Southampton - With Or Without You

Under new manager Ronald Koeman Southampton enjoyed another season of decent progress in 2014/15 with the club achieving its highest ever Premier League position, finishing 7th with a record 60 points, and qualifying for Europe for the first time in 12 years.

This was a testament to the success of the Southampton model, whereby a combination of thoughtful planning, good scouting and player development has allowed the club to move forward, despite selling around £130 million of talent over the past two seasons.

Summer 2014 saw the departure of Luke Shaw, Adam Lallana, Rickie Lambert, Calum Chambers and Dejan Lovren, while manager Mauricio Pochettino also left for Spurs after 18 months at St Mary’s. The trend continued this summer, albeit at a slower pace, with Morgan Schneiderlin moving to Manchester United and Nathaniel Clyne to Liverpool.

Clyne is actually a good example of the Saints’ business model, as his sale generated £12.5 million, while Southampton replaced him with Cédric Soares, a 23-year old Portugal international, for £4.7 million, around a third of the price.

"Long shot"

Up to now Southampton have managed to avoid the decline that normally follows a club selling its best players and replacing them with cheaper alternatives, though it has endured a fairly tough start to this season, including a dispiriting early elimination from the Europa League at the hands of Danish side Midtjylland. However, they now appear to be finding their feet, registering an impressive victory against Chelsea and reaching the quarter-finals of the Capital One Cup.

The club has also continued to thrive off the pitch with solid financial growth reflected by a second successive year of profits and net assets, though it will have to pay attention to its growing debts, including substantial amounts owed on transfer fees.

Profit before tax fell £14 million from £29 million to £15 million in 2014/15, though the decrease was higher after tax, as the switch from a tax credit of £5 million to a £3 million tax charge contributed to a fall of £21 million from £33 million to £12 million.

The figures were “impacted by high exceptional costs” of £15 million, comprising £8 million of “onerous and cancelled contracts”, mainly the termination of Dani Osvaldo’s deal, and £7 million of player impairment, presumably including the 25% sell-on fee that Southampton had to pay Bournemouth following Lallana’s sale to Liverpool. This should have been worth £6.25 million, but it has been reported that Bournemouth accepted a reduced fee of £4 million in order to facilitate the move.

Revenue rose 7% (£8 million) from £106 million to £114 million, largely due to more money from the Premier League TV deal for finishing a place higher, though total commercial income grew by an impressive 18% (£2 million) to £11 million and match day was (7%) £1 million higher at £18 million. Profit from player sales was also up £12 million to a meaty £44 million.

Against that, wages were 15% (£9 million) higher at £72 million and player amortisation surged 43% to £30 million. There were also increases of £4 million in other expenses, including a £1 million loss on disposal of legacy training ground assets as part of the current development project, and £1 million in depreciation and player impairment.

In addition, the previous year’s accounts benefited from £2 million compensation fees received that were classified as other operating income.

Last season Southampton’s pre-tax profit of £29 million was the third highest in the Premier League, only surpassed by Tottenham £80 million and Manchester United £41 million. Despite the fall to £15 million in 2014/15, Southampton have already overtaken United, whose absence from Europe led to a £4 million loss, and their profits are better than Manchester City’s £10 million, though Arsenal are now ahead of them with £25 million.

Of course, the days when the majority of clubs in the top flight lost money seem to be over, as additional funds from ever-increasing Premier League broadcasting deals, allied with the various Financial Fair Play (FFP) regimes, have produced improvements in financial results almost across the board. In fact, only five clubs lost money in the 2013/14 season.

The other driver of improved profitability is profits made from player sales. In 2013/14 Tottenham led the way with an incredible £104 million, mainly from Gareth Bale’s transfer to Real Madrid, followed by Chelsea £65 million (David Luiz to Paris Saint-Germain), then Southampton.

In 2014/15 all four clubs that have published accounts to date have seen increases in profits from this activity: Southampton from £32 million to £44 million, Arsenal from £7 million to £29 million, Manchester United from £7 million to £24 million and Manchester City from £200,000 to £14 million.

Southampton’s 2014/15 figures included money received for the sales of Lallana, Lovren and Chambers, but Schneiderlin and Clyne will only be reflected in the 2015/16 books, as they left after the 30 June accounting close.

Producing a total of £44 million of profits before tax in the last two years is a sign of what the club described as “financial and structural stabilisation”. Indeed, the previous year’s profit was the first time that Southampton had not declared a loss since they almost went bankrupt in 2009. To provide some context, the Saints had accumulated £54 million of losses in the six years between 2008 and 2013.

The club observed that the profit “is driven by sound underlying business operations supplemented by player trading”, though that tends to underplay the importance of player trading, which has boosted overall profits by £76 million in the last two seasons.

Without these profitable sales, Southampton would have reported losses of £32 million. Most of this, £29 million, was recorded in 2014/15 – though, in fairness, this season was also adversely affected by £15 million of exceptional items.

Given Southampton’s focus on player trading, it is worth exploring how clubs account for transfers, as it has a major impact on reported profits. The fundamental point is that when a club purchases a player the costs are spread over a few years, but any profit made from selling players is immediately booked to the accounts.

When a club buys a player, it does not show the full transfer fee in the accounts in that year, but writes-down the cost (evenly) over the length of the player’s contract. So, if Southampton spent £25 million on a new player with a 5-year contract, the annual expense is only £5 million (£25 million divided by 5 years) in player amortisation (on top of wages).

However, when that player is sold, the club straight away reports the profit on player sales, which is essentially sales proceeds less any remaining value in the accounts. In our example, if the player were to be sold 3 years later for £32 million, the cash profit would be £7 million (£32 million less £25 million), but the accounting profit would be higher at £22 million, as the club would have already booked £15 million of amortisation (3 years at £5 million).

