Bournemouth - Welcome To The Pleasuredome

There is a lot to admire about Bournemouth, not least the fact that they have managed to avoid relegation from the Premier League in their first ever season in the top flight, despite suffering early injuries to star striker Callum Wilson and summer signings Tyrone Mings and Max Gradel.

Under the guidance of talented young manager Eddie Howe, Bournemouth have played some stylish football to secure safety and finish ahead of major clubs like Aston Villa and Newcastle United.

For a club of Bournemouth’s size, this is a notable achievement, but it is merely the latest chapter in an amazing story. As recently as 2010 they were playing in League Two, England’s fourth tier, before winning promotion three times in six years. In fact, this season was only the sixth that Bournemouth have spent above the third tier in their entire history.

Not only that, but Bournemouth have fought their way back from severe financial problems, twice falling into insolvency: first in 1997 when the team had to pound the streets collecting money in buckets; then 11 years later when the club started the 2008/09 season with a 17-point deduction after failing to exit administration.

"Howe It Is"

In fact, Bournemouth only avoided non-league football by winning the last game of that season after promoting Howe to manager at the age of 31. As chairman Jeff Mostyn said following promotion to the Premier League, “Six years ago we were on the abyss. We were 10 minutes away from the Conference and the chances are we would never have got out of the Conference with the resources we had available to us at that stage.”

Players and staff went months without being paid, as Mostyn helped prop up the club, before leading a consortium that took control in the summer of 2009, including local builder Eddie Mitchell. Despite a transfer embargo, Howe somehow took Bournemouth to promotion the following season.

Finally putting years of financial chaos behind them, stability arrived in the shape of Maxim Demin, a petrochemicals tycoon, who was introduced to the club by Mitchell. The Russian first bought Mostyn’s stake in 2011 and then bought out Mitchell two years later to take full control.

Since then Demin has bank-rolled Bournemouth’s climb through the divisions. They were promoted to the Championship in 2013, spending a season getting used to that level before the glorious promotion campaign of 2014/15 took them to the delights of the Premier League.

"Tommy Gun"

Howe argued that this amazing accomplishment was not purely due to Demin’s financial support: “We’re thankful to the owner for his investment, but our success is not down to money.” That is undoubtedly true with Howe himself obviously playing a major role, but it is equally fair to say that having a wealthy Russian benefactor has not exactly hurt.

In some ways then, this is not the classic “fairy tale”, but it is undoubtedly tough for a small club to make progress these days without some form of investment, so it is difficult to blame Bournemouth for having a go.

That said, the club has to an extent gambled by investing heavily in order to secure promotion. Clearly, their bet has paid off, but it could easily have gone the other way and who knows what would have happened if Bournemouth had languished in the lower leagues for a few seasons?

"Charlie Don't Surf"

Mostyn referred to this tricky balance in the last accounts: “The club is aware of the risk associated with reliance upon finance from its parent company to fund operations. However, the directors are confident that this risk is minimal based on the ongoing commitment from its investors and recent positive developments within the business.”

Demin has indeed provided significant financial support, amounting to around £63 million over the last four years in the form of loans and new preference shares. That has helped to cover large losses that culminated in a £7.6 million fine for breaking Financial Fair Play (FFP) regulations in the 2013/14 promotion season.

That fine contributed to Bournemouth’s loss before tax rising from £10.3 million to a hefty £39.1 million in 2014/15. These numbers were also adversely impacted by the price of promotion, which caused a £2 million payment to a former shareholder, and bonus payments. These were not detailed, but helped drive the wage bill up £13.1 million (75%) from £17.3 million to £30.4 million.

This meant that wages were more than  double the club’s revenue, even though this rose £2.8 million (28%) from £10.1 million to £12.9 million, partly due to the Bournemouth’s highest ever attendances.

Unlike the previous year, the club made no significant profit on player sales, leading to a £7 million reduction year-on-year. Other expenses increased by £1.5 million (25%) from £6.0 million to £7.5 million, while player amortisation also went up by £1.1 million (43%) from £2.6 million to £3.7 million.

The loss after tax was slightly lower at £38.3 million, thanks to the sale of group relief tax losses to other companies in the group.

It is important to note that Bournemouth’s financial results should be much better this season for two reasons: first, the TV money is massively higher in the Premier League; second, there should be no repeat of the exceptional payments. As a topical example, Leicester City went from a £21 million loss in the Championship in 2013/14 to a sizeable £26 million profit in the top flight the following season.

