boro fans might question the quality, if not the quantity, of the recruitment.

The player recruitment does seem to have been funded on credit though, as amounts owing to other clubs increased to over £56 million, compared to just £1.5 million in 2013.

In the footnotes to the accounts it shows that the big spending on 2017/18 has subsequently been reversed as the club had net income of £27.7 million in summer 2018 from selling Traore and Gibson.

Funding

Clubs can obtain funding in three ways, bank lending, owner loans (which may be interest free) or issuing shares to investors. Historically Steve Gibson has lent ‘Boro over £93 million as well as about £90 million in shares, although this did not increase during 2017/18. Instead it looks as if the club bought most of its signings during the season on extended credit terms, which will result in significant payments being made for them over subsequent years.

Summary

Middlesbrough went for broke in 2017/18 in trying to immediately return to the Premier League. The failure to achieve this objective has resulted in cost cutting in the present season but if the club is not promoted this season there will be a tough challenge ahead as income will halve again likely to lead to a player exodus to balance the books unless Steve Gibson is willing to invest substantial amounts of cash once more.

Sheffield United 2017/18: Geisha Boys & Temple Girls

Introduction

Championship finances are the most mind numbing in any division in the professional game and Sheffield United have just produced their accounts for 2017/18.

Having to compete against clubs with the benefit of parachute payments as well as some with rich benefactors means that wages are high, and losses are common.

Relative to other clubs in the division was always a tough task but a seaason of consolidation in 2017/18 has been the platform for potential promotion in the current season.

I must confess to always liking Sheffield United as when I was a kid their Admiral kit was the one in the catalogue that looked cooler than a strawberry Mivvi and they had the magnificent Tony Currie playing for them.

Sheffield United’s finances showed the odds against which the club has had to struggle but a good manager and a goalscoring machine in Billy Sharp have helped keep the club competing in the Championship.

ey Financial Highlights for year ended 30 June 2018

Turnover £20.0 million (up 76%)

Wages £19.0 million (up 90%)

Pre-player sale losses £10 million (up 30%)

Player sale profits £8.4 million (up from £2.7 million)

Player signings £3.9 million (up from £3.1 million)

Income

Winning promotion to the Championship in 2016/17 meant that Sheffield United, like all clubs who went up, had access to potentially higher income sources from the three main activities, matchday, broadcasting and commercial.

Income from matchday rose by 34% to £8.7 million mainly due to average attendances rising from 21,892 to 26,854 as a combination of the attractiveness of Championship football, local derbies against Wednesday and Dirty Leeds and many away teams bringing full allocations.

Local rivals also have decent matchday income by Championship standards but the Blades figures for a side that has not been in that division for six years suggests the club has a very solid fanbase that is likely to sell out Bramall Lane should they be promoted to the Premier League (note figures are for 2016/17 unless clubs have published their totals for last season, which explains why there are some teams in the table who are now in other divisions).

Due to the Championship being on Sky Sports on a far more regular basis than Leagues One and Two, broadcast income quadrupled last season as the EFL TV deal is split 80%/12%/8% between the three divisions.

Every club in the Championship receives a solidarity fee from the Premier League (about £4.3m) a flat sum from the EFL from their Sky deal (about £2.2m) plus a ‘facility fee’ of £100,000 for a home match and £10,000 for an away match for those which are chosen for live broadcasts.

Relegated teams from the Premier League also receive parachute payments of between which completely distort the relative income of clubs in the Championship, this is estimated to be worth about 7 points a season to clubs in the first year of receiving such parachutes.

Income from ‘other’ sources is mainly from commercial deals, retail/merchandise and for some clubs conferencing/events, this showed a modest 7% rise for the Blades last season.

Sheffield United are in the bottom quartile of the Championship when it comes to other income and this is something they will no doubt try to grow if they are successful in the Championship and beyond as sponsors like to be associated with top division sides due to the high television profile.

Having the benefits of being in the Championship means that Sheffield United had a much more balanced split of income from the three sources compared to the previous year but there is clearly an opportunity to increase the ‘other’ stream.

Unlike those in receipt of parachute payments, Sheffield United have to budget for income in the £20 million bracket with a number of similar sized teams and this means that it is tougher, but not impossible, to be competing at the top of the Championship.

Costs

Nowadays the most significant costs for a club are in relation to player wages and transfer fees and here Sheffield United had some advantages and some disadvantages having come up from League One the previous season.

Going up resulted in a 90% rise in wages as many players who were responsible for promotion to the Championship were awarded enhanced contracts as well as the Blades having to offer more money when recruiting in 2017/18 to ensure the wages they offered were competitive for the division.

Leeds’s relatively low wage bill may surprise many but there is a significant difference between those clubs such as Sheffield United and those that still benefit from parachute payments with many players reluctant to move and take a pay cut.

Income for nearly all clubs in the Championship barely covers wages and this is true too for Sheffield United who paid out £95 in wages for every £100 of income.

Keeping wages under control when there is a potential £100-120 million a year windfall in the Premier League from TV income is very difficult to resist and this explains why some clubs gamble in terms of their wage bills even if it runs the risk of breaching FFP limits, which restrict losses to £39 million over three seasons.

Every player signed for a fee also adds to costs in the profit and loss account via transfer fee amortisation, which is calculated by dividing the amount paid over the contract period. So, when Sheffield United signed Richard Stearman for an estimated £900,000 on a three-year deal this works out as a £300,000 amortisation charge each year.

Amortisation for Sheffield United was broadly similar to that of the previous season in League One which may be reflective of boardroom struggles at the club and owners who were reluctant to spend large sums on players.

High amortisation fees reflect those clubs that have had a long-term investment in recruiting players on big transfer fees and once again those clubs who are in receipt of parachute payments have an advantage here as they have more income to spend on players and also have transfers from when they were in the Premier League.

