Chelsea - Accidents Will Happen

After such a successful 2014/15 when they won the Premier League and Capital One Cup, very few people would have expected Chelsea to fall off the rails so spectacularly this season. However, a combination of key players losing form and manager José Mourinho struggling to find a solution, not to mention the distasteful Eva Carneiro episode, led to a string of defeats and ultimately the departure of the “Special One”.

Guus Hiddink has been installed as interim manager until the end of the season with the club hoping he can repeat the achievements of his previous stint in that role or at the very least drive the club up the table and avoid the unthinkable threat of relegation.

Although 2014/15 brought two trophies to Stamford Bridge, the news was not so good off the pitch, as the previous year’s £19 million profit was transformed into a £23 million loss – a deterioration of £42 million.

This was driven by two main factors: (a) profit on player sales fell £23 million from £65 million to a still impressive £42 million, principally due to the sale of Romelu Lukaku to Everton, Andre Schurrle to Wolfsburg, Ryan Bertrand to Southampton and Thorgan Hazard to Monchengladbach; (b) the wage bill shot up £23 million (12%) to £216 million, the highest in the Premier League, which might be considered the price of success, as it included hefty bonus payments.

Revenue fell £6 million to £314 million, largely due to a £4 million decrease in broadcasting revenue to £136 million, as the increase in Premier League distributions was more than offset by not progressing so far in the Champions League. Commercial income was slightly lower at £108 million, while match day was largely unchanged at £71 million.

Other expenses rose £7 million (10%) to £83 million, while there was a £3 million net increase in exceptional items, as this year’s figures included a £1 million loss on the disposal of investments, while last year’s accounts featured a £2 million credit for the release of a provision for compensation payments following a change in management.

The only area that improved profitability was non-cash flow expenses, as Chelsea booked a £19 million impairment charge against player values last year, while player amortisation was £3 million lower at £69 million.

Chelsea’s £23 million loss is likely to be one of the worst financial performances in England’s top flight in 2014/15. To date, nine Premier League clubs have published their accounts for last season with six reporting profits, the largest being Arsenal £25 million, Southampton £15 million and Manchester City £10 million. Manchester United and Everton have also announced losses, but much lower at around £4 million.

Although football clubs have traditionally lost money, the increasing TV deals allied with Financial Fair Play (FFP) mean that the Premier League these days is a largely profitable environment with only five clubs losing money in 2013/14.

As we have seen, once-off profits on player sales can also be very important to the bottom line, especially at Chelsea, where the 2013/14 numbers were boosted by £65 million from this activity, which was only surpassed by Tottenham’s £104 million, almost entirely due to the record sale of Gareth Bale to Real Madrid.

Chelsea’s huge profit that season was largely due to the sales of David Luiz to Paris Saint-Germain, Juan Mata to Manchester United and Kevin De Bruyne to Wolfsburg.

Of course, Chelsea are no strangers to making losses in the Abramovich era, as they have invested substantially to first build a squad capable of winning trophies and then to keep them at the top of the pile. Since the Russian acquired the club in June 2003, it has reported aggregate losses of £684 million, though there has been much improvement after the spectacular £140 million loss in 2005 with Chelsea posting profits in two of the last four years.

The first profit made under the Abramovich ownership was a small £1 million surplus in 2012, though this owed a lot to £18 million profit arising from the cancellation of preference shares previously owned by BSkyB.

On the other hand, Chelsea have consistently suffered from so-called exceptional items, which have increased costs by £127 million since 2005, due to compensation paid to dismissed managers £61 million, impairment of player registrations £28 million, the early termination of a former shirt sponsor £26 million, tax on image rights £6 million, the impairment of other fixed assets £5 million and loss on disposal of investments £1 million.

That’s an average of around £12 million year, but was particularly relevant in 2011, when £41 million of exceptionals “had a significant impact on the size of the losses”. Next year’s accounts will again be hit by Mourinho’s pay-off. Although this has been reported as various sums, most sources suggest that this will be restricted to one year’s salary, even though he signed a new four-year contract last summer, but that would still amount to £9-10 million.

However, it is profit from player sales that is having an increasing influence on Chelsea’s figures. In the seven years between 2005 and 2011, Chelsea averaged £10 million profit from selling players, but this has shot up to an average of £38 million in the four years since then.

In particular, Chelsea’s figures have benefited from £107 million from player sales in the last two seasons. Their reliance on this activity is underlined by the fact that they would have made a loss of £46 million in 2014 instead of a £19 million profit without these transfers.

Chelsea noted that six players had been sold at a profit of £21 million since the latest accounts closed, including Petr Cech to Arsenal, Filipe Luis to Atletico Madrid and Oriol Romeu to Southampton. They also received £6 million in respect of sell-on clauses for players transferred in previous years.

"This Cesc is not on fire"

This is clearly lower than the last two years, though there could still be more to come in the January transfer window, e.g. Juventus are rumoured to want to make Juan Cuadrado’s loan deal permanent.

Chelsea’s extensive use of the loan system is also noteworthy with around 30 players currently listed as being out on loan, including four at Dutch club Vitesse Arnhem, which appears to be an unofficial feeder club.

Given that very few of these players have succeeded in establishing themselves in Chelsea’s first team, it would appear that the primary purpose of this strategy is to develop players for future (profitable) sales, while effectively placing them in the shop window.

"John, I'm only dancing"

Some of the player wages will be covered by the loanees’ clubs, though it is likely that Chelsea would still have to pay a fair amount, but from a financial perspective the real gains arise after the player is sold. Clearly, not every player will bring in big money, but this approach only needs a couple of lucrative sales to be successful. The pipeline of probable upcoming sales includes the likes of Mo Salah, Victor Moses and Marko Marin.