Even so, Bournemouth’s £39 million loss was the largest in the Championship in 2014/15, ahead of Fulham £27 million, Nottingham Forest £22 million and Blackburn Rovers £17 million. In fairness, hardly any clubs are profitable in the Championship with only six making money in 2014/15 – and most of those are due to special factors.

Ipswich Town were top of the pops with £5 million, but that included £12 million profit on player sales. Cardiff’s £4 million was boosted by £26 million credits from their owner writing-off some loans and accrued interest. Reading’s £3 million was largely due to an £11 million revaluation of land around their stadium. Birmingham City and Wolverhampton Wanderers both made £1 million, but were helped by £10 million of parachute payments apiece.

So the only club to make money without the benefit of once-off positives were Rotherham United, who basically just broke even – and ended up avoiding relegation to League One by a single place.

As we have seen, profit from player sales can have a major impact on a football club’s bottom line, but it’s not an enormous money-spinner outside the Premier League with the most profit made by Norwich City £14 million, followed by Ipswich £12 million, Leeds United £10 million and Cardiff City £10 million.

However, Bournemouth made the least money from this activity in the Championship in 2014/15. In fact, they were the only club to actually lose money from player sales, though this is more an indication of the fact that they wanted to keep the squad together, rather than not having any players that others wanted to buy. Many clubs need to sell players to help balance the books, but Bournemouth were in the fortunate position that this was not the case for them.

Of course, losses are nothing new for Bournemouth. Since making a small £1 million profit in 2011, the Cherries have reported losses four years in a row, including £15 million in League One in 2013. In fact, they have aggregated a total of £65 million of losses in the last three seasons alone.

The strategy was outlined by Mostyn: “As is the case with any business, success required investment. That is precisely what we embarked upon, and the end justifies the means.”

In this period, Bournemouth have been hit by a series of exceptional charges. On top of the £7.6 million FFP fine, there have been £2.4 million promotion payments to former shareholders, an impairment of £0.8 million of goodwill and various write-offs (£0.3 million investment in Poole Community Radio Limited and £0.2 million for loans due from related parties).

The only season where Bournemouth have benefited from player sales was 2013/14 when £6.9 million reduced the net loss to £10.3 million. This was enhanced by the 25% sell-on fee that Southampton had to pay Bournemouth following Adam 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.

There should be a similar sell-on fee from striker Danny Ings’ sale from Burnley to Liverpool in the next set of accounts, but this was capped at £200k. In the absence of any lucrative sales, profit from player sales should once again be on the low side in 2015/16.

To get an idea of underlying profitability, football clubs often look at EBITDA (Earnings Before Interest, Depreciation and Amortisation), as this strips out player trading and non-cash items. Even excluding exceptional items, this has been negative at Bournemouth and on a downward trend, falling from minus £3 million in 2012 to minus £25 million in 2015.

Again, only three clubs had a positive EBITDA in the 2014/15 Championship (Wolves, Birmingham City and Rotherham) and none of those clubs generated more than £1.5 million.

That said, Bournemouth still had the lowest EBITDA with their minus £25 million ahead of Nottingham Forest minus £20 million and Blackburn Rovers minus £15 million. This is again something that Bournemouth would except to sort out in the Premier League, where, in stark contrast, only one club (QPR) reported a negative EBITDA.

Bournemouth’s revenue has roughly tripled in the last three seasons, rising from £4.2 million in League One in 2012 to £12.9 million in the Championship in 2015. Of course, it will be massively higher in the Premier League in 2016, but we will have to wait for those numbers.

Unfortunately, Bournemouth is one of only two Championship clubs that does not separately break-down its revenue, so we have to estimate the split for match day, broadcasting and commercial.

Given the equal split of central TV distributions, we can fairly safely put in £4.5 million for broadcasting, while I have assumed £4 million for match day, based on average attendances and ticket prices of similar sized clubs. That leaves £4.4 million as the balancing figure for commercial. Of course, these figures are unlikely to be exact, but they can certainly be used for illustrative purposes.

What we can say without question is that Bournemouth’s £12.9 million revenue was one of the lowest in the Championship in 2014/15, which makes their promotion all the more impressive. Although Blackpool and Bolton Wanderers are yet to publish their accounts, their revenue was definitely higher than Bournemouth, as they both received £10 million parachute payments.