Other costs, including the likes of rent (£360,000) electricity, marketing, transport and insurance increased by 30% to £8.4million, reflecting the extra burden that clubs incur in the Championship.

Profits

Reference is oftern made to profits when discussing club finances but you have to be careful as there are as many types of profit as there are opening batting combinations for the England cricket team.

Subtracting expenses from income gives a profit figure, but some expenses are erratic in nature and sometimes excluded when trying to determine a club’s underlying financial health for the season.

Each profit figure shown has a slightly different view of the club and they are best considered together to highlight those costs which are significant.

The simplest profit is to deduct all day to day costs from revenue, before considering borrowing expenses, and this is called operating profit. Here Sheffield United made a relatively low loss of £1.7 million last season.

A look at the above figures shows there has been much volatility in relation to profits and losses from year to year. This is mainly due to one off transactions which distort the numbers, such as profits on player sales and in the case of Sheffield United in 2014 a £34.5 million loan being written off.

Most analysts ignore finance, tax and one-off costs to create something called EBIT (Earnings before interest and tax) which represents the club’s underlying profit, and for Sheffield United in 2018 these increased losses to £10 million.

The EBIT figure shows that running Sheffield United is a frighteningly expensive business as the club has effectively lost £150,000 a week from trading over the last seven years and therefore the club needs to generate income from an additional source, and that source if player sales. However, the Blades are far from towards the top of the EBIT losses table as many other clubs have huge running losses.

Sheffield United made a record profit of £8.4 million in 2018 from player sales and these appear to be linked to sell on clauses from the like of Harry Maguire and Kyle Walker.

Player Trading

Sheffield United spent a modest £3.9 million on new players in 2017/8 and after considering player sales had a net income of £4.5 million. In recent years the club has used player sales to balance the books with sales exceeding spending five times in the last seven years. The club has shown it’s the quality of the sums paid combined with astute management rather than the amounts themselves that can deliver a promotion challenge in the Championship.

According to TransferMarkt (and I know it’s not very accurate but better than nothing) the club has spent about £6 million on players in 2018/19 which is more than offset by the transfer of David Brooks to Bournemouth.

Funding

Clubs get funding from three sources, bank loans, owner loans (which may or may not be interest bearing) and shares issued to investors.

Sheffield United are controlled by Kevin McCabe and Prince Abdullah who have fallen out with one another and are involved with unpleasant legal battles. Whatever the club is worth in the Championship it could be sold for £150 million in the Premier League should promotion be achieved.

The partnership between the two parties was initially responsible for paying down the debts of the club but there have been little new borrowings in recent years.

Conclusion

Sheffield United have done extremely well to be at the top end of the Championship on a relatively low budget with owners who are reluctant to put in further cash until their dispute has been concluded. Realistically losses of about £10-12 million this season are likely to be the case, but the sale of David Brooks should offset some or all of them. How long the club can rely on player sales to balance the books in a division that generates higher losses than any other in Europe is uncertain.

Credit has to be given to Chris Wilder and his team for getting on with the day job, making smart loan to buy signings (Oliver Norwood potentially is looking at his third promotion to the Premier League in three seasons with different clubs) and ignoring the boardroom shenanigans.

If the club does not go up this season a lot will depend on Billy Sharp to maintain his prolific scoring to help the Blades in 2019/20 and whilst he is getting no younger the likes of Jermaine Defoe and Glenn Murray have shown that age is not necessarily an issue if you know how to hit the back of the net.

Liverpool 2017/18: Toxteth O’Grady

Liverpool 2018: The Killing Moon

Pick it, lick it, roll it, flick it.

Introduction:

Jurgen Klopp has many reasons to smile at present with his team competing for the Premier League title and in the knock out stage of the Champions League.

Under Klopp’s management, combined with what seems to be astute operational management by the club’s commercial and marketing department, the club has also announced a world record pre-tax profit of £125 million for 2017/18.

Reds’ fans won’t give a hoot about the profits as they look forwards with anticipation and trepidation to the remainder of the season, but there is a link between good financial and footballing management depending upon the business model employed by different club owners.

Grinding through the numbers suggests that the club is in good financial shape although a closer inspection reveals that the record figures were mainly due to the sale of Philippe Coutinho.

Even so, compared to the management of the club under Hicks and Gilette a few years ago Liverpool are light years away from the near bankruptcy that they faced as debts piled up and banks came closer to pressing the trigger.

Key financial figures for year to 31 May 2018: Liverpool Football Club and Athletic Company Limited

Income £455.0 million (up 25%).

Wages £263.0 million (up 27%) .

Operating profit before player sales £1.1 million (down 84%)

Player signings £190 million (up 149%)

Player sales £137 million (up 89%)

Owner loans £120 million (down £10 million)

Income:

New income sources are always a challenge for clubs as ultimately they are split into three broad areas, matchday, broadcast and commercial, some of which are more controllable than others in terms of increasing the numbers.

Keeping up with the peer group is the hardest challenge for Liverpool and in this regard the club has done exceptionally well in 2017/18 as the club rose from 9th to 7th in the Deloitte Football Money League, which focuses on club revenue.

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Liverpool’s income rose faster than any other club (that has reported to date) for last season as total revenue increased by a quarter, which is an achievement for any business that has been trading for over a century.

Of the ‘Big Six’ clubs (although Spurs haven’t won the title for nearly 60 years and are yet to publish their 2018 results) the income growth in 2017/18 allowed Liverpool to leapfrog both Chelsea and Arsenal last season.

Premier League income is dominated by the big clubs but has increased for everyone nearly every year since its inception in 1992, when Liverpool’s revenue was only £17.5m, which in the Reds’ case equates to a 14% increase every year.

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Parting fans from their cash is never an easy task for football clubs but Liverpool have managed to increase matchday income by 82% since 2013 on the back of greater capacity at Anfield and selling more tickets to the hospitality sector.