Although some might complain that this smacks of treating players like stocks and shares, not to mention ensuring that rival clubs cannot buy this promising talent, there are (currently) no rules against it and other clubs, such as Udinese, have operated in a similar way for many years.

It remains to be seen whether more academy players make it at Chelsea, though there are high hopes for Ruben Loftus-Cheek, Nathan Aké, Dominic Solanke, Lewis Baker and Izzy Brown.

The other side of player trading is obviously player purchases, which is reflected in the profit and loss account via player amortisation. To illustrate how this works, if Chelsea paid £25 million for a new player with a five-year contract, the annual expense would only be £5 million (£25 million divided by 5 years) in player amortisation (on top of wages).

However, when that player is sold, the club reports the profit as 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 £22 million, as the club would have already booked £15 million of amortisation (3 years at £5 million).

The accounting for player trading is fairly tedious, 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 it is possible for clubs like Chelsea and Manchester City to spend so much and still meet UEFA’s FFP targets.

Chelsea’s initial wave of purchases under Abramovich saw player amortisation shoot up to £83 million in 2005, before falling away to £38 million in 2010 in line with less frenetic transfer activity. As spending kicked in again, player amortisation steadily rose to £72 million in 2014, before falling back to £69 million in 2015.

Unsurprisingly, this is still one of the highest player amortisation charges in the Premier League, only surpassed by Manchester United, whose massive outlay under Moyes and van Gaal has driven their annual expense up to £100 million, and Manchester City £70 million.

The value of Chelsea’s squad on the balance sheet fell slightly to £223 million in 2015, though this understates how much they would fetch in the transfer market, not least because homegrown players are ascribed no value in the books. Chelsea are one of the few clubs to formally acknowledge this factor in the accounts, as they have valued the playing staff at £350 million.

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 Chelsea’s case this metric highlights their recent improvement, as it is has been positive for the last three years, though it did fall from the £51 million peak in 2014 to £16 million in 2015.

However, to place that into context, this is way behind Manchester United £120 million, Manchester City £83 million and Arsenal £64 million. In fact, United’s amazing ability to generate cash is reflected in their projected EBITDA of £165-175 million for 2015/16 following their return to the Champions League and their new kit deal.

Despite slipping back in 2015, Chelsea have increased their revenue by 52% (£108 million) since 2009 from £206 million to £314 million. The growth is split evenly between commercial income, which has roughly doubled from £55 million to £108 million, and broadcasting income, which has increased 71% (£56 million) from £79 million to £136 million.

Match day receipts have actually fallen from £75 million to £71 million, as this is linked to the number of home games played, which were lower due to not progressing so far in the Champions League. As the club noted, “all three sources of income are dependent on the performance of the first team.”

In terms of revenue, Chelsea were overtaken by Arsenal in 2014/15, so now have the fourth highest in England, behind Manchester United £395 million, Manchester City £352 million and the aforementioned Arsenal £329 million.

This performance was defended by chairman Bruce Buck: “To record the second-highest turnover figure in the club’s history, despite the Champions League campaign ending at the earliest knockout round, demonstrates our business is robust and is testament to good work regarding our commercial activities, our growing fan base around the world and the tremendous support the team received at home and away matches in 2014/15.”

However, the lack of growth was disconcerting, especially as Arsenal grew by 10% (£31 million) last season. Even though City’s growth was only 2% (£5 million), this was obviously preferable to Chelsea’s 2% (£6 million) decline. Manchester United’s 9% (£38 million) decrease was due to their failure to qualify for Europe.

In fairness to Chelsea’s executive team, 2015/16 will again see a rise in revenue, as the club observed, “Following our Premier League championship-winning season, we expect the current year to produce record revenues once again. These will be powered by new commercial deals, including our record-breaking partnership with Yokohama, and revenues related to this season's Champions League which improve due to entering as Premier League champions and an increase in TV revenue for English clubs.”

Chelsea’s 2013/14 revenue of £324 million (based on the holding company accounts) placed them 7th highest in world football as per the Deloitte Money League, though Real Madrid continued to lead the way with £460 million, followed by Manchester United £433 million, Bayern Munich £408 million, Barcelona £405 million and Paris Saint-Germain £397 million.

The gap to the top is likely to increase in the next edition, as 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 Chelsea’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 commercial income, where Chelsea are substantially lower than their rivals that have traditionally been more successful in monetising their brand: Bayern Munich £131 million (£244 million minus £113 million), Real Madrid £80 million and Manchester United £76 million. The £161 million shortfall against PSG is largely due to the French club’s “friendly” agreement with the Qatar Tourist Authority.

On the plus side, Chelsea look to be fine on broadcasting and not too bad on match day income, though there is room for improvement in the latter category.

Despite the fall in broadcasting revenue, this still accounts for the largest share of Chelsea’s revenue, though this fell from 44% to 43%. Commercial was unchanged at 34%, while match day rose slightly to 23%.

Chelsea’s share of the Premier League television money rose £5 million from £94 million to £99 million in 2014/15, largely due to higher merit payments for winning the league, as opposed to finishing third the previous season. This is likely to fall this season, as Chelsea will finish in a lower place.

However, there will be a substantial increase from the mega Premier League TV deal starting in 2016/17. My estimates suggest a place in the top four would be worth an additional £50 million under the new contract. 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 Chelsea receiving €39 million for reaching the last 16 in the Champions League, compared to €43 million for getting to the semi-final the previous season. The reduction was higher in Sterling terms, due to the weakening of the Euro. Of course, Chelsea’s European revenue peaked in 2011/12 when they beat Bayern Munich in a dramatic final to win the Champions League.