This is all horribly technical, but it does help explain how Southampton’s model boosts their reported profits. Furthermore, any players developed through a club’s academy have zero value in the accounts, so in these cases any sales proceeds represent pure profit. Like other clubs, Southampton are clearly keenly aware of this accounting treatment – though they also fully appreciate that cash flow might be different (which we shall explore later).

Even though the annual cost of purchasing players is therefore somewhat reduced in the profit and loss account, it is worth noting that the impact of Southampton’s increasing gross spend in the transfer market has pushed up player amortisation, which has gone up from £3 million in 2012 to a hefty £30 million in 2015 (plus £7 million of player impairment).

Obviously this is nowhere near as much as big spenders like Manchester United (£100 million), Chelsea (£72 million) and Manchester City (£70 million), but it is still higher than all but the “Sky Six” in the Premier League and will need to be kept under observation in future years.

The other side of the coin here is that all these player purchases have helped strengthen the balance sheet with player values (reported as intangible assets) climbing to £75 million, compared to only £4 million just four years ago. This has helped increase the club’s net assets (assets less liabilities) in the last 12 months from £32 million to £44 million.

Even though player trading (and particularly profits from player sales) have such an important impact on Southampton’s bottom line, we should acknowledge that the club has also become profitable from its core business. This can be seen by looking at the EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), which can be considered a proxy for the club’s profits excluding player trading. After many years of negative EBITDA, this has turned positive in the last three years, though it did fall back from £28 million to £21 million in 2014/15.

This is not bad, but at the same time helps to explain why Southampton have been so reliant on a player sales business model, as the EBITDA at those clubs that Sam Allardyce refers to as the “big boys” is significantly higher, despite larger wage bills: Manchester United £120 million, Manchester City £83 million, Arsenal £64 million, Liverpool £53 million and Chelsea £51 million.

In fairness, Southampton have managed to grow their revenue by around 670% in just five years from £15 million in 2010 to £114 million in 2015, facilitated by two promotions in that period. In particular, £83 million of the £99 million growth since 2010 is due to significantly better TV deals in the Premier League. That said, commercial income has increased by 187% (£7 million), while match day is up 82% (£8 million).

Southampton’s 2015 revenue of £114 million places them very much in mid-table in the Premier League (they were 11th highest the previous season) around the same level as Aston Villa and West Ham. Although Southampton’s 2014/15 revenue growth of 7% was not as high as the previous season, this is very largely linked to the cycle of the TV deal. As last season was  only the second year of the current three-year TV deal, it is unlikely that other clubs will see significant revenue gains in 2014/15.

Of course, the Saints are still miles below the English elite, e.g. the top four clubs all earn more than £300 million: Manchester United £395 million, Manchester City £352 million, Arsenal £329 million and Chelsea £320 million.

Such an enormous revenue disparity underlines the magnitude of Southampton’s challenge in trying to move to the next level. As Koeman put it, “You never know, but it’s not realistic at the moment to finish in the top four. The Europa League for us is like the Champions League for Manchester United and Arsenal.”

However, Southampton’s revenue is now the 25th highest in the world according to the Deloitte Money League, around the same as famous clubs such as Marseille £109 million, AS Roma £107 million and Benfica £105 million. Impressive stuff, but that doesn't help much in the Saints' domestic battle.

This is largely on the back of broadcasting revenue of £84 million, which now accounts for 74% of Southampton’s total revenue. Match day revenue contributes 16% with commercial income only 10%. Chief executive Gareth Rogers is acutely aware of the need to grow the other revenue streams: “Whilst we may have very, very, very large broadcasting income within the Premier League, every club has it. Therefore, you have to do something else in order to differentiate yourself and the commercial income is important as a result of that.”

As you might imagine, Southampton’s reliance on TV money of 74-75% is one of the highest in the Premier League, but the previous season no fewer than six clubs had a greater dependency with Crystal Palace leading the way at 82%.

Considering the significance of Premier League television money to the Saints, it is worth exploring how this is distributed in some detail. In 2014/15 Southampton’s share rose 7% from £77 million to £83million. This is based on a fairly equitable distribution methodology with the top club (Chelsea) receiving £99 million, while the bottom club (QPR) got £65 million.

Most of the money is allocated equally to each club, which means 50% of the domestic rights (£22.0 million in 2014/15), 100% of the overseas rights (£27.8 million) and 100% of the commercial revenue (£4.4 million). However, merit payments (25% of domestic rights) are worth £1.2 million per place in the league table and facility fees (25% of domestic rights) depend on how many times each club is broadcast live.

In this way, Southampton were helped by climbing one place to 7th and being broadcast live on three more occasions. However, they were still only shown live 13 times, as compared to Liverpool’s 25 times (even though only one place separated them in the league table), which meant that they earned £9 million less than the club from Anfield.

My estimates suggest that Southampton’s 7th place would be worth an additional £48 million under the new contract, increasing the total received to an incredible £131 million. This is based on the contracted 70% increase in the domestic deal and an assumed 30% increase in the overseas deals (though this might be a bit conservative, given some of the deals announced to date).

Another way that Southampton could generate more money is with a successful European run, though they were eliminated before the Europa League group stages in 2015/16. Admittedly, that competition does not bring in substantial funds unless you actually win the competition, but it did earn Everton €7.5 million last season.

The big money is obviously in the Champions League with English clubs averaging €39 million in 2014/15, especially as the new TV deal from the 2015/16 season is worth an additional 40-50% thanks to BT Sports paying more than Sky/ITV for live games.

This might feel like an unrealistic aspiration for Southampton, but it is clearly in the long-term plans of the club’s hierarchy, as chairman Ralph Krueger outlined: “People tell us it’s not possible, with our budget and our infrastructure. We believe it is.” Executive director Les Reed was equally bullish, “We’d like to think we have the structure to (reach the Champions League) in the next five years.”