Every club has a slightly different strategy when it comes to season ticket holders and Liverpool’s is to restrict ST numbers to just 26,000 out of their 54,000 capacity and have many more available to fans on a match by match basis.

Although such an approach does generate resentment from those on the Liverpool season ticket waiting list (presently closed as it could take up to 15 years to get a ST) from a cold commercial basis this policy makes financial sense given the club’s international appeal.

The concept of the football tourist, armed with selfie stick and half and half scarf, provokes merriment from away fans at Anfield but such fans do generate cash even if they are held in contempt by regulars at the club.

Success in reaching the Champions League which meant more sold out matches at Anfield which contributed to the 10% rise in matchday income last season, despite a freeze in individual ticket prices.

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Having matches sell out is great but matchday revenue is a combination of attendances, prices and number of matches and Liverpool were relatively successful here in generating over £1,500 per fan over the course of the season, nearly 50% more than present Premier League rivals Manchester City and three times as much as neighbours Everton.

Income from broadcasting increased by 43% due mainly to Liverpool generating £72 million in UEFA TV income as a function of reaching the Champions League final compared to a European free season in 2016/17.

Such is the importance of Champions League progress Liverpool generated more broadcast income that any other English club last season despite only finishing 4th in the Premier League.

Being a club with a large global profile helped drive up commercial income by 13% in 2017/18, partly due to a sleeve sponsorship deal with Western Union and in addition sponsors paying bonuses as Liverpool reached the Champions League final.

Of the commercial deals that clubs have, kit manufacturing and shirt sponsorship are usually the most lucrative, Liverpool renewed their deal with Standard Chartered in May 2018 for an estimated £160 million over four years so this should provide a boost for 2018/19.

Getting hold of a Liverpool replica shirt at present is tricky as practically everyone produced by present manufacturer New Balance has flown off the shelves as sales have hit record levels.

In comparison to the other ‘Big Six’ clubs Liverpool are doing well but there is scope for further growth, Manchester United’s commercial department are legendary at getting companies to pay for the privilege of attaching their products to United’s crest and Liverpool appear to be trying to copy this model of having different commercial partners for the same product in different locations.

Ensuring the club has commercial income growth is an essential feature of setting a club apart from the also rans in the Premier League and it appears that Liverpool are in talks with a variety of kit manufacturers to boost the present £45m a year they generate from New Balance in a deal that expires after 2019/20 to something closer to the £75m that Manchester United earn from adidas.

Success on the pitch makes clubs very appealing for sponsors and the lack of it in recent years is partly why Liverpool have suffered relative to some of their peer group, although this could reverse if Jurgen Klopp starts bringing trophies to Anfield.

Costs

The main costs for clubs are those relating to players, in the form of wages and transfer fee amortisation.

Liverpool’s wages have doubled since 2013 and increased by 27% in 2017/18 reflecting the investment in the squad as Salah, VVD and others were recruited during last season as well as other players earning improved contracts. This meant that overall Liverpool’s wage bill overtook those of Chelsea and Manchester City, although City’s figures should be viewed with caution due to the unusual structure of the club in terms of how costs are treated by the parent company City Football Group Limited, which also owns clubs in Australia, USA and Uruguay.

Liverpool’s average weekly wage (and we fully accept that these are rough and ready figures) jumped from £100,000 to £126,000 a week, allowing Liverpool to compete with other elite clubs both domestically and internationally.

Despite the wage increase Liverpool are paying just £58 in wages for every £100 of income. As a rule of thumb clubs in the Premier League are usually deemed to have good wage control if they are paying out 60% or less of income as wages, so the significant increase in income in 2018 covered the wage rise. If Liverpool don’t make a lot of progress in the Champions League in 2018/19 this ratio could deteriorate.

It is not just players who have benefitted from the generosity of the owner, the highest paid director saw their income rise by 45% to £1,329,000, although this is not overly high by Premier League standards.

By Premier League standards Liverpool’s board are reasonably well paid, but this pales into significance when compared to Daniel Levy’s package of over £6 million at Spurs, although Daniel’s fan club will no doubt point out this is partially linked to bonuses linked to his amazing success at delivering Spurs’ new stadium on time and budget. Those who are suspicious of Manchester City’s finances will have food for thought as City have a zero cost for their directors.

The amortisation cost represents the transfer fee paid spread over the term of the contract signed by a player. So, when Liverpool signed Virgil Van Dijk for £75 million on a five and a half year deal it meant that the amortisation cost is £13.6 million (75/5½) a year.

Liverpool’s annual amortisation cost has doubled since 2013, showing the extent of FSG’s h investment in the playing squad.

In using amortisation, it is possible to get a broader feel for a club’s longer-term transfer policy rather than just a couple of windows of buying a selling within an individual season.

Although Liverpool have invested heavily in players in recent years, they are relative paupers in terms of amortisation compared to the two Manchester clubs and Chelsea as the latter have all been spending large sums on transfers over a number of years.

In terms of player sales, these were substantial, as the departure of Coutinho, Sakho, Lucas and Stewart contributed to a profit of £124 million from disposals. As can be seen from the above chart these figures are volatile and vary considerably from year to year. Sales of the likes of Suarez and Sterling in previous years have been lucrative financially for Liverpool but didn’t necessarily help achieve success on the pitch.

Liverpool also had an interest cost of £7.5 million in 2017/18, although some of this was due to accounting dark arts in relation to amounts owed on player transfers and a £19 million tax bill, again mainly due to accounting issues rather than tax being paid to HMRC.

Profits and Losses

Profit, if you ask the right accountant, is what you want it to be, and there are as many types of profit as there are ex-members of the Sugababes.

A rough definition is that profit represents income less costs, and if this figure becomes negative it becomes a loss.

The headline figure in the Liverpool press release was a world record profit of £131million, before taking into consideration finance costs and tax. Taking such a profit figure as a measure of success is okay, but it includes some items which are volatile (such as player sales gains, redundancy costs and player write-downs).