Here, it is worth noting the importance of the TV (Market) pool to the Champions League distributions. First of all, 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 (as was the case in 2013/14 with Celtic). Second, 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.

Finally, half of the distribution is based on how far a club progresses in the Champions League, while the other half depends 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 Chelsea won the title in 2014/15, compared to finishing third the year before, they will receive a higher percentage in 2015/16.

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.

If Chelsea fail to qualify for Europe’s flagship tournament (for the first time under Abramovich), their revenue would be hit to the tune of at least £40 million (including gate receipts and sponsorship clauses).

Match day income was largely unchanged at £71 million with the number of home games staged remaining at 26 (2 more in the League Cup, 2 fewer in the Champions League). This revenue stream peaked at £78 million in 2011/12, thanks to the victories in the Champions League and the FA Cup.

Admirably, Chelsea have held ticket prices at 2011/12 levels for five consecutive seasons and this year introduced a new price bracket for U20s. In fact, Bruce Buck confirmed, “This is the eighth time in 10 seasons there has been no increase in the cost of general admission tickets at Stamford Bridge.”

Chelsea’s match day revenue is £20-30 million lower than Arsenal and Manchester United, as they have much bigger grounds, which helps explain why the club has spent so much time searching nearby locations for a new stadium. However, they were outbid for the Battersea Power Station and have ruled out moves to Earls Court and White City.

Instead, Chelsea have now submitted a planning application to increase the capacity of Stamford Bridge from 41,600 to 60,000. This would be a complex build with the plan being to lower the arena into excavated ground, but the estimated £500 million cost would be funded by Abramovich.

The hope would be to start work in 2017 with Chelsea having to find a temporary home for three years. The club is in discussions with the Football Association to play at Wembley (as are Tottenham who are also planning a stadium move), though Twickenham, the headquarters of the Rugby Football Union, has also been mentioned as a possibility. This would cost around £15 million a year, though income might be higher if the crowds increased.

Chelsea have previously highlighted “the need to increase stadium revenue to remain competitive with our major rivals, this revenue being especially important under FFP rules.” More corporate hospitality in particular could deliver significant additional revenue with additional potential revenue from naming rights or other sponsorship opportunities.

Commercial revenue fell slightly by £1 million to £108 million, which was disappointing, especially as they are the only Premier League club to date to report a decrease in this revenue category in 2014/15. It was still higher than Arsenal £103 million and Liverpool £104 million (2013/14 figure), but it was a long way below Manchester United £196 million and Manchester City £173 million.

Over the last three years Chelsea’s commercial income has grown by 61% (£41 million), which would be considered pretty impressive were it not for Arsenal growing by 97% (£51 million) and Manchester United 67% (£79 million) in the same period.

However, Chelsea’s commercial revenue will increase in the next set of accounts, as the five-year shirt sponsorship deal with Yokohama tyres started this season. This is worth £40 million a year, i.e. more than double the £18 million previously paid by Samsung. This is on top of the Adidas kit supplier deal, which was extended in 2013 to 2023, which increased the annual payment from £20 million to £30 million.

Buck specifically noted that “our program of partnering with world-renowned and innovative market leaders is accelerating”, as seen by a deal with Carabao, a leading energy drink company in Thailand, to sponsor training wear from 2016/17 for a reported figure of £10 million a year.

These deals will leave Chelsea only behind Manchester United for the main shirt sponsorship and kit supplier deals and it’s difficult to compete with their massive Chevrolet and Adidas agreements.

Wages surged by £23 million (12%) from £193 million to £216 million, reflecting bonuses paid for winning the Premier League and Capital One Cup. This means that the wage bill has risen by £43 million (25%) in the last two years.

As a technical aside, note that these wage figures have been corrected for exceptional items, e.g. in 2013/14 the reported staff costs of £190.6 million included a £2.1 million credit for the release of a provision for compensation for first team management changes, so the “clean” wage bill was £192.7 million.

The accounts also include a £1.5 million payment to a director for compensation for loss of office. He is not named, but this is likely to be Ron Gourlay, who resigned in October 2014.

All this increased the wages to turnover ratio from 60% to 69% following the slight revenue decline in 2014/15, thus reversing the trend of this ratio improving every year from the recent 82% peak in 2010. Although the wages to turnover ratio tends to worsen in the second year of the Premier League TV deal, Chelsea’s is still one of the highest with only West Brom, Fulham and Sunderland reporting worse ratios (previous season’s figures).

So Chelsea once again have the highest wage bill in the top flight at £216 million, which is the first time since 2010. This is well ahead of Manchester United £203 million, Manchester City £194 million and Arsenal £192 million. There is then 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.

This reflects Chelsea’s stated strategy: “In order to attract the talent which will continue to win domestic and European trophies and therefore drive increases in our revenue streams, the football club continually invests in the playing staff by way of both transfers and wages.” This ambitious approach would explain why the club has not seen fit to insert relegation clauses in the players’ contracts, as the club has finished no lower than sixth in Abramovich’s time.

Both Manchester clubs saw reduction in wages in 2014/15. United’s decrease was due to their lack of success on the pitch, as bonuses fell, while City’s is partly due to a group restructure, where some staff are now paid by group companies, which then charge the club for services provided.

Although there is a natural focus on wages, other expenses also account for a considerable part of the budget at leading clubs, especially at Chelsea where these rose £7 million (10%) from £76 million to £83 million. This means that Chelsea also top this particular league table, ahead of Manchester City £76 million, Manchester United and Arsenal (both £72 million)

Other expenses exclude wages, depreciation, player amortisation and exceptional items. They cover the costs of running the stadium, staging home games, supporting commercial partnerships, travel, medical expenses, insurance, retail costs, etc.