Match day revenue rose by £1.2 million (7%) from £17.1 million to £18.3 million, despite playing one less home game, thanks to an increase in average attendance from 30,212 to 30,652 and a 4% rise in ticket prices.

Despite this increase, Southampton’s revenue is still miles below Manchester United and Arsenal, who both generate around £100 million from this activity, though it is around the same as Everton £19.3 million and West Ham £19.5 million and actually above Sunderland £15.8 million and Aston Villa £12.8 million.

Southampton’s match day revenue is outperforming their attendance, which is only the 13th highest in the Premier League, because their ticket prices are on the high side. The good news for Saints season ticket holders is that renewal prices were frozen for 2015/16, leading to a 20,000 sell-out.

However, Southampton’s renaissance can be seen through their improving attendances over the last few years with their 30,500 average since their return to the Premier League being 70% higher than the 17,800 low point in 2008/09.

Commercial income grew by £1.7 million (18%) from £9.5 million to £10.3 million, which means that this revenue stream has more than doubled since promotion to the Premier League. However, although this “remains a key focus on the board”, this is still far away from the massive sums generated by the elite clubs, e.g. Manchester United £196 million and Manchester City £173 million. Fair enough, but the Saints are also below clubs like Norwich City and Stoke City.

Chief executive Rogers has acknowledged the need to significantly improve the club’s commercial operations, but admits that the club is only “at the start of that journey”, emphasising that fans will not see an overnight improvement.

He explained, “It can be a slow process, there's no two ways about it. When you look at commercial contracts, a) the first one has to finish and b) you're not going to get companies to commit to multi-million pound deals on the whim of one conversation. These conversations can take a long time to evolve and a long time to develop and, therefore, we do expect it to be the future years where you really do start to see this commercial growth.”

That’s undoubtedly true, though he did say almost exactly the same thing the previous year and, despite Brand Finance recognizing Southampton as one of the fastest growing football brands, there is plenty of room for improvement.

That’s certainly evident when you look at Southampton’s main commercial deals, e.g. the shirt sponsorship with consumer electronics firm Veho is one of the lowest in the Premier League at £1 million a season .Given the club’s booming brand, they should certainly aspire to securing a £3-5 million deal when the current agreement expires at the end of the 2015/16 season.

Southampton terminated its long-term kit contract with Adidas in December 2013 (after it released a controversial home shirt without the traditional stripes), but surprisingly there was no replacement in place, which meant that the 2014/15 kits were made in-house. Adidas has returned as kit supplier for the 2015/16 campaign, which should have a beneficial impact on this season’s financials.

Excluding the £8.3 million cost of onerous and cancelled contracts, the wage bill rose 15% (£9 million) from £63 million to £72 million, increasing the wages to turnover ratio from 59% to 63%. As Rogers said, “We believe we have a much stronger squad, but naturally the cost for that reinvestment is there, and that’s shown within the wages that have grown this year.” The number of employees increased from 283 to 302, meaning that the staff numbers have shot up by 72 (31%) in just two years.

This is likely to be one of the higher wages to turnover ratios in the Premier League last season, but is nothing like as bad as the 125% Southampton reported in 2012 (though this was inflated by £5.3 million of promotion bonus payments). Also, to be fair, 13 of the 20 clubs were in a fairly narrow range of 56-64% the previous season.

It was striking how much Southampton over-performed in 2013/14 relative to their wage bill, which was only the 15th highest in the Premier League, while they finished 8th. Only five clubs had lower wages (Stoke City, Cardiff City, Norwich City, Crystal Palace and Hull City) and two of those were relegated.

However, the 2014/15 growth will almost certainly place the Saints higher in the wages league, though they are obviously a long way behind the leading clubs: Manchester United £203 million, Manchester City £194 million, Chelsea £193 million and Arsenal £192 million. Little wonder that Les Reed commented, “We will always be vulnerable to our very best players being attractive to the top clubs, who can afford to pay salaries that we just can’t get near.”

Nevertheless there is a clear bunching of clubs in the £60-70 million range, as the traditional bigger spenders like West Ham and Aston Villa have only grown a little, while the nouveaux riches like WBA, Stoke City, Swansea City and indeed Southampton have all had to significantly increase their wage bill in order to compete. As Saints striker Graziano Pellè noted, “All the teams are now building really good squads. The difference is minimal.”

It is certainly true that Southampton have spent big in the transfer market since returning to the top flight in 2012/13, averaging annual gross spend of £43 million in those four years, compared to just £2 million in the previous six years.

In the last two years, they have really ramped up, splashing out £103 million on a lengthy shopping list of players: Shane Long £12 million, Virgil van Dijk £11.5 million, Dusan Tadic £10.9 million, Fraser Forster £10 million, Saido Mané £10 million, Ryan Bertrand £10 million, Pellè £9 million, Jordy Clasie £8 million, Florin Gardos £6 million, Juanmi £5 million, Oriol Romeu £5 million and Soares £4.7 million.

That said, they have also made a lot of money from player sales, leading to net sales of £26 million in this period. In fact, Southampton are the only club in the Premier League without a positive outlay on players over the last two seasons, so are bottom of the so-called net spend table.

To once again highlight Southampton’s nifty footwork in the transfer market, many clubs spent big, most notably Manchester City £151 million, Manchester United £145 million and Arsenal £74 million. However, this is no guarantee of success, as can be seen by the club with the fourth highest net spend, namely Newcastle United, whose £62 million has clearly not been spent wisely.

The difference with Southampton is that it feels like they have a long-term plan where any sales are made on their terms and at their price. Rogers confirmed this: “We make decisions based on what is the best thing for the club at the time. We don’t need transfer fees to fund the operating costs of the club.”