Therefore, Bournemouth had the 19th highest revenue in the Championship, only above five clubs: Charlton Athletic, Millwall, Rotherham, Huddersfield Town and Brentford. To further place this into perspective, four clubs enjoyed revenue higher than £35 million (around three times as much as Bournemouth): Norwich City £52 million, Fulham £42 million, Cardiff City £40 million and Reading £35 million.

The challenge for clubs like Bournemouth was neatly summarised by Howe, as he justified their (relatively) big spending: “We do not want a league table that picks itself. We want that smaller club that can still achieve great things. We have got an ambitious owner, we’re an ambitious club that wants to move forward and to do that, I’m sorry, at this level and Championship level, our income is nowhere near enough to achieve success.”

Of course, these revenue figures are distorted by the parachute payments made to those clubs relegated from the Premier League, e.g. in 2014/15 this was worth £25 million in the first year of relegation. Mostyn has complained that the Championship is intensely competitive, but is financially imbalanced by the substantial parachute payments.

If we were to exclude this disparity, then the revenue differentials would be smaller, but Bournemouth would still be well down the league table in 18th place, only overtaking Wigan Athletic.

In the Championship most clubs receive the same annual sum for TV, regardless of where they finish in the league, amounting to just £4 million of central distributions: £1.7 million from the Football League pool and a £2.3 million solidarity payment from the Premier League.

However, the clear importance of parachute payments is once again highlighted in this revenue stream, greatly influencing the top eight earners, though it should be noted that clubs receiving parachute payments do not also receive solidarity payments. As a comparison, we have estimated Bournemouth’s broadcasting income as £4.5 million, while Fulham earned nearly £30 million from this revenue stream.

Looking at the television distributions in the top flight, the massive financial chasm between England’s top two leagues becomes evident with Premier League clubs receiving between £65 million and £99 million, compared to the £4 million in the Championship. In other words, it would take a Championship club more than 15 years to earn the same amount as the bottom placed club in the Premier League.

As a result, promotion to the Premier League will have delivered immense financial gains for Bournemouth. Securing their status in the top flight means that they will also share in the astonishing new TV deal that starts in 2016/17, which will be worth an additional £30-50 million a year, depending on where they finish in the table.

Even if Bournemouth were to be relegated next season, their two years in the Premier League would have brought them around £240 million in TV money alone (£70 million in 2015/16, £95 million in 2016/17, then £75 million in parachute payments). The size of the prize goes a long way towards explaining the loss-making behaviour of many Championship clubs.

From 2016/17 parachute payments will be higher, though clubs will only receive these for three seasons after relegation. My estimate is £75 million, based on the percentages advised by the Premier League (year 1 – £35 million, year 2 – £28 million and year 3 – £11 million). Up to now, these have been worth £65 million over four years: year 1 – £25 million, year 2 – £20 million and £10 million in each of years 3 and 4.

There are some arguments in favour of these payments, namely that it encourages clubs promoted to the Premier League to invest to compete, safe in the knowledge that if the worst happens and they do end up relegated at the end of the season, then there is a safety net. However, they do undoubtedly create a significant revenue advantage in the Championship.

Of course, Bournemouth would also have spent more on improving their playing squad, but the net impact on the club’s finances would undoubtedly have been positive, as evidenced by the clubs promoted in the past few seasons. In 2014/15 the closest comparative to Bournemouth from a wages  perspective were Leicester City, whose wage bill rose by £21 million (from £36 million to £57 million), but their revenue surged by £73 million.

Bournemouth had one of the lowest match day incomes in the Championship (based on our estimate of £4 million), far lower than clubs like Norwich City £10.7 million, Brighton £9.8 million and Leeds United £8.8 million.

This was despite the attendances being the highest ever, rising from 9,952 to 10,265 in 2014/15. Mostyn said that this demonstrated “strong and continual support for the club”. In fact, attendances have further risen in the Premier League to 11,189, which is nearly double the 5,720 attendance in League Two.

However, the club’s income is clearly limited by the 11,500 capacity of the ground, meaning that Bournemouth’s average attendance was the second smallest in the Championship, only ahead of Rotherham.

The comparison is even starker in the Premier League, as there are only two clubs whose grounds have a capacity lower than 25,000, namely Swansea City (21,000) and Watford (22,000).

The club is well aware of this weakness with chief executive Neill Blake commenting, “Whilst we are delighted with the progress that the team has been making on the pitch, we are fully aware that demand for tickets far outweighs our current capacity.”