Chelsea’s activity in the transfer market is interesting. For the four years up to 2010 Chelsea only had average gross spend of £25 million (net spend being just £2 million), but they then returned to spending big, averaging £94 million of gross spend in the last six years. In the last two seasons alone they spent £186 million bringing in new players, including Diego Costa, Cesc Fabregas, Juan Cuadrado, Pedro, Baba Rahman, Filipe Luis and Loic Remy.

However, there is a big difference in net spend. The average annual net spend between 2010 and 2014 was £67 million, but this has fallen to only £20 million for the last two years, thanks to equally big money sales, which did not exactly ease Mourinho’s frustrations.

It may be a surprise to some, but Chelsea’s total net spend of £40 million in the last two years was only mid-table. Not only were they over £100 million behind the Manchester clubs (City £151 million, United £145 million), but they were also outspent by the likes of West Ham, West Brom and Crystal Palace in this period.

Chelsea have no financial debt in the football club, as this has all been converted into equity by issuing new shares. That said, the club’s holding company, Fordstam Limited, does have over £1 billion of debt (£1,041 million as of June 2014) in the form of an interest-free loan from the owner, theoretically repayable on 18 months notice.

Not that it makes much difference, given Abramovich’s willingness to continue to fund the club, but Chelsea noted in the accounts that they had acquired eight players at an initial cost of £69 million this summer. There were also minimal contingent liabilities of £1.5 million, suggesting that Chelsea, unlike most football clubs, pay all their transfer fees upfront, which must be an advantage in negotiations compared to other clubs that have to pay in stages.

Other clubs have to carry the burden of sizeable debt, notably Manchester 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.

The advantage of having a benefactor like Abramovich is demonstrated by the annual interest payments at those clubs: £35 million for United, £13 million for Arsenal. That is money that could be spent on transfers or player wages.

Although Chelsea’s cash flow from operating activities has turned positive in the last three seasons (after adjusting for non-cash flow items, such as player amortisation and depreciation, plus working capital movements), they still require funding from the owner to cover player purchases and investment in improving facilities at Stamford Bridge and the training ground at Cobham.

That amounted to £104 million in the last two years: £47 million in 2015 and £57 million in 2014. In fact, since Abramovich acquired the club, he has put around £1 billion into the club, split between £611 million of new loans and £350 million of share capital. In that period £672 million of loans have been converted into share capital.

Most of this funding has been seen on the pitch with £744 million (77%) spent on net player recruitment, while another £130 million went on infrastructure investment. A further £73 million was required to cover operating losses with £17 million on interest payments (in the early years).

Given Chelsea’s several years of heavy financial losses, many observers had believed that they would fall foul of FFP, but that has not been the case, as confirmed by Buck: “Chelsea has been consistent in our intention to comply with FFP and it was a primary aim in the past financial year to be one of the clubs with a continuous record of meeting the regulations, which we have achieved.”

The club has taken advantage of some of the allowable exclusions for UEFA’s break-even analysis, namely youth development, infrastructure and (for the initial monitoring periods) the wages for players signed before June 2010.

Even though Chelsea are compliant, it is clear that this legislation has been at the forefront of the club’s thinking, hence their focus on earning more commercially. The accounts state: “FFP provides a significant challenge. The football club needs to balance success on the field together with the financial imperatives of this new regime.” In other words, Chelsea cannot simply spend their way out of trouble.

"Save a prayer"

Looking ahead, Chelsea’s 2015/16 accounts will benefit from the Yokohama shirt sponsorship (£22 million higher) and more money from the Champions League (new TV deal, market pool benefit of entering competition as Premier League champions). However, they will be hit by the Mourinho pay-off and reduced TV money for a lower Premier League finish (e.g. merit payment difference between 1st and 12th is £14 million). Against that, bonus payments should plummet, which would reduce the wage bill.

The following season (2016/17) will again be a mixed bag. Not qualifying for Europe would mean a revenue reduction of at least £40 million, though costs would also fall, e.g. staging home games, travel, bonus, etc. There would also be the cost of rebuilding the squad in the image of the new manager, More positively, Chelsea would be boosted by the new Premier League TV deal and the training sponsorship contract.

"Willian, it was really something"

Longer term, it will be all about the stadium development at Stamford Bridge, but that is very much future music. Such developments rarely go smoothly, especially in an urban environment, as opposed to a green field site.

It’s incredible what a difference a year can make: twelve months ago everything looked rosy in Chelsea’s garden, but this season has seen one problem after another. The vast majority of other clubs would still prefer to be in their position, but the Roman empire has looked shakier than at any other period in recent times.

Nevertheless, it would be a brave man that bet against a Chelsea recovery, though a lot will depend on who arrives as permanent manager in the summer.

Swansea City - Don't Let The Sun Go Down On Me

Even though Swansea City’s form has not been great, it still came as something of a surprise when manager Garry Monk was sacked this month, not least because the customary smooth succession to a capable replacement seems to have foundered. There have reportedly been talks with former Argentina and Chile coach Marcelo Bielsa, but coach Alan Curtis remains in charge for the time being.

With the Swans hovering close to the relegation zone, this feels like it might be the first genuine setback since the club’s steady recovery from near insolvency, when their financial difficulties inevitably spilled onto the pitch and they only avoided demotion to the Conference in 2003 by the skin of their teeth.

Since those trying times Swansea have become somewhat of a model club, surging up the leagues until they secured promotion to the Premier League in 2011. They are owned by a consortium of local businessmen and fans with a 21% share being held by the Supporters’ Trust. Furthermore, they have moved from the ramshackle, run-down Vetch Field to a spanking new stadium.

"Williams, it was really nothing"

People noted this success and started to talk of the “Swansea Way”, partly due to the way that the club has been run, but also referring to an attractive, passing style of play. They have been prudent, spending their funds wisely, as they are acutely aware of the problems off the pitch in their recent past.