Krueger added that the club was not worried about the numerous ins and outs: “The world around us had a problem with it, but we didn’t, because what happened last summer and this summer gave us the opportunity to deepen the squad.”

Southampton’s net debt increased by £23 million from £25 million to £48 million, as the £11 million rise in gross debt from £51 million to £62 million was exacerbated by the £12 million reduction in cash balances from £26 million to £14 million.

The gross debt of £62 million includes £32.7 million owed to the owner Katharina Liebherr (up from £14.7 million the previous year), a Swiss loan facility of £15 million secured on the owner’s personal estate plus a £13.9 million loan with Macquarie Bank (replacing a Vibrac loan on better terms).

This is a fairly high debt for a club of Southampton’s size, which Rogers acknowledged: “Fundamentally as a business we don’t want to be carrying that level of debt, even if the majority of it is to the owner, though it’s not actually increased as much as we thought it would do, due to good governance and various other things.”

"Is Vic there?"

However, the hope is that the debt has now peaked, with Rogers adding: “It’s a figure that we aim to reduce over time, but in a managed way, so it doesn’t affect the on-field success of the business.”

What is striking is how much the club has made use of transfer fee funding, i.e. stage payments, as can be seen by the increase in transfer fees payable from £26 million to £43 million, though Southampton are in turn owed £55 million by other clubs. This latter point is important in terms of how much cash is really available for investment. Specifically, it looks like Southampton have driven a hard bargain in terms of a player’s selling price, but have been more flexible on when the money is actually paid to them.

In addition, Southampton’s contingent liabilities, dependent on the number of first team appearances, goals and international debuts being made, have increased from £1.7 million to £5.1 million.

In fairness to the Saints, their debt is still one of the smallest in the Premier League with five clubs having borrowings above £100 million, namely Manchester United £411 million, Arsenal £234 million, Newcastle United £129 million, Liverpool £127 million and Aston Villa £104 million.

Although Southampton have reported largish accounting profits in the last two years, this does not necessarily mean that the club has produced cash, as can be seen by reviewing the cash flow statement for 2014/15.

On the plus side, the club generated £17 million from operating activities, but then spent a net £31 million on player purchases (remember those stage payments on transfers); £6 million on improving infrastructure, such as the Markus Liebherr Pavilion that has resulted in an additional 9 pitches and an all-weather state of the art dome; and a further £2 million on loan interest.

That left a £22 million deficit, which was partly financed by £18 million of additional loans from the owner, though £8 million was used to reduce other loans. All of this led to a net £12 million reduction in cash.

This point is better illustrated by Southampton’s cash flow over the last three seasons, when they have had a £120 million available to invest. Half of this has come from operating activities, but the other half has been provided by additional loans. Almost 60% (£71 million) of this has then been spent on players with a further £32 million invested into the Training Campus and other infrastructure projects. Just over £4 million has gone on interest payments, while the cash balance has increased by £12 million in this period.

This essentially backs up the chief executive’s assertions that “We have categorically reinvested everything we have received in sales of players in the past two years.”

It also highlights the fact that the owner’s support will still be valuable for a little longer. The Swiss-German Katharina Liebherr has certainly delivered the “stability and calm” that she promised the fans after inheriting the club after her father’s sudden death in August 2010, notably taking the departure of former chairman Nicola Cortese in her stride in January 2014.

Liebherr has put in more than £70 million to date, including writing-off the £38 million of loans made up to June 2012 by converting these into equity capital, leaving the amount owed to her at £32.7 million as at June 2015.

Importantly, she has not taken advantage of the club’s new-found prosperity to reduce her debt, as Rogers confirmed: “There was an opportunity to clear the entire debt of the football club and take out money that had been put in, but Katharina didn’t do that. Instead she allowed us to re-invest all of the money, either in fees or contracts.”

So much so that Southampton’s cash balance actually fell to £14 million, while the trend at other clubs has seen cash increasing, e.g. Arsenal from £208 million to £228 million, Manchester United £66 million to £156 million and Manchester City from £21 million to £75 million.

As well as player trading, developing young players is one of the principal reasons for Southampton’s success with significant investment being made into this area, as noted in the accounts: “For the advancement of the player development business model, total expenditure on the Training Campus is expected to amount to approximately £38 million.”

Not only will this enable the club to replace any sold first-team players from within, but also to sell its graduates for a healthy profit. A recent study by the CIES Football Observatory showed that Southampton had the most profitable academy in Europe, based on the sale of graduates like Lallana and Shaw since 2012.

"Reel around the Fonte"

Incredibly, this put the Saints above the likes of Real Madrid, Barcelona, Bayern Munich and Manchester United. As CIESC noted, “Southampton is an outstanding example of how youth training can constitute a key competitive advantage both sportingly and economically even in the richest league of the world.”

There are few signs of this slowing down with eight academy graduates featuring in the first team last season and the Development Squad winning the U21 Premier League Cup. The club has high hopes for Matt Targett, Harrison Reed and England U16 captain Callum Slattery.

Les Reed outlined the club’s aim to incorporate players into a successful first team squad: “That’s got to be six (coming through). There’s no point running an academy at category one level if you think you’re only going to get one through every now and again. We have raised a banner and shown you can produce homegrown talent.”

"Pelle the Conqueror"

Southampton’s recovery from the dark days of administration has been highly impressive, as they have intelligently applied their business model, while still listening to the input from their “real football men”. As they say, “the foundations are in place for the club to build upon its sporting success and to move forward sustainable.”

Then again, they remain “wary of the balance to be struck between ongoing sustainability and investment” to achieve that success, which some supporters have taken as an indication that the club is unwilling to spend big to meet its objectives. However, Krueger quickly dismissed these concerns: “In the end we will never forget that the final product on the pitch, out there with Ronald and the team, is our main priority.”