As a result, Bournemouth have announced their intention to submit plans to increase the capacity of the Vitality Stadium. Specifically, they would install a new permanent South Stand and fill in the South West and South East corners.

This limitation has also hit the supporters in the pocket with the club applying big increases to ticket prices in both 2014/15 (20%) and 2015/16 (15%). Given that there are fewer home matches in the Premier League, the price per game actually went up around 40% this season.

Mostyn justified the increase as being due to the size of the ground: “When you also consider the fact that that our capacity is under 12,000, and the effect that has on match day income, we believe we have been respectful in our pricing structure. It is very easy for (clubs with larger stadiums) to balance the books with cheap tickets in order to fill the ground, we don’t have that luxury.”

The chairman added, “Whilst I know supporters of any club, given the choice, would prefer no increase in season ticket prices, I sincerely hope the vast majority of our supporters will understand this increase given our new Premier League status. There can be no question that our ticket pricing remains more than competitive in comparison with other Premier League clubs.”

The estimated commercial income of £4.4 million was also among the smallest in the Championship, way behind Norwich City £12.8 million, Leeds United £11.3 million and Brighton £8.9 million. This included stadium naming rights for the Vitality Stadium (Dean Court, as was).

The shirt sponsor in the Championship was Energy Consulting, who paid the princely sum of £200k, though they were replaced by online gaming business Mansion Group in 2015/16. The new deal increased the annual payment to £750k, but this was still the lowest shirt sponsorship in the Premier League.

Although the press is full of reports of colossal sponsorship deals for the elite clubs, e.g. £47 million for Manchester United from Chevrolet and £40 million from Yokohama for Chelsea, the reality at the lower end of the table is very different with six Premier League clubs earning £1.4 million or lower.

The terms of the kit supplier deal with Carbrini (owned by JD Sports) are undisclosed, but this is also unlikely to bring in big money.

Bournemouth’s wage bill shot up by 76% (£13 million) from £17 million to £30 million in 2014/15, though this was inflated by promotion bonuses. These were not quantified, but as a comparison Watford paid £6.7 million, while Burnley paid £6.1 million, so this is likely to have had a substantial impact on Bournemouth’s wages. In addition, the number of playing staff increased from 96 to 112.

Either way, the Cherries’ wage bill has risen by £26 million in the three years since 2012, while revenue only grew by £9 million in the same period, pushing the wages to turnover ratio up to a staggering 237%.

Of course, wages to turnover invariably looks terrible in the Championship with no fewer than 10 clubs “boasting” a ratio above 100%, but Bournemouth’s 237% was in a class of its own, a long way ahead of Brentford 178% and Nottingham Forest 170%.

It might come as something of a surprise then to see that Bournemouth’s wage bill of £30 million was actually only the fifth highest in the Championship, behind Norwich City £51 million, Cardiff City £42 million, Fulham £37 million and Reading £33 million – though it was almost £10 million more than Watford, who were also promoted.

Stop me if you’ve heard this before, but this was once again because these clubs enjoyed the benefit of parachute payments. If we look at clubs who did not receive such payments, then Bournemouth had the highest wage bill, ahead of Nottingham Forest and Derby County.

Howe observed, “You are not going to get promoted to the Championship or into the Premier League without some investment”, though that has not stopped Burnley, who have not splashed the cash.

Another aspect of player costs that has been steadily rising at Bournemouth is player amortisation, which is the method that football clubs use to expense transfer fees. In line with the higher sums spent on bringing players into the club, player amortisation has grown from just £0.5 million in 2012 to £3.7 million in 2015.

As a reminder of how this works, transfer fees are not fully expensed in the year a player is purchased, but the cost is written-off evenly over the length of the player’s contract via player amortisation. As an illustration, if Bournemouth were to pay £5 million for a new player with a five-year contract, the annual expense would only be £1 million (£5 million divided by 5 years) in player amortisation (on top of wages).

Although this is not a huge charge, it was actually the 6th highest in the Championship, only significantly surpassed by those clubs relegated from the Premier League in recent times, i.e. Norwich City, Cardiff City and Fulham. Of course, this expense will have grown considerably based on the much higher transfer spend in 2015/16.

The other side of that coin is that player values on the balance sheet have also increased, rising from £2.1 million in 2012 to £16.9 million in 2015. That is the accounting value in the books, but the actual market value would obviously be much higher if Bournemouth were to sell any of its players.