The approach was summarised by chairman Huw Jenkins thus: “We don’t have dramatic changes. We make sure managers are comfortable and take on board our philosophy and stick to it. We run a common sense business and when clubs change their playing squads to suit a new manager, it seems completely wrong to us.”

The fruits of their labour have been clear for all to see, as Swansea won the Capital One Cup in 2012/13, thus qualifying for the Europa League. There was a series of encouraging mid-table finishes, culminating in what Jenkins described as “the best season in the club’s history” in 2014/15, as Swansea registered their highest Premier League finish of 8th (the second best of all time in the top flight) with their highest ever total of 56 points.

"Don't bet against the Fed"

However, things can quickly change and there has been a marked dip this season following an indifferent summer recruitment campaign. Portuguese international Eder has been ineffective, while French defender Franck Tabanou has been virtually non-existent and the new strike force of Andre Ayew and Bafetimbi Gomis has mainly flattered to deceive.

This led to Monk’s departure with the club clearly worried about the implications of dropping down to the Championship. As Jenkins explained, “With the recent uncertainty surrounding the club, the decision has been made in the best interests of Swansea City and its supporters.”

The riches available in the Premier League can be seen in Swansea’s accounts for the 2014/15 season, as the club broke through the £100 million revenue barrier for the first time. Despite this feat, profit after tax was £0.6 million lower at £1.1 million, though profit before tax actually rose £0.4 million to £1.7 million, as the latest accounts had a tax charge of £0.6 million, while the previous year benefited from a £0.4 million tax credit.

Importantly, Swansea changed their financial year-end from May to July in order to be more aligned to the football season, so the 2014/15 accounts cover 14 months. This means that costs are a fair bit higher than a normal year, as these are incurred over the whole period, while revenue is only slightly higher, as there is no additional match day or broadcasting income in June and July.

This helped contribute to wages increasing by £19 million (31%) to £83 million and other expenses rising £6 million (51%) to £19 million. Player amortisation and depreciation were also £2 million higher, though player impairment was reduced by £4 million.

Revenue rose by £5 million (5%), largely due to broadcasting income increasing by £4.5 million (6%) to £85 million, but there was also growth in commercial income, up £1.7 million (21%) to £10 million, and player loans, up £0.5 million to £1 million. On the other hand, match income was down £1.5 million (16%) to £7.7 million, mainly due to the lack of Europa League games.

All this meant that Swansea’s operating profit fell £18 million, though this was offset by the £19 million increase in profits from player sales, mainly due to Wilfried Bony’s transfer to Manchester City.

The expenses growth reflected the cost of playing in “the best league in the world”, as Swansea’s finance director Don Keefe observed, “These latest financial results continue to reveal the club’s desire to maintain investment to improve performance standards and, in particular, to compete successfully in the Premier League.”

Given the cost impact of a 14-month accounting period, making any sort of profit is not to be sniffed at, though it has become less of a rarity in the Premier League these days. In fact, no fewer than 15 of the 20 clubs in the top flight made money in 2013/14 (the last season for which all clubs have published their accounts).

Swansea’s achievement is even more impressive if you consider that half of the eight Premier League clubs to have published their 2014/15 results have reported worse figures, namely Everton, Manchester United, Southampton and West Ham. This is fairly typical in the years when there is not a new TV deal, as there is relatively little revenue growth, while wages keeps going up.

Nevertheless, Swansea’s annual profits in the last couple of years are among the lowest in the Premier League. For example, in the prior season their profit of £1 million was way behind Tottenham Hotspur £80 million, Manchester United £41 million, Southampton £29 million and Everton £28 million.

To an extent, this merely highlights the major impact that once-off player sales can have on a football club’s profitability. To reinforce this point, in 2014/15 Southampton made £44 million from player sales, mainly due to the transfers of Adam Lallana and Dejan Lovren to Liverpool plus Calum Chambers to Arsenal, while the previous season saw Tottenham Hotspur make an amazing £104 million (largely from the mega sale of Gareth Bale to Real Madrid) and Chelsea £65 million (David Luiz to Paris Saint-Germain).

In stark contrast, Swansea were the fourth worst in the Premier League at making money from this activity in 2013/14, generating just £5k. Fortunately, this significantly improved in 2014/15, when they made £19 million from player sales. Most of this was from Bony’s record move to City, but there were also gains from the sales of Michel Vorm to Tottenham and Chico Flores to Lekhwiya in Qatar.

Swansea’s focus on the bottom line is evidenced by them being consistently profitable over the last four seasons, making a total of £41 million profits before tax since promotion to the Premier League. Most impressively, Swansea had profits of £17 million and £21 million in 2012 and 2013 respectively. Indeed the latter profit was the highest achieved in the top tier that particular season.

The last time that Swansea made a loss was £11 million in 2011, which could ironically be considered as the price of success, because promotion triggered hefty bonus payments to the players and management staff plus additional transfer fees.

As we have seen, when football clubs make large profits it is often down to major player sales. This was certainly the case for Swansea in 2013, when the £21 million profit was essentially due to transfers, mainly Joe Allen to Liverpool, Scott Sinclair to Manchester City and Danny Graham to Sunderland.

Very little will come Swansea’s way from player sales in 2015/16, unless they make sales in the January window, as they have only earned around half a million to date from Jazz Richards’ transfer to Fulham.

Profits can also be boosted by other exceptional items. In Swansea’s case, they have made £7 million in compensation fees for management “transfers” in the last few years: £5 million from Liverpool in 2012 for Brendan Rodgers and his staff; £2 million from Wigan Athletic for Roberto Martinez in 2010. In contrast, next year’s books will have to absorb a £3 million severance payment to Monk.