"Something that I Sadio"

The chairman did concede that players might still leave, e.g. the exciting winger Sadio Mané seems to be lined up for a big money move to Manchester United, but he believes that Southampton will not be a selling club forever: “The goal is, of course, over time that this is a final destination. Maybe it isn't yet for players, but we're moving towards that.”

There are obviously no guarantees that the Southampton model will continue to work, as it is very difficult for clubs to continually reinvent themselves after major upheaval, but they have demonstrated that they are better than most at trading players. As Les Reed said, “As long as we’ve got the ability to keep replacing them, we can still achieve our ambitions.”

And that’s pretty much the bottom line for the Saints.

Manchester City - The Modern World

Most football clubs would be very satisfied if they ended up with a second place Premier League finish and qualifying for the knockout stages of the Champions League, but not Manchester City. In fact, chairman Khaldoon Al Mubarak said, “it is hard to look back on the 2014/15 season without a degree of disappointment”, as there was no title to show for their efforts.

However, he did point out, “The fact that we consider last season to be below par for Manchester City is a testament to how far we have come in the last seven years”, adding “this is a level of ambition that we should not shirk or shy away from.”

Although City may not have met all the owners’ demanding objectives in terms of filling the trophy cabinet, they certainly performed off the pitch. As chief executive Ferren Soriano said, “The 2014/15 season marked a historical step in Manchester City’s journey. The club delivered an annual profit for the first time since its acquisition in 2008.”

In fact, City reported a pre-tax profit of £10.4 million (£10.7 million after tax), compared to the previous year’s loss of £22.9 million, a year-on-year improvement of £33.3 million. Revenue rose by £5 million (2%) to a record £352 million, marking the seventh straight year of revenue growth, with commercial income up £7 million (4%) to £173 million and broadcast revenue up £2 million (2%) to £135 million, though match day revenue was £4 million (9%) lower, largely as a result of the stadium expansion works.

Profit on player sales was £14 million higher, but the main driver of the better figures in 2014/15 was a reduction in costs, as the wage bill was cut by £11 million (5%) to £194 million and player amortisation was £6 million (8%) lower. Against that, other expenses rose £8 million (12%) to £76 million and depreciation was £2 million higher.

This year also benefited from having no exceptional items, while 2013/14 was adversely impacted by the £16 million settlement with UEFA for failing to meet Financial Fair Play (FFP) regulations, though this was partly offset by £7 million insurance proceeds. Finally, there was a £2 million loss on disposal of fixed assets, while other operating income was £1 million lower.

Of course, these days the Premier League is a largely profitable environment, largely thanks to the ever increasing TV deals, with City being one of just five clubs in the top flight to lose money in 2013/14. Only three clubs have to date published their accounts in 2014/15 with both City and Arsenal reporting healthy profits, though Manchester United’s absence from the Champions League contributed to them slipping into the, ahem, red with a £4 million loss.

Once-off profits on player sales can also be very important to the bottom line. While City made less than £200,000 from this activity in 2013/14, this rose to £13.8 million last season, helping the club’s return to overall profitability. This was largely due to the sales of Matija Nastasic to Schalke 04, Jack Rodwell to Sunderland, Javi Garcia to Zenit Saint Petersburg and Gareth Barry to Everton.

This has not been a great money-spinner for City recently, but next year’s accounts will benefit from a number of players leaving the club, which has generated sales proceeds of around £48 million (Alvaro Negredo to Valencia £24 million, Rony Lopes to Monaco £9 million, Karim Rekik to Marseille £3.5 million, Scott Sinclair to Aston Villa £2.5 million and Dedrick Boyata to Celtic £1.5 million) and £5 million of loan fees (including Edin Dzeko to Roma £2.9 million and Stevan Jovetic to Inter £2 million). Dzeko’s loan was made permanent in October, bringing in an additional £8 million.

After deducting accumulated amortisation, all those deals could bring in over £40 million of profits in 2015/16 with a further £10 million due if the other loan deals are made permanent (though that might only hit the 2016/17 books).

Other clubs have been generating sizeable profits from this activity, as can be seen in 2013/14: Tottenham £104 million (largely Gareth Bale to Real Madrid), Chelsea £65 million (David Luiz to PSG), Southampton £32 million (Adam Lallana to Liverpool) and Everton £28 million (Marouane Fellaini to Manchester United).

After years of heavy spending in order to build a squad and the facilities required to compete at the highest level, City’s losses have been steadily reducing since the record £197 million peak posted in 2011, effectively halving each year (2012 £99 million, 2013 £52 million and 2014 £23 million) before reaching profitability in 2015.

Al Mubarak described the transition to profitability as “a long planned milestone”, being part of “a strategy predicated on long-term sustainability and the ongoing development of momentum year-after-year.” The figures certainly seem to support this viewpoint, marking out an almost perfect v-shaped recovery.

Another impressive aspect of these results is that they have not been enhanced by some of the fancy footwork that has been seen in previous years, most notably in 2013 when the sale of intellectual property lowered the loss by £47 million.

Against that, City would actually have been close to profitability last year without the £16 million UEFA fine.

The other side of player trading is obviously player purchases, which is reflected in the accounts via player amortisation, as transfer fees are not fully expensed in the year a player is purchased, but the cost is spread evenly over the length of the player’s contract. City’s initial spending spree saw player amortisation shoot up from just £6 million in 2007 to a peak of £84 million in 2011, before falling away in the last three years to £70 million in line with less frenetic transfer activity.

In addition, City have frequently extended player contracts, so any remaining written-down value in the accounts for those players has been amortised over the term of the new contract. This has had the advantage of reducing the annual amortisation charge in recent years, but has the disadvantage of extending the period for which these players’ transfer fees are amortised.