Up until very recently Bournemouth spent hardly anything in the transfer market. Even after Demin’s arrival, the club hardly went crazy, averaging just £3 million gross spend a season while in the Championship. They only really pushed the boat out following promotion to the Premier League, when they spent £41 million gross in the 2015/16 season.

However, it is worth noting that the core of the side remains the survivors from the days in the lower leagues, including the entire first-choice back four: Simon Francis, Tommy Elphick, Steve Cook and Charlie Daniels.

As Howe said, it’s a challenge for a club like Bournemouth to sign players: “We need to look at it from a different angle. Of course the finances are difficult for us. When we are competing against other clubs we will lose, so that’s where the other factors become so important in trying to attract players here. We can offer a really good environment and total dedication to their profession, trying to develop them and give them a great stage to show how good they can be.”

Nevertheless, little old Bournemouth had the third highest net spend in the Premier League this season, only behind Manchester City £91 million and Newcastle United £73 million. Of course, any promoted club has to spend big if it wishes to survive, as shown by Watford being the fourth highest spenders, so maybe this should not be overly surprising.

Bournemouth’s net debt almost doubled in 2015 from £21.5 million to £40.6 million, as gross debt rose by £17 million from £25 million to £42 million and cash fell £2.1 million from £3.5 million to £1.4 million. All the debt is owed to the club’s owner. Maxim Demin, via his company A.FC.B Enterprises Limited, and is unsecured and interest-free.

A previous loan with Wintel Petrochemicals Limited, another Demin company, bore interest at 3% per annum before being transferred to A.FC.B, though interest on this loan was written-off (as was the proposed dividend on the owner’s 6% preference shares).

Bournemouth’s was by no means the largest debt in the Championship, being lower than 11 other clubs. In fact, four clubs had debt over £100 million, including Brighton £148 million, Cardiff City £116 million and Blackburn Rovers £104 million. Bolton Wanderers have not yet published their 2015 accounts, given their much publicized problems, but their debt was a horrific £195 million in 2014.

That said, the vast majority of this debt is provided by owners and is interest-free, so the amounts paid out by Championship clubs in interest is a lot less than you might imagine.

Even after adding back non-cash items such as player amortisation and depreciation, then adjusting for working capital movements, Bournemouth have substantial cash losses from operating activities, e.g. £16.7 million in 2015. They then spent a net £3.8 million on player recruitment and £4.6 million on bringing the stadium up to Premier League standards. This was effectively funded by Demin injecting £23 million through £17 million of loans and £6 million of new preference shares.

As the accounts drily observed, “The company is dependent on the financial support of its parent company.” You can say that again.

In the four seasons since Demin arrived, the club’s only real source of funds has been the £63 million that the owner has pumped in (£42 million in loans and £21 million in preference shares). Most of this (£44 million) has been used to cover operating losses, with £8 million spent on infrastructure investment and £8 million on new players (net). Another £1 million went on interest payments, leaving £1 million to increase the cash balance.

As we have already noted, Bournemouth’s hefty 2014/15 loss brought them a £7.6 million FFP penalty, which provided their detractors with more ammunition, though at least the Cherries have accepted their punishment – unlike QPR who are still challenging the legality of these regulations two years after they were promoted to the Premier League with an even bigger loss.

Some have questioned why Bournemouth’s fine was not higher, given the size of their loss, so let’s have a go at explaining this.

Under the rules for 2014/15, clubs were only allowed a maximum annual loss of £6 million (assuming that any losses in excess of £3 million are covered by shareholders injecting £3 million of capital). Any clubs that exceeded those losses were subject to a fine (if promoted – like Bournemouth) or a transfer embargo (if they remain in the Championship – as was the case with Fulham, Nottingham Forest and Bolton Wanderers).

There is a sliding scale for excess losses up to £10 million, but beyond that the fine is imposed on a pound-for-pound basis. Therefore, based on Bournemouth’s £7.6 million FFP fine, we can calculate that their excess loss was £10.9 million. Adding that to the £6 million maximum permitted loss, we can see that the FFP loss was £16.9 million.

That is still a lot lower than the reported £39.2 million loss, but that included the FFP fine itself, so that should be deducted. In addition, there are certain costs that can be excluded for the purpose of FFP, including any promotion bonuses. From the accounts we know that £2 million was paid to a former shareholder and I have estimated £7 million for bonus payments (based on similar payments at other promoted clubs).