Stripping out the above distortions gives something called EBIT (earnings before interest and tax) profit, which is a better measure of recurring profits excluding the non-recurring transactions.

Liverpool’s EBIT is far lower than the operating profit, but it does show that the club is capable of making profits without having to rely on player sales. This is a good sign as there are some clubs who have suffered significant losses from their day to day activities and so player sale profits become a necessity rather than a bonus.

Liverpool’s EBIT losses worked out at £140,000 a week in 2017/18, reasonable but not spectacular by Premier League club standards.

If non-cash costs such as player amortisation are stripped out, the position however improves, and Liverpool have an EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) profit of a far more impressive £95 million.

EBITDA is an important profit measure as it is the closest to a ‘cash’ profit that analysts use to assess a business and shows how much the club has to invest in player acquisitions from its day to day activities. Liverpool have made over £339 million in EBITDA profit over the last six years but have invested more than that in improving the squad.

Player trading:

Liverpool had a record year in 2017/18 in terms of player purchases and sales, but the net spend was broadly the same as in 2015 and 2016 at £58 million.

Compared to their peer group, Liverpool’s spending is very modest.

Since the end of the season the board have backed Jurgen Klopp in the summer 2018 transfer windown with a net £181 million on new signings such as Allison, Fabinho and Keita.

Liverpool were owed £169 million by trade creditors, this will mainly be for player transfers but at the same time owed others £148 million

Funding the club

Clubs usually have a choice between third party loans (which attract interest payments) owner loans (which may or may not charge interest) and shares (which occasionally pay dividends).

In the case of Liverpool, the club have focussed on owner and bank loans. Liverpool have an overdraft facility at the bank of £150 million but at 31 May 2018 ‘only’ had used £56 million of this available facility. In addition, Liverpool owed FSG £100 million for a loan in respect of stadium expansion.

A look at the cash movements on borrowings shows that Liverpool appear to have peaked in terms of their debts and are in a position to repay some of the sums due, as £30m was given back to the bank and FSG in 2017/1. The large investment in players in 2018/19 may have resulted in the overdraft increasing again.

Conclusion

Liverpool have had a strong, but perhaps not as spectacular a year financially as has been reported elsewhere. Money spent on infrastructure in previous years has borne fruit in terms of generating extra income and the club has invested record sums in player purchases in the ambition of reaching the Holy Grail of a Premier League title.

This level of investment will have to continue if Liverpool want to consistently challenge to the two Manchester clubs for titles and trophies. Manchester United have an advantage in terms of stadium capacity and commercial deals, Manchester City have the backing of owners will limitless funds. The three main London clubs seem to be at a hiatus at present and it will take time to work out what are the ambitions of their respective owners.

Swansea City: Soul Train

Introduction

Huw Jenkins, Swansea’s chairman, who made millions when the club was acquired by American investors in 2016, has resigned. Reading between the lines it appears that there are conflicts in terms of day to day running of the club.

The club’s finances are clearly an issue, as is the strategy of the majority shareholders Jason Levien and Steve Kaplan in terms of how the club is going to deal with the aftermath of relegation.

Swansea haven’t yet published their accounts for 2017/18, but were there warning signs in the previous year?

Key Financial Highlights for year ended 31 July 2017

Turnover £128 million (up 31%)

Wages £99 million (up 21%)

Pre-player sale losses £22 million (up 12%)

Player sale profits £37 million (up from £6 million)

Player signings £64 million (up from £16 million)

Income

Swansea, like all clubs, have three main sources, matchday, broadcasting and commercial.

The club reduced season ticket prices in 2014/15 which explains why matchday income fell that season and since then the amount generated from fans has been broadly static as ticket prices have been frozen.

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Given the relative scarcity of large corporate sponsors in the area, a limited stadium capacity and the club not being located in an affluent area it is of little surprise that Swansea are close to the bottom of the table when it comes to matchday income.

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This is also reflected in the relatively low average sums generated from each fan by the club from matchday. The big English city clubs, with the added attraction of UEFA cup fixtures were generating 3-5 times as much from each fan compared to the Liberty Stadium.

Broadcast income is allocated in a relatively democratic method in the Premier League (although the ‘Big Six’ of Manchester United, Manchester City, Arsenal, Spurs, Chelsea and Liverpool, three of which have US owners, one Russian, one Middle East and one Bahamas are doing their best to skew the money further towards themselves) and is by far Swansea’s biggest paymaster.

The large rises in 2013/14 and 2016/17 were due to new BT/Sky deals coming on stream. The Big Six generate more money from TV due to three factors, participation in Champions/Europa League, appearing more often on BT/Sky (each appearance is worth £1 million once a club appears more than ten times) and prize money linked to the final position in the table.

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Swansea’s broadcast income fell by about £10 million in 2017/18 due to being relegated and so receiving less ‘merit’ money.

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In 2018/19 Swansea’s broadcast income will fall to about £45 million, followed by £35 million, £14 million and £7 million if they remain in the Championship, so cost cutting will be a feature of the club unless the owners invest.

Swansea have done well to nearly double their commercial income since 2013. Part of this is due to signing shirt sponsorship deal with betting companies, who are prepared to pay more than companies in other industries for the benefit of exposure globally on television. Expect this figure to fall in 2018/19 as Championship matches attract much lower TV audiences than the Premier League. LeTou were estimated to be paying Swansea £4.5 million in 2017/18 but this will fall substantially this season/.

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Like most clubs, Swansea generate the greatest proportion of their income from broadcast revenues, with £86 out of every £100 coming from BT/Sky . This is fine so long as the club was a member of the Premier League.

Every club in the Premier League is looking to increase income but with TV deals having perhaps reached a ceiling and grounds already full the burden for growth is falling upon commercial departments.

