Strategy & Operations » How are Premier League FDs managing finance in football?

The English Premier League (EPL) kicked off last week in a season guaranteed to deliver shock results, exciting cup ties, and of course, displays of celebration and heartbreak across players, managers, and fans alike.

But, the action is not only confined to the pitch, with high levels of activity taking place in the board rooms of football clubs up and down the country.

The Annual Football Finance Directors Survey 2017, conducted by BDO, found that 86% of finance directors in the EPL, Championship, Leagues One and Two, and the Scottish Premiership considered their club’s financial position to be “very healthy”, or “not bad”. None of the EPL FDs surveyed believed their club finances to be “in need of attention”, or “a cause for concern”. This data is in comparison to the 2014 survey, in which 25% of respondents across all leagues noted that their club finances were in need of attention or worse.

So, with football demonstrating economic stability, in stark contrast to the country’s economic outlook as a whole, what challenges are football FDs facing in their quest to ensure their clubs retain a strong financial position?

Shareholder funding and development priorities

While the EPL club finances were considered stable by FDs, 36% of EPL clubs reported being dependent on their principal shareholders to finance operating losses or annual revenue shortfalls, an increase of 3% compared to 2016. In the Championship however, the percentage spikes, with 77% of respondents being dependent on shareholder funding.

Reliance on shareholders in the Championship can be attributed to intense competition for promotion – for which clubs are willing to invest heavily in player transfers and wages, funded by shareholders. When asked about club development opportunities, 35% of Championship FDs said their club’s top priority was promotion to the Premier League, with 30% of clubs opting for avoiding relegation.

EPL clubs’ primary concern was avoiding relegation (29%) with qualifying for European cup competitions also listed as the top priority, backed by 21% of clubs.

Other strategies to strengthen the clubs’ future growth involved investment in real estate, with one-third of EPL finance directors noting stadium and training facility investment as one of their top two priorities.

BDO highlighted that a “disproportionate number” of clubs in League One and League Two were planning to develop their academies. This particular growth strategy has been attributed to the rising price of players, with clubs unable to acquire quality players so instead focusing on club-grown talent.

When looking at overseas ownership, unsurprisingly, the EPL has the highest percentage of overseas controlling investors. While 31% of controlling parties are domestic investors, 23% are European, 8%  Far Eastern, 8% Middle Eastern, and 21% from the US or Americas. This compares to 55% domestic controlling investors in the Championship, 73% in League One, 90% in League Two, and 100% in the Scottish Premiership.

Investment and profitability

With player transfer fees increasing, 58% of clubs across all divisions were planning to expand their academies in the next year to 18 months. Academies are now seen as a profit centre with clubs being able to sell on young players once developed. Additionally, academy costs are not included in Financial Fair Play tests, providing an opportunity for clubs with resources to invest.

Finance directors were planning to finance this investment with cash, shareholder investment or third-party debt. Cash was the most popular funding option for the EPL, with the Championship favouring shareholder investment. The majority of clubs across all leagues however were not currently seeking third-party debt finance.

With regard to profitability, 93% of EPL finance directors expected to be profitable before player trading and amortisation in the next accounting period, compared to 88% in 2016. However, when asked about profit expectations after player trading and amortisation, only 55% of EPL finance directors said that they expected to make a profit, compared to 88% 2016, indicating that clubs are more likely to invest in players to push for success in domestic and European competitions.

In terms of the future impact on club profitability, the EPL has a more negative outlook on Brexit compared to last year. 50% of finance directors said they were anticipating a “moderately negative impact” on the UK football sector as a result of Brexit, while 17% said they were anticipating a “highly negative impact”. 33% thought there would be “no net impact”, with only 13% opting for a “highly positive impact”. EU player mobility and sponsorship revenue were the key concerns of FDs post-Brexit.

Taxation

HMRC has recently embarked on a campaign to crack down on tax non-compliance by football clubs, as part of a wider initiative to target tax avoidance in the UK. The tax authority has announced that it will review the tax structures of all EPL and Championship clubs over the next three years, with salary structures, employee benefit trusts and agent payments likely to be under investigation.

As a result, 43% of EPL finance directors said they were “somewhat concerned that a sizeable challenge could create a problem”, with only 21% of FDs not being concerned, citing their tax position as “robust and very defendable”. Across all football leagues, the outlook becomes more positive with 55% of FDs classing themselves as not concerned, and only 18% somewhat concerned.

In relation to individual tax affairs, while 21% of EPL FDs said that HMRC’s crackdown on image rights payments and avoidance payments were a concern for clubs, as it was a distracting issues for players, only 7% said it had changed the way that clubs dealt with player emoluments, agents and structure payments.

Surprisingly, only 36% of EPL finance directors said that they had a formal tax strategy, with that percentage dropping to only 15% in the Championship. 100% of those EPL clubs with a formal strategy said that it covered the club’s approach to risk management and governance, the attitude towards tax planning, the level of risk deemed acceptable by the club and the approach towards its dealings with HMRC.

Player costs and transfer fees

Player costs demonstrated a particular challenge for FDs in the survey. 29% of finance directors said that liquidity in the transfer market was improving, down from 33% in 2016, while 14% said that it was worsening.

In the event of relegation, 38% of FDs said that all players in their senior squad had clauses in their contract to reduce their wages. This was compared to 58% of clubs in the Championship, 36% in League One, 67% in League Two and 50% in the Scottish Premiership. In the EPL, 33% of respondents said that wages would be cut by between 40-50%, with 56% of clubs prepared to reduce wages by between 20-30%.

Looking to the 2017-18 season, 57% of EPL FDs said that the first team squad size would remain the same, however 79% of FDs said that they expected the payroll cost of the first team squad to increase, indicating a rise in player wages.

Interestingly, only 29% of EPL clubs were looking to increase their transfer budget this year, with 50% planning reductions. However, 91% of clubs said that the Financial Fair Play rules had no impact on this decision.

When asked about the sustainability of player transfer fees for domestic football clubs, 71% of EPL clubs said that the current levels were not sustainable. In contrast, 64% of League One clubs said the opposite, with BDO suggesting that clubs in this league were seizing the opportunity to sell young players for big fees.

In terms of the impact of transfer fees on domestic players and the international team, 82% said that inflated fees and salaries were having a negative effect, but over half of respondents did not think that tighter restrictions on the number of overseas players allowed in squads would help the situation.

Looking ahead

With Premier League clubs set to earn television rights allocations of between £100m-£150m this season, it’s no wonder that EPL finance directors believe their clubs are in a healthy financial position. However, with rising player transfer fees, increasing player wages and impending tax crackdowns from HMRC, football FDs aren’t without their challenges. While the main focus will be on players’ performance and the clubs’ league positions over the next nine months, it’s up to the FDs to underpin that success with strong financial support all year round.

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