Strategy & Operations » Leadership & Management » Football’s punctured finances

SIR DAVE Richards, the Premier League chairman, scored a fabulous diplomatic own goal in an extraordinary rant in which he accused FIFA of “stealing” football from England. Speaking at a sporting conference in Qatar, Richards told delegates: “”England gave the world football. It gave the best legacy anyone could give. We gave them the game.”

What Richards should have added was that for the country that invented football, the British have singularly failed to figure out how to make any money out of our greatest cultural export. When it comes to turning a profit the so-called ‘best league in the world’ is more third-world than world-class.

According to Deloitte’s latest annual review of football finance covering the 2009/10 season, the Premier League was remarkably resilient to the recession – collective revenues for the league’s clubs increased 2% to exceed £2bn for the first time – yet still managed to make a collective pre-tax loss of £445m with only four of the leagues 20 members actually posting a profit in 2010.

The Premier League was not the only offender. While the spotlight might be on oil tycoons ploughing cash into loss making businesses in the football’s top flight, further down the football food chain the financial performance is little better. For the 2009/10 season clubs in the Championship made a collective loss of £138m, while total losses for the Football League – excluding the Premiership – stacked up at a staggering £194m.

Clearly something had to give, and in the past two months it has. In February, Portsmouth FC went into administration for the second time in two years over an unpaid tax bill of £1.6m having earlier been issued with a winding-up petition by HM Revenue and Customs on 3 January, freezing the club’s bank accounts.

During the administration hearing at the High Court, it emerged that Portsmouth owed around £2m to business creditors, and that electricity and gas suppliers have been threatening to cut off power to the club’s Fratton Park stadium for non-payment.

There were real concerns the club would not have enough finance to finish the season after both the Premier and Football Leagues refused to issue them with parachute payments. However, the Football League later relented and confirmed that Portsmouth would receive its monthly payments of about £200,000.

In the shape of Rangers there was an even bigger club teetering on the brink of extinction. The club, one of the giants of Scottish football, was also placed into administration in February as a result of a petition for the club’s winding up from HMRC following non-payment of about £9m in PAYE and VAT after its takeover in May 2011 by Craig Whyte.

The Ibrox club is embroiled in an on-going tribunal relating to employee benefit trust payments to staff and which could cost Rangers up to £49m, while the club’s players and management have agreed temporary wage reductions until the end of the season.

Price worth paying

The finance director of one Premier League club in the bottom-half of the table but that made a healthy profit in its latest set of financial results, says they feel frustrated when they see the poor health of football finances.

“There wasn’t much financial consistency when I came into the industry. I was shocked at how basic some of the systems used to be,” they tell Financial Director. “There was a feeling among FDs that something had to be done to bring in a level financial discipline and comparability.”

While discipline has improved since the FD joined the industry some costs have continued to spiral. For instance, while wage inflation in the Premier League slowed, wages in the 2009/10 season increased by more than revenue, resulting in the overall wages/revenue ratio reaching an all-time high of 68%.

According to Deloitte, for a second successive year increases in Premier League club’s total wages outstripped revenue growth, rising by £64m to almost £1.4bn. Whether it is Premier League members trying to challenge the established order, or clubs from the Championship trying to break through, the FD on one mid-table Premier League club says running at a loss is a risk many are willing to take.

“To some extent club’s are gambling to try and get in the Premier League so they are going to have to push the boat out,” they say.”The desire to get into the Premier League will always encourage club’s to sustain what they hope are short term losses with the hope of future revenue in the Premier League.”

The necessary cost of progression is investment in the playing squad through additional wages and transfer fees. But is it a price worth paying? According to Deloitte, all the clubs that improved their Premier League position, with the exception of Fulham, reported wage growth in excess of the extra revenue generated – ranging from £4.8m for Bolton Wanderers to £36.3m for Manchester City.

“We are very controlled in our player spending. We set the budget at the beginning of the year and we do not exceed that. It is about setting the right balance,” says the FD of the bottom-half club.

With the cost of relegation from the Premier League estimated to be as much as £60m it is no surprise they do not play fast or loose with player spending. Dealing with fixed costs in the form of long-term player contracts can be one of the most damaging costs to a club that gets relegated.
Taking the right precautions should be simple business sense for any finance director, says the FD of the mid-table club.

“The more you lock in long term cost the harder it is to react. You have to have flexibility in your finances to protect you in the event of going down,” they say.

A dirty word

It is the way that football clubs are financed that has perhaps faced the most scrutiny from fans, the media, politicians and the sport’s governing body. Alarm bells are set ringing by £2.6bn of net debt carried by the Premier League’s members in 2009/10, although this represented an improvement on the previous season’s position. Of more concern is the aggregate net debt of the Championship’s 24 clubs, which according to Deloitte increased to £865m at the end of the 2009/10 season, with 17 clubs carrying net debt in excess of £10m.

Although debt has become a dirty word in football, it is not necessarily a bad thing. Much depends on the club’s ability to service it. For instance, Deloitte’s data shows that while Manchester United (£590m) and Arsenal (£136m) had net debt levels among the highest in the Premier League, they also recorded the highest operating profits.

Problems occur for clubs when they extend themselves to the point that the ongoing debt service charges are unaffordable, as was the case with Portsmouth when it went into administration the first time around.

“I don’t think football is any different from any other business. It is not about the level of debt but about your ability to service it at the end of the day,” says the FD of the mid-table club.

Too much, too late

For must clubs long-term debt is used to fund long-term investment in their infrastructure and stadia. According to Deloitte, total investment across Leagues One and Two in 2009/10 was £58m, a record level and more than twice the amount seen in any previous year.

The past decade has seen over £1.9bn of capital expenditure resulting in 17 new club stadia opening and capacity across the top 92 clubs increasing by 3.3 million. However, the challenging economic environment has contributed to a reduction in top flight stadia construction projects with only Wolverhampton Wanderers currently working on capacity expansion.

But there are other ways clubs can spend their money that, while not so high profile, are no less important. The FD of the bottom half club suggests investing in analytics to support customer profiling to better understand customer spending behaviour.

Whether through innovative ticket pricing, investment in real estate or simply improving stadia, football finance directors must find ways to create a financially self-sustaining model for their clubs.

Europe’s footballing governing body UEFA is set to introduce financial fair play requirements that will apply to all clubs entering UEFA competitions.

The cornerstone is the break-even requirement that will require clubs to not spend more than the income that it generates. The requirement will first apply for the financial statements for the reporting period ending in 2012.
The FD of the bottom-half club agrees that financial fair play is a step in the right direction, although it is much too early to predict whether it will actually work.

“I do feel that what is happening with financial fair play is too much too late. It is a bit of a knee jerk reaction to Portsmouth’s [first administration],” they say. “Bigger clubs can’t be in a position to abuse the system.”