Swansea fans are realistic enough to know that they are in the bottom ten clubs each season whose overall income is fairly close to one another and to an extent determined by merit and facility broadcast fees. These clubs are the ones most likely to be in the relegation mix each season so realistically start each season with a 30% chance of being relegated.

Costs

The most significant costs for a club are in relation to player wages and transfer fees and here Swansea have been notable for their willingness to pay decent wages by Premier League standards, with an average weekly wage of £47,000 in 2016/17, which is towards the top end of the bottom half of clubs in the Premier League .

The problem with such an approach is that the club pays out so much of its income in wages that there is little left to pay the other running costs.

Dividing wages by income gives a ratio that is used by analysts to assess whether a club is spending too much on player remuneration and Swansea had the second highest ratio in the Premier League in 2015, 2016 and 2017.

Without knowing much about the internal workings of the club one person who seems to do reasonably well from Swansea’s tenure in the Premier League is the highest paid director.

£12,000 a week isn’t excessive by Premier League standards, (the median amount paid is £620,000) but you would expect someone on such a wedge to be capable of making good recruitment and commercial decisions.

Every player signed for a fee also adds to costs in the profit and loss account via transfer fee amortisation, which is calculated by dividing the amount paid over the contract period. So, when Swansea signed Sam Clucas from Hull for an estimated £12 million on a four-year deal this works out as a £3 million amortisation charge each year.

Swansea’s amortisation cost has more than doubled since 2013 as the club tried to further establish its position as a Premier League club.

Despite the investment in the likes of Ayew, Bony and Clucas in 2017/18 Swansea’s amortisation cost was slightly lower than some of their peer group in the bottom ten and this may be an indicator why the club was relegated in 2018. There is a case for saying amortisation highlights the medium/long term investment in new players.

If the amortisation charge is added to wages, then it is possible to look at the total investment in players as a proportion of income.

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In Swansea’s case this is quite alarming as the club was paying £96-£102 in these costs for every £100 of income. This left virtually nothing remaining to pay the rest of the bills and therefore either player sales or owner funding was required to balance the books.

Like all businesses, Swansea have to also pay for everything from electricity, transport and insurance as overheads and these have risen substantially in the last five years. This is an area the club must address in the Championship as by 2017 the club was spending £1/2 million a week on such costs.

Profits

In finance you have to be careful when discussing profits as there are as many types of profit as there are ex-members of The Fall.

Expenses are usually subtracted from income to arrive at profit, but some expenses are erratic in nature and sometimes excluded when trying to determine a club’s underlying financial health for the season.

Simply deducting all day to day costs from revenue, before considering borrowing expenses, meant that Swansea could claim to have made a record £79 million last season.

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A look at the above profit and loss figures shows there has been much volatility in relation to Swansea’s profits and losses from year to year. This is mainly due to one off transactions which distort the numbers, such as profits on player sales and in the case of Swansea paying up the contracts of a variety of sacked managers and their entourages.

Most analysts ignore finance, tax and one-off costs to create something called EBIT (Earnings before interest and tax) which represents the club’s underlying profit, and for Swansea in 2017 this converted the profit of £14 million into a loss of £22 million. The main reason for this decline was the combination of lower income and higher player related costs that have been already highlighted. Swansea have been dependent upon player sales to balance trading losses that averaged £380,000 a week in the last three seasons, despite record levels of broadcast income.

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The EBIT figure shows that running Swansea is a frighteningly expensive business and therefore the club needs to generate income from an additional source, and that source if player sales.

Swansea made a record profit of £37 million in 2017 player sales (Ayew, Williams etc) and this is likely to have been eclipsed in 2018 as Sigurdsson and Llorente were sold.

If player transfer sales are to be excluded from profit, then there is a case for excluding transfer amortisation costs too, which leads to another form of profit, called EBITDA. This is popular with analysts as it is a trading cash profit equivalent.

This is possibly the most revealing figure about Swansea as it suggests that the club has a strategy of breaking even at least in terms of EBITDA profit. This does mean that the club has to also break even in terms of player trading unless it wants to borrow from banks or the owners stick their hands in their pockets. However, Swansea’s relatively loose wage bill control resulted in the club having the lowest EBITDA profit in the Premier League.

Player Trading

Swansea spent a record amount on new players in 2016/17 but also had record revenues from sales, which resulted in a net spend of £22 million. According to Transfermarkt the net spend the following season was £8 million.

Swansea seem to have had a policy of re-signing player whom they had previously sold at a profit, but this has not been successful on the pitch as the likes of Bony and Ayew failed to impress on their return to the club.

Funding

Clubs get funding from three sources, bank loans, owner loans (which may or may not be interest bearing) and shares issued to investors.

Swansea are controlled by Steve Kaplan and Jason Levien, who have a 70% majority stake between them. When the deal was brokered a lot of people made a lot of money and the romantic element of Swansea’s rescue from near bankruptcy and rise through the divisions looked slightly grubbier as a result.

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The sale of the club in 2016 seems to have been the start of the club’s decline on the pitch as relations between the Supporter’s Trust and the new owners have fractured. Kaplan and Levien’s motives are unclear, but they presumably perceive Swansea as a franchise and want a return on their investment.

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Since acquiring the club there is no evidence of substantial investment by the new owners. There’s a case for saying this shouldn’t be necessary given the riches of the Premier League, but it’s an uncomfortable situation to be in when so many people

Conclusion

Swansea are in a tricky position, they have not invested in the playing squad since relegation and are using player sales and parachute payments as a means of generating cash. Matchday prices have been reduced to try to ensure that attendances do not fall significantly but the club appears to be budgeting for life as a Championship club rather than gambling on a quick return to the Premier League.

The club’s business model in the Premier League was a dangerous one, spending more on wages than their peers worked for a while, but some poor managerial and player choices had led to a fire sale and a desperate need to get players off the wage bill now the club are in the Championship.