As transfers can have such a major impact on reported profits, it is worth exploring how football clubs account for these deals. Even though this is fairly technical, 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.

So, 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. Therefore, if Swansea were to spend £15 million on a new player with a 5-year contract, the annual expense would be only £3 million (£15 million divided by 5 years) in player amortisation (on top of wages).

However, when that player is sold, the club will straight away report the profit, which is basically the sales proceeds less any remaining value in the accounts. In our example, if the player were to be sold 3 years later for £18 million, the cash profit would be £3 million (£18 million less £15 million), but the accounting profit would be much higher at £12 million, as the club would have already booked £9 million of amortisation (3 years at £3 million).

Notwithstanding the accounting treatment, essentially the more that a club spends, the higher its player amortisation. Thus, Swansea’s player amortisation has shot up from just £1 million in 2011 to an £18 million peak in 2015, reflecting the years of higher spending in the transfer market since promotion to the Premier League.

However, Swansea’s financial results have also been influenced by the £7 million of impairment charges they have booked since 2011, most notably £4.7 million in 2014. This happens when the directors assess a player’s achievable sales price as less than the value in the accounts.

Going back to our example, if the player’s value were assessed as £4 million after 3 years instead of the £6 million in the accounts, then they would book an impairment charge of £2 million. Impairment could thus be considered as accelerated player amortisation. It also has the effect of reducing the annual player amortisation going forward.

In any case, Swansea’s player amortisation is still one of the lowest in the Premier League and is obviously miles behind the really big spenders like Manchester United (£100 million), Chelsea (£72 million) and Manchester City (£70 million).

Despite the use of impairment charges, the higher spending means that player values on the balance sheet have increased from just £3 million in 2011 to £50 million in 2015. Moreover, this accounting treatment actually understates the value of Swansea’s squad, as it does not fully reflect the real market value of its players.

Given all the accounting complexities arising from player trading, clubs often looks at EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation). Admittedly, this is a horrible acronym, but it simply shows how profitable a club is from its core business.

On the face of it, the steep decline in Swansea’s EBITDA from £23 million to £3 million in 2015 should be a little concerning, but this is partly due to the 14 month accounting period last year, which includes more costs. In reality, EBITDA has been solidly positive at Swansea since promotion with last year’s increase driven by the new TV deal in 2014.

That said, this also outlines the challenge for clubs like Swansea, as the EBITDA is significantly higher at the leading clubs, even though they have much larger wage bills: Manchester United £120 million, Manchester City £83 million, Arsenal £64 million, Liverpool £53 million and Chelsea £51 million.

Swansea’s massive revenue growth from £12 million in 2011 to £103 million in 2015 has been very largely due to the club’s elevation to the top flight, which the accounts noted, “amply demonstrates the rewards of gaining promotion.”

In effect, there have been two revenue uplifts: first, from £12 million to £65 million in 2012, which highlights the enormous disparity in TV money between England’s top two leagues; second, the increase from £67 million to £99 million in 2014, thanks to the new TV deal commencing that season.

In fact, virtually all of the £39 million revenue growth since the first season back in the top flight is from TV (£36 million), even though commercial income has nearly doubled from £5.2 million to £10.0 million and match income is up a third from £5.8 million to £7.7 million.

Swansea’s achievement in finishing 8th in the Premier League is really put into perspective when you compare their revenue to other clubs: in 2013/14 their revenue of £99 million was only the 13th highest in the top tier.

It should be a similar story in 2014/15, as their revenue growth of £5 million is in line with many of the clubs that have reported to date (Southampton £8 million, West Ham £6 million, Manchester City £5 million and Everton £5 million), though Arsenal’s new commercial deals resulted in a hefty £31 million increase.

Either way, the fact remains that their revenue of £103 million is overshadowed by the elite clubs. At the top of the pile, Manchester United’s revenue of £395 million (reduced in 2014/15, due to not qualifying for Europe) is around four times as much as Swansea, while significant sums are also generated by Manchester City £352 million, Arsenal £329 million and Chelsea £320 million.

More encouragingly, Swansea now have the 29th highest revenue in the world, according to the Deloitte Money League, which allows them to pay higher wages than famous clubs such as Ajax and Lazio. They are within striking distance of European thoroughbreds such as Hamburg £101 million, Benfica £105 million, Roma £107 million and Marseille £109 million.

The problem is that these additional riches do not help Swansea much domestically, as there are no fewer than 14 Premier League clubs in the world’s top 30 clubs by revenue (and all of them are in the top 40).

What is striking is that no club in that top 30 has a higher reliance on TV money than Swansea, where a staggering 82% of their total revenue comes from broadcasting. That leaves only 11% from commercial activities and just 7% from match day income.

Unsurprisingly, only Crystal Palace (also 82%) are more dependent on TV for their revenue, but in fairness the majority of Premier League clubs are also heavily reliant on this revenue stream. In fact, all but the top six clubs get at least 60% of their income from broadcasting.

In 2014/15 Swansea’s share of the Premier League TV money rose 9% from £74 million to £81 million. The distribution of these funds is based on a fairly equitable 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, Swansea were helped by their attractive style of football, as they were broadcast live 12 times, which was more than, say, Stoke City (9 times) and so was worth an additional £1.5 million (£10.3 million less £8.8 million). Each place in the league table is worth around £1.2 million, so Swansea’s 8th place merited £16.2 million, compared to receiving £11.1 million the previous season for coming 12th.

The blockbuster new TV deal starting in 2016/17 only reinforces the need to stay in the Premier League. My estimates suggest that Swansea would receive an additional £37 million under the new contract for finishing in the same position as 2014/15, increasing the total received to an incredible £117 million.