Clubs that are regarded as big spenders logically have the highest player amortisation charges, so United’s massive outlay under Moyes and van Gaal has driven their annual expense up to £100 million. The next highest in the Premier League is Chelsea £72 million (2013/14), followed by City £70 million, while Arsenal’s relatively restrained spending has left them with £54 million of player amortisation in 2014/15.

The accounting for player trading is horribly technical, but it is important to grasp how it works to really understand a football club’s accounts. The fundamental point is that when a club purchases a player the costs are spread over a few years, but any profit made from selling players is immediately booked to the accounts, which helps explain why clubs like City can spend so much and still meet UEFA’s Financial Fair Play targets.

As a result of all this accounting smoke and mirrors, clubs often look at EBITDA (Earnings Before Interest, Depreciation and Amortisation) for a better idea of underlying profitability. In City’s case this metric clearly shows their improvement, as it has steadily risen from a negative £71 million in 2011 to an impressive £83 million in 2015.

This is only behind Manchester United, whose amazing ability to generate cash is reflected in their EBITDA of £120 million (and they are projecting an astonishing £165-175 million for 2015/16 following their return to the Champions League and their new kit deal).

However, to better place City’s £83 million EBITDA into context, it is still a third higher than Arsenal’s £64 million, while the next best are Liverpool £53 million, Chelsea £51 million and Tottenham £39 million (all 2013/14 figures).

City have increased their revenue by over 300% (£265 million) since 2009 from £87 million to £352 million. The majority of the growth has come from commercial income, which has surged £155 million to £173 million, so is almost 10 times as much as the £18 million in 2009.

In the same period, broadcasting income has nearly tripled from £48 million to £135 million with £54 million coming from improved Premier League TV deals and £33 million from Champions League participation. Match day receipts have more than doubled from £21 million to £43 million.

That’s very impressive, but the growth in 2014/15 was only 2% (£5 million), which is less than analysts had anticipated and also worse than Arsenal, who grew by 10% (£31 million). However, it was better than Manchester United, whose revenue fell by 9% (£38 million), due to their failure to qualify for Europe.

This should not be overly concerning for City, as there is more to come in every revenue stream: TV – through higher Premier League and Champions League deals; commercial – from renegotiating the shirt and kit sponsorship; and match day – after expanding the stadium.

Despite United’s decline, they still have the highest revenue in the Premier League in 2014/15 with £395 million, which is £43 million more than their “noisy neighbours”. However, City are the second highest in England, ahead of Arsenal £329 million, Chelsea £320 million and Liverpool £256 million (the latter two being 2013/14 figures).

City’s 2013/14 revenue of £347 million placed them 6th highest in world football as per the Deloitte Money League, though Real Madrid continued to lead the way with £460 million, followed by United £433 million, Bayern Munich £408 million, Barcelona £405 million and Paris Saint-Germain £397 million.

In their annual report City claim to have “the highest annual growth in revenues of the top 10 clubs”, but this does not automatically mean that they will overtake the leading contenders, as they too are making good progress. For example, both Spanish giants have announced good revenue growth in 2014/15: Real Madrid up 5% to €578 million, Barcelona up 16% to €561 million. Against that, their revenue in Sterling terms will be impacted by the weakness of the Euro.

Furthermore, United are estimating revenue of £500-510 million in 2015/16 following their return to the Champions League and the record Adidas kit deal, which would make them the first English club to break through the half-billion pounds barrier.

If we compare City’s revenue to that of the other nine clubs in the Money League top ten, we can immediately see where their largest problem lies, namely match day income, where City are substantially lower than their rivals, e.g. they were £61 million behind United (£47 million compared to £108 million).

On the plus side, City look to be fine on broadcasting and pretty good on commercial. City’s spectacular commercial growth means that they are ahead of most clubs, though are still lower than those that have traditionally been successful in monitising their brand: Bayern Munich £78 million, Real Madrid £28 million and Manchester United £23 million. The £108 million shortfall against PSG is largely due to the French club’s “friendly” agreement with the Qatar Tourist Authority.

Unsurprisingly, commercial income is the largest revenue stream, accounting for around 50% of total revenue, followed by broadcasting 38%. Match day income contributes only 12%, following the 2014/15 reduction.

City have grown commercially at a far faster rate than all their domestic rivals (861% since 2009) with their revenue rising to £173 million in 2014/15, but they are still behind Manchester United, whose commercial juggernaut produced £197 million – and that is before United’s blockbuster new deal with Adidas that commences in 2015/16.

However, City are miles ahead of all other English clubs commercially, e.g. even after Arsenal reported 34% growth last season, their £103 million was still £70 million lower than City. It’s a similar story at the other English clubs: Chelsea £109 million, Liverpool £104 million, then a big drop to Tottenham £42 million and Aston Villa £26 million.

Critics will argue that City’s commercial success is built on friendly deals with Arab partners, but the fact is that City are now signing up many other deals not linked to their owners with 22 additional partnerships last season alone, including Nissan, SAP, City and Coco Joy (the official coconut water partner, oh yes).

Al Mubarak argues that the commercial growth “is also in large part due to the City Football Group strategy that has been rolled out over the last two years…(that) creates global scale.” This involves joint initiatives with New York City FC, Melbourne City FC and Yokohama F Marinos.

There is obviously some truth in that, but it is also down to the fact that sponsors simply like to be associated with success on the pitch. Either way, Brand Finance have rated City as the fourth most valuable football brand globally and the second most valuable in the Premier League.

In any case, the groundbreaking 10-year £400 million deal with Etihad Airways, covering shirt sponsorship, stadium naming rights and the campus development, now looks to be behind the market, as other clubs have since raised the bar. It is estimated that the shirt sponsorship element of City’s deal is worth £20 million a season, which would put City’s deal way below their competitors: Manchester United – Chevrolet £47 million ($70 million); Chelsea – Yokohama Rubber £40 million; and Arsenal – Emirates £30 million.