Kaplan and Levien’s motives for running the club are mysterious. They appear to want Swansea to be self-financing, which is understandable to a degree, but having spent £70 million buying control in the club in 2016 it is difficult to see how they will get their money back as the club is likely to be valued at half that sum or less outside of the Premier League.

It’s probable that their aim was to generate some income from dividend payments from the club whilst it was in the Premier League or alternatively flip the club and sell it on to another ‘investor’ with the moral compass of  an alleycat for a handsome profit, but neither has materialised to date.

The Championship is a bear pit of a division, with clubs averaging trading losses of £330,000 a week, which have to be funded somehow. Player sales can only assist here for a limited time as ultimately the pool of players who can be sold at a profit diminishes as wage levels fall.

Huw Jenkins’ cryptic comments and the silence from the owners suggests that finance-based arguments led to his resignation and fans are no doubt fully aware of the profit that Jenkins made when selling his stake in the club in 2016 (and the £4 million of dividends paid to shareholders prior to that).

Good governance for any business requires transparency and honest communication and these both appear to be in short supply in SA1 at present.

Arsenal 2017/18: My Friend Stan

Introduction

That’s another fine mess.

Stan Kroenke, Arsenal’s invisible owner, saw goodbye to three big players in the club during 2018 as the club went trophy less but perhaps more importantly for the moneymen failed to qualify for the Champions League for the second season in a row.

The power struggle with Ukrainian Alisher Usmanov ended with Stan as the final man standing as he bought out his rival, allowing the American to also take Arsenal from the AIM Stock Exchange to the less scrutinized private company.

Arsene Wenger’s dignified reign as manager came to an end with perhaps sighs of relief from both the Frenchman and his many vocal and at times very angry detractors amongst Gooners.

‘Necessary change and succession’ was the official reason for Chief Executive Ivan Gazidis leaving the Emirates too, which seems perhaps one person too many with experience at the top of the club departing for Milan.

Keeping things quiet has always been the Kroenke way and the way the club’s accounts were added to the website, without any fanfare or accompanying trumpets, was in keeping with his style of communication.

Key Financial Highlights

Turnover £403 million (down 5%)

Wages £240 million (up 20%)

Pre-player sale losses £18 million (previously £53 million profit)

Player sale profits £12 million (up from £7 million)

Player signings £166 million (up 46%)

Income

Reporting income, Arsenal, like all clubs, have three main sources, matchday, broadcasting and commercial.

Overall income fell by 5%, which in an age where clubs are supposed to be making more and more money, is a cause for concern.

Emirates regulars will be familiar with the high prices charged for both season and day tickets to watch Arsenal, but the club appears to have realised that it cannot squeeze more money out of fans for tickets as many prices were frozen for the fifth year in a row.

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Nevertheless, matchday income fell slightly, mainly due to the club being unable to generate as high prices, especially for hospitality packages for Europe League fixtures against the likes of Bate Borisov as for Champions League opponents.

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Keeping up with Manchester United will be difficult but compared to other Premier League clubs Arsenal’s matchday income is impressive, but there is no room for complacency, with Liverpool and Spurs likely to catch up as capacity increases at their stadia.

Extracting money from fans is never easy, but the high proportion of corporate and hospitality seats at The Emirates means that Arsenal generated £1,660 per fan last season and Arsenal have the highest proportion of income from matchday of any Premier League club as a result.

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Due to the way that UEFA allocate TV money, Arsenal’s broadcast income fell by 10% despite the club reaching the semi-final of the Europa League, where clubs receive only a quarter of the prize pot available in the senior competition.

Relative to other clubs in the Europa League Arsenal earned more than any other club in terms of UEFA prize money, mainly due to BT paying a huge sum for the broadcasting rights, a large portion of which then goes to clubs from BT’s ‘domestic’ leagues in England and Scotland.

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Only those clubs with Champions League participation (Leicester’s figures are from 2017 when they were in the CL) exceed those of Arsenal, but the gap is one they can ill afford to let grow.

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Penalty clauses from commercial partners sponsors for only qualifying for the Europa League may have been the reason why Arsenal’s commercial income fell in 2018 too, albeit by a small amount.

Sponsors want their products to be seen by big audiences, mainly on TV, and this is where the Champions League delivers as it has such a global appeal with armchair fans.

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Some £15 million of Arsenal’s commercial income total comes from property income, compared to just £1 million the previous season, otherwise there would have been a far more significant fall from this area.

In comparison to Manchester United, which is in a league of its own when attaching the badge to sponsor products and Manchester City, with its unusually lucrative deals with Middle East partners. Arsenal are generating about half as much from commercial sources, which ultimately has an impact upon the ability to compete in the player market.

Like most clubs, Arsenal generate the greatest proportion of their income from broadcast revenues, but the club does generate more matchday income as a proportion of total than any Premier League team.

Every club in the Premier League is looking to increase income but with TV deals having perhaps reached a ceiling and grounds already full the burden for growth is falling upon commercial departments.

No one at The Emirates will admit it but the danger for Arsenal is that Liverpool are likely to overtake them in terms of revenue when their 2018 figures are released, and Spurs could do the same within two years should they ever finally move to the new stadium.

Costs

The most significant costs for a club are in relation to player wages and transfer fees and here Arsenal saw significant increases in 2018.

Bringing new expensive players to The Emirates meant that the wage bill rose 20% in 2018 to £240 million although included in this figure is a £17 million payoff for Arsene Wenger and his coaching team who departed from the club when The Professor left office at the end of the season.

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Urgent investment in the squad necessitated the wage rise and Arsenal were not alone in 2018 in having pay outstrip income, but this is not sustainable in the long run.

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The club, compared to the remainder of the ‘Big Six’ are where most would expect to see them, trailing the two Manchester teams and close to Chelsea, the only consolation for Gooners is seeing Spurs having a lower wage bill than Everton although Spurs are yet to report for 2018.