This is based on the contracted 70% increase in the domestic deal and an assumed 30% increase in the overseas deals (though this looks to be on the conservative side, given some of the deals announced to date). Of course, if they were to finish lower in the league table, they would earn a bit less.

Given the figures, it is obvious why Swansea are so scared of relegation and why they felt they had to sacrifice Monk. If they were to drop down, they would get around £38 million in the Championship, including a £35 million parachute payment and £2 million distribution from the Football League, compared to at least £92 million in the Premier League.

Of course, this would be considerably higher than those Championship clubs without parachute payments, who receive only £5 million, but it’s still a considerable reduction in revenue that would require major cuts in the wage bill, i.e. selling the club’s better players.

As the club’s accounts stated, “The major risk continues to be relegation from The Barclays Premier League and the adverse effect it would have on liquidity, operational activity and our ability to realise future plans.”

Swansea’s 2013/14 figures had been boosted by their Europa League adventures, but only to the tune of €4 million, even though they got out of their group, memorably defeating Valencia in the Mestalla Stadium, before being eliminated by Napoli in the last 32.

Match day revenue fell 16% (£1.5 million) from £9.2 million to £7.7 million, due to the lack of Europa League competition (six home games) in 2014/15. This revenue stream peaked at £9.9 million in the 2012/13 season, largely thanks to progress in the domestic cups, including three home matches in the run to Wembley for the Capital One Cup triumph against Bradford City.

Swansea’s match day income is significantly lower than many other Premier League clubs. At the other end of the spectrum, Manchester United and Arsenal earn around £100 million match day income or more than ten times as much as Swansea. Put another way, they earn more in three matches than Swansea do in an entire season.

In fairness, Swansea should be commended for their ticket pricing strategy, as they have not raised prices in the five years they have been in the Premier League. In fact, they cut season ticket prices by £10 for the 2015/16 season and have announced a price freeze for the 2016/17 season. According to the BBC’s Price of Football survey, Swansea have the second cheapest “most expensive” season tickets in the Premier League.

Vice-chairman Leigh Dineen explained the thinking: “We will continue to work hard on reducing the price of football for our supporters wherever and whenever we can. Our supporters will always remain the lifeblood of this club and the Board of Directors believe these season ticket prices remain exceptional value for money to watch quality football at the Liberty Stadium.”

Furthermore, the club also agreed to subsidise the price of tickets purchased through the Jack Army membership scheme for away fixtures, so that no adult would pay more than £22 for a game.

Swansea’s advancement through the leagues has been matched with increases in attendances, facilitated by the move to the Liberty Stadium in the summer of 2005. Last season’s average attendance of 20,555, slightly higher than the previous year, is more than 12,000 higher than the last season at the old Vetch.

However, this was still one of the lowest attendance in the Premier League, only ahead of Burnley and QPR in 2014/15. The problem is that the Liberty Stadium is too small to satisfy demand with around 98% of the capacity being sold and a lengthy waiting list for season tickets.

Therefore, the club has started negotiations with the local council to buy the Liberty, as it would not want to invest in a facility where it is only a tenant. It currently shares the stadium with rugby union side Ospreys on a 50-year lease.

Although planning permission has been granted for a stadium expansion to increase the capacity from just under 21,000 to 33,000, there is still much to agree with the local council before any development.

"I could be happy"

As finance director explained: “Any plans for an expansion of the East Stand at the Liberty Stadium cannot go ahead until we have negotiated a fair and equitable deal with the City and County of Swansea which is in the best interests of the club and not to the detriment of our available resources.”

The potential purchase price has been reported as £20-25 million, but the club would want a long-term payment schedule (over 15-20 years) to reduce their risk, especially if they were to be relegated.

Jenkins emphasised that any stadium expansion should not damage the playing squad, “so the club is not held back financially when it comes to the No. 1 priority of putting a team on the pitch and making sure we remain competitive in the Premier League.”

Commercial income was up an encouraging 21% (1.7 million) from £8.3 million to £10.0 million, but this was still one of the lowest in the Premier League, only above Crystal Palace and Hull City in 2013/14. To place this into context, the top five earners here are Manchester United £196 million, Manchester City £173 million, Chelsea £109 million, Liverpool £104 million and Arsenal £103 million. No wonder that Jenkins has admitted that the club is “miles behind” rivals commercially.

However, there are some signs of improvement, as the shirt sponsorship with Chinese financial services firm Goldenway (with their GWFX brand adorning the shirt) doubled from £2 million to £4 million a season when it was extended by two years until the end of the 2015/16 season – “the largest agreement in the club’s proud 102-year history”.

Similarly, the kit supplier deal originally signed with adidas in 2011 was extended in 2014. No financial details were divulged, but it is estimated to be worth £1.5 million per season.

The reported wage bill shot up 31% (£19 million) from £63 million to £83 million, thus increasing the wages to turnover ratio from 64% to 79%, but this is misleading, as the figures include 14 months of wages, while revenue is effectively only 12 months (match day and broadcasting are unchanged).

If we were to pro-rate the wage bill for 12 months, then it would be a more respectable £71 million with a wages to turnover ratio of 69%. That would still represent a 12% (£8 million) increase in wages, but that would be altogether more reasonable.

Even so, this would still be one of the highest wages to turnover ratios in the Premier League with only West Brom, Fulham and Sunderland reporting worse ratios (in the previous season). In fairness, Swansea have significantly improved from a horrific 149% in 2011 (though the wage bill was inflated that season by bonus payments linked to promotion).

Interestingly, the wages in Swansea’s first season back in the big time were amazingly low at £35 million – unsurprisingly the smallest wage bill in the Premier League in 2011/12.