In fact, there has been talk of City renegotiating the Etihad deal upwards to reflect their higher commercial value after two Premier League titles and regular Champions League participation. Some reports have speculated that the value could even double to £80 million a season.

There are also rumours that City are trying to negotiate upwards their £12 million kit supplier deal with Nike, even though their current six-year contract only started in 2013. There is certainly room for improvement, as this is now well behind other clubs’ latest deals: United £75 million (Adidas), Arsenal £30 million (PUMA) and Liverpool £25 million (Warrior).

City’s share of the Premier League television money was £98.5 million in 2014/15, up £2 million from the previous season. This was even before the increases from the mega Premier League TV deal in 2016/17. My estimates suggest that City’s second place would be worth an additional £51.5 million under the new contract, increasing the total received to an incredible £150 million. This is based on the contracted 70% increase in the domestic deal and an assumed 30% increase in the overseas deals (though this might be a bit conservative, given some of the deals announced to date).

The other main element of broadcasting revenue is European competition with City receiving €46 million for reaching the last 16 in the Champions League. Although this was €11 million higher than 2013/14, in Sterling terms this was only worth an additional £2 million (£33 million compared to £31 million), due to the weakening of the Euro.

It is worth noting the importance of the TV (Market) pool to the Champions League distributions. Half of this is based on how far a club progresses in the Champions League, so City benefited from other English clubs not doing so well in 2014/15 as the prior year. The other half is dependent on where a club finished in the previous season’s Premier League: 1st place 40%, 2nd place 30%, 3rd place 20% and 4th place 10%. As City won the title in 2013/14, compared to finishing runners-up the year before, they received a higher percentage in 2014/15.

In addition, there was more money available in the UK market pool in 2014/15, as this did not have to be shared with a Scottish club in 2014/15 (as was the case in 2013/14 with Celtic). The allocation also depends on how many clubs reach the group stage from a country, which explains why Juventus received such an enormous slice of the Italian market pool, as they only had to share it with one other club, while the UK pool was split between four clubs.

The financial significance of a top four placing is even more pronounced from the 2015/16 season with the new Champions League TV deal worth an additional 40-50% for participation bonuses and prize money and further significant growth in the market pool thanks to BT Sports paying more than Sky/ITV for live games. This could be worth an additional €20 million to City.

Match day income fell 9% (£4 million) to £43 million in 2014/15, partly because of temporarily reduced seating capacity due to stadium expansion works, which reduced the average attendance from 47,091 to 45,365, and two fewer home games following shorter campaigns in the domestic cups.

Although this revenue stream had been on a rising trend, City’s £43 million is less than half the money generated by Arsenal £100 million and United £91 million, partly due to City season tickets being among the cheapest in the Premier League.

For the 2015/16 season the Etihad Stadium capacity has been increased by 7,000 seats to 55,000 after adding a third tier to the South Stand and adding three new rows of pitchside seats, which should result in higher match day income. The club sold out its full allocation of more than 35,000 season tickets with a 9,000 waiting list. City have also received planning permission for potential further expansion up to 62,000 by doing the same for the North Stand.

City’s wage bill decreased by 5% (£11 million) from £205 million to £194 million, the second year in a row that wages have been cut. A large part of the decrease was due to smaller bonus payments, as no silverware was secured, with chief executive Ferran Soriano renegotiating a number of contracts with a lower basic salary, but higher bonus payments.

This lowered the wages to turnover ratio to a “healthy” 55%, the fourth successive year that this metric has improved from the peak of 114% in 2011. In fact, this is now one of the lowest in the premier League, better than Arsenal’s 58%, but still higher than United’s 51%.

The magnitude of City’s wages reduction has raised a few eyebrows, especially as the number of football staff was slashed from 222 to 112 in 2014. This is essentially due to a group restructure, where some staff are now paid by group companies, which then charge the club for services provided.

Whatever the rights and wrongs of City’s reported wages, they have been overtaken by United, whose wage bill was £203 million in 2014/15. It is striking how the wage bills at the leading clubs are converging around the £200 million level with Arsenal up to £192 million in 2014/15 and Chelsea £193 million in 2013/14. It should be noted that one of the clauses in UEFA’s FFP settlement with City stated that they could not increase their wage bill during the next two financial periods (2015 and 2016) – though performance bonuses are not included in this calculation.

Of course, there is a big gap to the other Premier League clubs with the nearest challengers (in 2013/14) being Liverpool £144 million, Tottenham £100 million and Newcastle £78 million.

Although there is a natural focus on wages, other expenses also account for a considerable part of the budget at leading clubs, especially at City with £76 million, now ahead of United and Arsenal (both £72 million). These cover the costs of running the stadium, staging home games, supporting commercial partnerships, travel, medical expenses, insurance, retail costs, etc.

In City’s case, there is also the impact of the restructure whereby some staff are now paid by group companies with the costs included in external charges, as opposed to wages. This helps explain the steep growth in external charges, which have risen from £42 million in 2013 to £69 million in 2015.

After an initial period of major investment following the club’s purchase by Sheikh Mansour, which peaked with £155 million of gross spend in 2010/11, City had been reducing their activity in the transfer market (relatively speaking), as explained in the annual report: “Consistent with the commitment made in 2009/10 that transfers of the scale seen in previous years would be unlikely to be repeated, the club is continuing to benefit from greater stability in the first team squad.”

Well, yes, that may have been the case – until this summer’s £142 million outlay, when City brought in Kevin De Bruyne (£54 million from Wolfsburg), Raheem Sterling (£44 million from Liverpool), Nicolas Otamendi (£28.5 million from Valencia), Fabian Delph (£8 million from Aston Villa) and Patrick Roberts (£5 million from Fulham). These purchases are not included in the 2014/15 accounts.