Dividing wages by income gives a ratio that is used by analysts to assess whether a club is spending too much on player remuneration and Arsenal have moved having the second lowest ratio in the Premier League in 2017 to mid-table last season.

Every player signed for a fee also adds to costs in the profit and loss account via transfer fee amortisation, which is calculated by dividing the amount paid over the contract period.

Arsenal’s amortisation cost has more than doubled since 2013 as the club has taken the foot off the brake in terms of player recruitment to try to compete with the other ‘Big Six’ clubs (excluding Spurs).

Despite the investment in the likes of Lacazette and Aubameyang in 2017/18 Arsenal’s amortisation cost is substantially lower than some of their peer group and this may be an indicator why the club failed to qualify for the Champions League as amortisation highlights the medium/long term investment in new players.

Like all businesses, Arsenal have to also pay for everything from electricity, transport and insurance as overheads and these are now running at about £80 million a year.

Profits

In finance you have to be careful when discussing profits as there are as many types of profit as there are Pringles flavours.

Expenses are usually subtracted from income to arrive at profit, but some expenses are erratic in nature and sometimes excluded when trying to determine a club’s underlying financial health for the season.

Simply deducting all day to day costs from revenue, before taking into account borrowing expenses, meant that Arsenal could claim to have made a record £79 million last season.

A look at the above profit and loss figures shows there has been much volatility in relation to Arsenal’s profits and losses from year to year. This is mainly due to one off transactions which distort the numbers, such as profits on player sales and in the case of Arsenal paying up the contracts of Arsene Wenger and his coaches.

Most analysts ignore finance, tax and one-off costs to create something called EBIT (Earnings before interest and tax) which represents the club’s underlying profit, and for Arsenal in 2018 this converted the profit of £79 million into a loss of £18 million. The main reason for this decline was the combination of lower income and higher player related costs that have been already highlighted.

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The EBIT figure shows that running Arsenal is a frighteningly expensive business and therefore the club needs to generate income from an additional source, and that source if player sales.

Arsenal made a record profit of £120 million last season from player sales (Oxlade-Chamberlain, Sanchez, Walcott, Giroud etc) which helped to offset the day to day losses. However, in previous years the club had made minimal profits from player disposals.

If player transfer sales are to be excluded from profit, then there is a case for excluding transfer costs too, which leads to another form of profit, called EBITDA. This is popular with analysts as it is a trading cash profit equivalent.

The good news for Arsenal is that their EBITDA is a positive figure for 2017/18 but £60 million lower than the previous season.

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The EBITDA profit at £84 million shows the club is generating over £1.5 million a week in terms of cash, which can then be used to invest in player transfers.

All clubs in the Premier League generate a positive EBITDA, but some are juggernauts and others also rans. Arsenal are certainly generating cash but trail some way behind most of their peer group.

Player Trading

Arsenal spent a record amount on new players in 2017/18 but also had record revenues from sales, which resulted in a net spend of just £28 million.

Spending £166 million on players should have improved the quality of the squad, but the final league position may lead observers to conclude that the acquisitions have failed to improve Arsenal, who ultimately spent less than the other clubs (excluding Spurs) with whom they are competing for a top four place

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In a somewhat footnote to the accounts Arsenal did spend a net £61 million in the summer 2018 window on players.

The problem for Arsenal going forwards is that they appear to have some highly paid players on contracts that are unlikely to be matched by other clubs. Getting such players off the books is a delicate negotiating task.

Under a form of financial fair play rule in the EPL called Short Term Cost Control (STCC) clubs can only increase the wage bill by £7million a season plus any extra income they generate from matchday or commercial sources.

Arsenal are snookered here at present as the Emirates is sold out every week and fans won’t tolerate higher prices and so it’s up to the commercial department to make the club attractive, but to do this they need to be able to offer them Champions League football.

A new kit deal with adidas worth £60m a year will help here but when competing with other big clubs it’s a case of running to stand still in terms of wages as other clubs are giving double digit percentage increases.

Media talk is that Emery will be limited to £45m in the market this summer, although if that is a net spend then should still give them a chance to compete.

Funding

Clubs get funding from three sources, bank loans, owner loans (which may or may not be interest bearing) and shares issued to investors.

Arsenal are owned by KSE UK Inc, Stan Kroenke’s private company, but the club also has loans as a legacy of moving from Highbury to The Emirates stadium. The club repaid £8 million of these loans in 2017/18 but paid over £11 million in interest on the outstanding loan balance of £193 million. Whilst this seems a large sum Arsenal had over £230 million in the bank at 30 June 2018, so their net debt position is healthy.

Conclusion

Arsenal are in a tricky position, two years without Champions League participation is costly for a club that has invested so much in player transfers and wages in the last couple of years but to a certain extent they are running to stand still when competing with the other big clubs in terms of player investment (except Spurs).

Stan Kroenke’s motives for running the club are as mysterious as ever. He appears to want Arsenal to be self-financing, which is understandable to a degree, but this may result in the club earning the riches of the Champions League less regularly and finding it harder to attract the best talent in terms of coaches and players, which will restrict growth in terms of commercial deals and further anger Gooners who have been patient to date with Unai Emery but a few more moderate results could result in them returning to the toxic atmosphere that blighted the latter days of Arsene Wenger’s dynasty.

Rangers: Phoenix from the ashes or new dawn fades?

Rangers won the Scottish Premier League five times between 2003 and 2011, as well as reaching the final of the UEFA Cup in 2008, which on the face of it was an impressive achievement as the club went toe to toe with a resurgent Celtic during that period.

To compete with Celtic the club was however prepared to take steps that would ultimately lead to the liquidation of the club’s operating company and had to apply for membership of the Scottish Third Division. It would take four years out of the top flight before the club was once again able to face its rivals in a league match.