Swansea’s wages, heavily based on performance-related contracts, are among the lowest in the top tier, though they have been steadily increasing, so in 2013/14 they had the 13th highest wage bill. This is partly due to the increase in staff numbers, e.g. football headcount rose from 167 to 222 in 2014/15.

Clearly, they still managed to over-achieve by finishing 8th last season, but Jenkins does not like to use that argument as an excuse: “We’ve never accepted that because of the money, we should be grateful and happy where we are. There is always the challenge to compete and you’ve got to find ways of doing that.”

That is more important than ever when you see how the wage bills of the mid-term clubs are converging around the £70 million level, e.g. West Ham £73 million, Southampton £72 million, Swansea £71 million, Stoke City £67 million.

It is only recently that Swansea’s directors started receiving payment for their efforts, but it is worth noting that the highest paid director (presumably Jenkins) earned £517k in 2014/15, down from £550k in 2013/14, though that included a £275k bonus for retention of Premier League status. Both payments are significantly up from the £250k earned in 2012/13.

The promotion effect can also be seen in the club’s activities in the transfer market. In the six seasons before promotion to the Premier League, there was hardly any gross spend, but this has now increased to average annual expenditure of around £16 million, including the signings of Wilfried Bony, Federico Fernandez, Ki Sung-Yeung, Pablo, Kyle Naughton, Jonjo Shelvey, Eder and Jefferson Montero.

However, even with this increase, Swansea are hardly recklessly extravagant, as big money sales have produced a very low net spend. Their approach was summarised in the accounts thus: “we will continue year on year to improve our playing squad, but in a sensible and cost effective manner.” It should therefore be no surprise that Swansea are among the lowest spenders in the Premier League.

In the last two years Swansea actually had net sales of £3 million, one of only two clubs with a surplus in the transfer market (Southampton being the other one). As might be expected, the spending league table is lead by Manchester City and Manchester United, but Swansea have also been comfortably outspent by the likes of Crystal Palace, Leicester City, Sunderland, Bournemouth and Watford.

Swansea have made their strategy very clear: “The secret is to balance spending to maintain and improve performance on the pitch so we remain in the Premier League, and spending on new projects considered important to the wellbeing of the club going forward.” It’s a tricky balance that has worked well for the club, though they might come to regret the lack of quality recruitment this summer if they don’t avoid the dreaded drop.

After three years of enjoying net funds (cash higher than debt), Swansea returned to a net debt position of £22 million in 2014/15, comprising gross debt of £25 million less £3 million cash. Gross debt comprised a £15 million overdraft, £8 million of other loans, £1 million owed to group undertakings plus £0.6 million of hire purchase contracts.

It should be noted that total creditors have been rising and increased £37 million in 2014/15 alone to a hefty £73 million. In addition, Swansea have contingent liabilities of £6 million (up from £3 million) for potential future transfer payments, dependent on player appearances and club success, and a possible £19 million of additional signing-on fees (significantly up from £2 million).

Although Swansea’s debt is still one of the smallest in the Premier League (with five clubs having debt above £100 million), this situation is one that will need careful monitoring following last season’s increase and potential future commitments.

To be fair, Swansea have been investing in the club infrastructure, specifically on new training bases at Fairwood (first team) and Landore (academy), including £3 million in 2014/15 and £6.9 million in 2013/14. This will be of long-term benefit to the club, but cash is tight, as noted by the finance director: “we recognise that we need further injection of funds before we can commit to any more significant capital investment programmes.”

This is highlighted by last season’s cash flow statement. Although Swansea generated £6 million from operating activities, further boosted by a new £8 million loan, they spent £24 million on players, £3 million capital expenditure and £1 million on dividends, thus requiring a £15 million overdraft.

Since promotion, Swansea have had £76 million of available funds, largely driven by £57 million cash from operating activities, supplemented by a £13 million increase in the overdraft plus a net £6 million increase in net loans. They have spent £53 million (70%) on bringing in new players and invested £18 million on infrastructure plus £4 million in dividends.

Interestingly, the player investment in the cash flow statement is a lot higher than the net spend reported in the press, which could be due to a number of reasons, such as the timing of stage/conditional payments for player sales or high agent and signing-on fees (not included in transfer figures).

There has been some noise about the dividends paid to Swansea’s directors, but most fans seem to think that this is fair reward for all their efforts in first saving and then running the club so well.

Swansea’s unique ownership structure, with 21% held by the Supporters Trust and a fan elected on the board, has been described by the Premier League’s chief executive, Richard Scudamore as “ideal”, but the need for outside investment is clear, especially when you compare their cash balance with their Premier League rivals: Swansea have less than £3 million, while 11 clubs have more than £20 million.

Indeed, last season they held discussions with American businessmen John Jay Moores and Charles Noell, the former owners of Major League baseball team the San Diego Padres, who were reportedly seeking to acquire an initial 30% stake (rising to 66% in a few years), but these came to nothing and they seem to have moved their interest to Everton.

"You're gonna hear me roar"

The club is keen to focus on developing its academy and is hopeful that its investments will help secure the Category One status. The good news is that the Premier League has already promoted Swansea’s U21 and U18 teams to the higher level this season, pending an audit of its facilities. As academy manager Nigel Rees said, “It means the boys will be competing against some of the very best players and teams at their age level. It’s all part of their development by creating a clear pathway towards the first team.”

Swansea’s recovery from near disaster at the turn of the Millennium is a fabulous story (“Jack to a King”), as a fading, provincial club climbed back up the leagues, all the time playing entertaining football and running the club in the right way.

However, football can be a harsh mistress, so no club can afford to rest on its laurels. To continue their impressive progress, Swansea will need to appoint the right man to manage the team in order to retain their Premier League status. There will be many hoping that they can do it.