Interestingly, City’s gross spend in the last five years of £462 million (averaging £92 million a season) is almost exactly the same as the £456 million spent in the previous five years – though most of this (£407 million) was incurred in the three years after the new regime arrived in September 2008.

Of course, there are two sides in a market and City managed to recoup £41 million through player sales, giving a net spend of £101 million. Obviously this is still on the high side and most clubs can only dream of such a level of expenditure, but it’s not quite so dramatic as the gross spend figure widely reported. It is also worth noting that this is the highest annual player sales figure achieved to date by City.

To an extent City have been playing catch up this summer, as UEFA had imposed restrictions on their transfer spending last year. Nevertheless, City still have the highest net spend over the last two season of £151 million, though Manchester United are pretty much at the same level with £145 million, as Moyes and Van Gaal have both endeavoured to reinvigorate their squad following the departure of Sir Alex Ferguson.

Both Manchester clubs are a long way ahead of the other Premier League clubs in terms of net spend with the closest challengers being Arsenal £74 million (around half as much), Newcastle United £62 million and Liverpool £57 million.

City have stated that they are “operating with zero financial debt”, which is true, but their own net debt calculation includes £67 million of debt from finance leases (for future obligations under the lease of the Etihad Stadium). Nonetheless, this is not a problem, especially as it is covered by £75 million of cash to give net funds of £8 million.

However, it is worth noting the impact that the transfer market has had on City’s liabilities. They owe an additional £29 million in transfer fees to other clubs, though this is more than compensated by the £42 million that other clubs owe City.

The really prominent figure is the £113 million that City have included for contingent liabilities (up from £42 million in 2012), which is for “additional transfer fees, signing-on fees and loyalty bonuses… that will become payable upon the achievement of certain conditions contained within player and transfer contracts”, i.e. number of appearances, success on the pitch, etc. To place this enormous sum into perspective, contingent liabilities at other leading clubs are significantly smaller: United £26 million, Arsenal £9 million and Chelsea £3 million.

Where City are doing well compared to their peers is on net financing costs, as their annual payment of £5 million (mainly stadium finance lease charges) is a lot lower than United £35 million and Arsenal £13 million. For context, it’s around the same as Everton, West Ham and Liverpool.

Similarly, other clubs have to carry the burden of sizeable debt, especially United who still have £411 million of borrowings even after all the Glazers’ various re-financings and Arsenal, whose £234 million debt effectively comprises the “mortgage” on the Emirates stadium. There were four other clubs with debt above £100 million in the Premier League in 2013/14, namely Cardiff City £135 million, Newcastle United £129 million, Liverpool £127 million and Aston Villa £104 million.

The turnaround in City’s financial performance n the last two years is underlined in the cash flow statement, which shows that the club is now generating cash. In 2014/15 they generated an impressive £103 million from operating activities, spending a net £66 million on transfers, £62 million on capital expenditure (i.e. infrastructure investment in the stadium expansion and the City Football Academy) and £5 million on interest/lease payments. This produced a cash deficit of £31 million that was funded by issuing £84 million of new shares, leading to an increase in cash balances of £53 million.

Of course, City’s development has been largely funded by Sheikh Mansour, who has put in around £1.2 billion since the takeover in August 2008 through £0.9 billion of new share capital and £0.3 billion of loans (subsequently converted to shares). Most of this has gone into the squad (£679 million) with a further £288 million invested into the club’s infrastructure. Around 10% (£121 million) of the money has been used to finance loans and leases with a further £76 million required to fund (cash) operating losses. This leaves £65 million that has simply increased the club's cash.

City now have a very healthy cash balance of £75 million, but this is still a lot lower than Arsenal £228 million and United £156 million.

Although some might believe that this is evidence that City have bought success, it is in stark contrast to United, whose owners have cost the Red Devils around £850 million in interest payments, debt repayments and professional fees, thus restricting the amount they have been able to spend on improving the squad and the club’s infrastructure.

"Hand in Glove"

As the Manchester United Supporters' Trust said, “If it were a race, then United are dragging their owners behind them like a tractor, while Manchester City's owners are providing rocket fuel.”

Financial Fair Play has obviously been one of the most important challenges for Manchester City, including a €20 million (£16 million) settlement in 2013/14. The failure to meet UEFA’s break-even targets had actually resulted in a €60 million (£49 million) fine, but €40m (£33 million) of this was suspended.

"Captain Sensible"

City would now appear to be out of the woods with Al Mubarak confirming that there are “no outstanding restrictions”, though UEFA have noted that this was “subject to ongoing additional controls and audits”, adding, “the club remains under strict monitoring and has still to meet break-even targets and is therefore subject to some limitations in 2016.”

In any case, City are already looking to the future with the opening of the City Football Academy in December 2014. This has been built on 80 acres featuring a 7,000 capacity stadium and 16.5 pitches with two thirds of the site dedicated to youth football.

Al Mubarak observed, “The signs are all positive. Our Academy enjoyed one of its most successful years to date with accomplishments at every age group.” Importantly, he was keen to note that “ten players from our development system earned first team debuts in 2014/15.”

"Pablo Honey"

It has been a long journey for City, but they have rarely put a foot wrong in executing their Masterplan. As Soriano said, “Manchester City is now a profitable, self-sustainable club competing at the highest level in world football.”

That’s already a fine achievement, but, echoing famous City fan Noel Gallagher (“I'm part of the greatest band in the world. Am I happy with that? No, I'm not. I want more!”), Soriano is eager for further progress, talking of “the potential that exists for Manchester City to reach even greater heights in the future.”

The other elite clubs might have something to say about that, but it is fair to say that this version of City is considerably different from the one that used to suffer from what Joe Royle once called “Cityitis”. They are well placed to win more honours, but it’s now up to manager Manuel Pellegrini to deliver.