The high profile recruitment of Steven Gerrard as manager in the summer of 2018 has whetted the appetite of fans and pundits, but is the club a phoenix from the ashes, or are its new foundations made of sand?

During the 1990’s Rangers were the dominant force in Scottish football, the wealth of owner David Murray allowed the club to recruit the likes of Paul Gascoigne, Tore Andre Flo, Brian Laudrup and Mo Johnston, and the club won nine titles in a row. Murray claimed ‘for every five pounds Celtic spend we will spend ten’ and the dynasty seemed unstoppable, but it was built on debt.

Celtic were however improving their finances thanks to the backing of Irish billionaire Dermot Desmond, with managers such as Wim Jansen and Martin O’Neill the battle for supremacy in the Scottish game became more balanced on the field, and the investment in infrastructure at Celtic Park plus more regular progress in UEFA competitions meant that the club’s income was ahead of that of their rivals.

Because Celtic were generating more money in the early 2000’s, it meant they could sign better players to compete with their rivals in terms of recruitment. Rangers were during this period generating large losses as they had a smaller capacity stadium and were generating less matchday income.

The only way to underwrite these losses was to borrow money, which the club did with enthusiasm such that by June 2004 Rangers owed £74 million to financial institutions.

Behind the scenes Rangers were also trying to compete with Celtic by some creative tax activities. This involved the creation of Employee Benefit Trusts (EBTs) where the club paid money into a trust.

The EBT then ‘lent’ money to players who in theory promised to pay it back, but there was no or little effort to ask for that money back from the players, who effectively therefore treated it as regular income.

The advantage to Rangers in taking this approach was that the club did not pay National Insurance contributions on the payments to the players, who also did not pay income tax on these loans from the trusts.

The players were happy because they ended up with the net pay they were seeking, so everyone was a winner…apart from the government.

This policy worked to the extent that Rangers won the Scottish Premier League five times from 2003 to 2011, but critics will argue they were abusing the tax system in the process and those titles were at best tainted and some even go as far as to say those achievements should have been stripped from the club’s list of trophies.

The global financial crash of 2007, created by the financial community who lent money to people and businesses who had no ability to repay the sums advanced, hit Rangers in two ways.

Owner David Murray’s business struggled and so was unable to provide the club with further financial support, and the main external lender, the Bank of Scotland, (now part of Lloyd’s Group) effectively went into public ownership following its own financial meltdown, and there was a far less relaxed approach towards Rangers from the bank’s new senior management as a result.

Furthermore, the UK tax authorities became increasingly unhappy with Rangers’ use of EBTs, which had been originally sanctioned for non-employees, which was not the case in respect of the club and its players. The tax authorities saw the approach taken by the club as extreme tax avoidance and pursued Rangers for a tax bill of up to £49 million.

An increasingly desperate David Murray therefore sold the club to Craig Whyte for just £1. Whyte promised to settle the tax issues and the bank loans but did neither and as more and more creditors were issuing writs for unpaid debts the club appointed administrators in February 2012.

This angered HMRC, who had wanted to appoint their own administrators to investigate Rangers’ affairs. HMRC therefore refused to agree to a deal with the administrators, leading to Rangers operating company going into liquidation, provoking a constitutional crisis in Scottish football.

A new company, Sevco Scotland, was set up and bought Rangers’ assets from the liquidator, although players were allowed to leave the club for free as their contracts were with the old club.

Most SPL clubs voted that SevCo, now called Rangers Football Club Limited, was not allowed to take the place of Rangers in the top flight, and instead the newly formed company was allowed instead to join the Scottish Third Division, giving people in small towns such as Peterhead and Elgin the opportunity to learn about seventeenth century Irish history through the songs sang by Rangers fans when their club visited.

  • Rangers had income of £19 million in 2012/13 in the Scottish Third division, which was more than double than that of the other nine teams in the division combined as the club unsurprisingly won the division and Rangers had similar success in the Scottish Second division the following season.

During this time Rangers was falling further behind Celtic in terms of generating income and signing players, which meant that when Rangers were finally promoted to the SPFL and had their first season there in 2016/17 they generated only a third of Celtic’s revenue.

Rangers have also returned to using debt as a means of funding the club, although as there is great suspicion from banks towards the club, the lending is almost exclusively from directors.

At the last count Rangers owed lenders £21 million in June 2018, although subsequently some of this has been written off as lenders converted the IOU’s from the club, which some consider to be worthless, into shares instead.

The arrival of Steven Gerrard has introduced a feel-good factor to the club, and there were million pound plus signings such as Barisic, Goldson and Murphy, along with loans from Liverpool as Stevie G used his contact book to try and improve the quality of the playing squad.

The club is now competing with their rivals in an SPFL that has greater uncertainty than has been seen for many years. For this to be achieved the board has admitted it will need a further £4.6 million to survive this season and has gone cap in hand to investors for extra funds.

The recent elimination from the Europa Cup will not have helped Rangers’ financial position although reaching the group stages has helped generate greater income than in 2017/8.

In addition largest shareholder Dave King seems to spend more time in court arguing with the likes of Mike Ashley and The Takeover Panel, who believe he should buy out remaining shareholders, than focussing on issues on the pitch.

Whether King has the wealth that he claims to buy the shares from these shareholders is as yet unproven, as are many issues in relation to the club’s activities.

Even if King himself does not have funds there appear to be other backers to underwrite the club’s losses, although this could lead to another power struggle.

Furthermore, there are squabbles and threats of litigation between the administrators, liquidators, former owners, HMRC and former players, which could result in large sums being payable by some of them, but the only guarantee is that the lawyers, as always, will be rich on the pickings between the disputes between these parties. The club however is unlikely to bear these potential costs.

One of Rangers’ fans most popular songs is ‘Follow Follow’, but given the club’s present predicament, perhaps this should be renamed ‘Borrow Borrow’.