We can also exclude the £4.6 million paid for stadium improvements, which would leave a balancing figure of £0.9 million for youth development, which is another allowable expense. Therefore, it does seem possible to get from the reported loss to the smaller loss required for the FFP fine.

"Kiss Like Ether"

Enough of the mechanics, what about the moral issues? Yes, FFP regulations can prevent another Portsmouth (to take another South Coast club as an example), but they also seem designed to maintain the pecking order (“survival of the fattest”, if you will).

Not only that, but the Football League itself has moved the goalposts by increasing the allowable loss to £13 million from the 2015/16 season (in line with the maximum loss of £39m over a rolling three season timeframe).

Let’s leave it to Eddie Howe to provide the main argument against FFP: “If you look back through the history of football there have been great stories where teams have achieved great things from an owner or a benefactor or whatever you want to call it. They have enabled that side to push on to great things. What the FFP structure will do is stop the underdog, the smaller team, having the chance to succeed and I do not think anyone will want to see that.”

All that said, if Bournemouth maintain their presence in the Premier League, they are likely to become a profitable club, though they are still likely to require support from their owners for investment in the squad and potential stadium redevelopment.

To that end, Demin sold a 25% stake in November to US investment firm Peak6, led by Matt Hulsizer, who also owns a share of the Minnesota Wild in the NHL. Jeff Mostyn explained the thinking behind this move: “The club is confident this partnership will further strengthen its ability to compete with the very best, and provide a platform to establish itself as a long-term Premier League club.”

"Hurry Up, Harry"

So there you have it, a small club on the South Coast of England, now backed by a combination of Russian and American money. In a way, that’s a perfect demonstration of the global nature of today’s Premier League, but that should not detract from a great story about Bournemouth beating the odds.

This was perhaps best summed up by Eddie Howe: “The qualities that saw us win our fight to stay in the Football League are the same qualities that have seen us succeed ever since. Hard work and a total commitment to our footballing philosophy have seen us develop into the team we are today.”

That seems fair enough to me. Of course, the owner’s money has helped, but it’s not a guarantee of success. The club has invested well and deserves its place at the top table. As club captain Tommy Elphick said, “Together, anything is possible.”

Sunderland - All Cats Are Grey

Yet again Sunderland are involved in a fight against relegation, though they should be used to this annual struggle by now, as the last time they finished in the top half of the table was back in 2011 when they came 10th.

It is fair to say that the Black Cats have not exactly flourished under Irish-American owner Ellis Short, the billionaire financier who completed his takeover of the club in May 2009, replacing Niall Quinn as chairman two years later.

On the one hand, Short has proved himself a good owner by providing significant funding to Sunderland. In fact, not only has he loaned the club around £160 million interest-free, but he has actually capitalised £100 million of this debt. This is money he would only get back if he sold the club (and for a decent price).

On the other hand, Short has operated a flawed strategy, which has essentially amounted to a series of quick fixes, exacerbated by poor choices in player recruitment.

"Fast Khazri"

These pros and cons were acknowledged by the owner in a vigorous defence of his tenure: “The assertion that I have been unwilling to spend money to fulfil the ambitions of the club and its fans is completely wrong. Every penny that comes from TV money and other commercial activities is spent on operating the club – that is, buying players, wages, and other associated costs. I have never taken money out of the club. In fact, I have funded significant shortfalls each and every season.”

Short continued, “The amount that I fund, every season, exceeds the collective total amount funded by every owner the club has ever had since the club was formed in 1879. I have done this willingly because I want us to be more than a club that simply exists in the top flight. Negligible owner-funding during the Premier League era resulted in Sunderland not being in the top flight for 15 of the 22 years. Since I have been involved, the good news is that my investment has kept us in the Premier League for nine consecutive seasons.”

However, here’s the kicker: “The bad news is, for that amount of money spent, we should be better than we are and no-one knows that more than me. Has the money been spent effectively? No – that much is clear and ultimately that is my fault, but it is not a result of a lack of ambition or commitment.”

"Heroes and M'Vila"

Sunderland’s performance has not been helped by constant managerial upheaval. The club has had nine managers in the last ten years, including five in the last four years alone: Martin O’Neill, Paolo Di Canio, Gus Poyet, Dick Advocaat and Sam Allardyce.

The routine is all too familiar to Sunderland supporters: an initial positive impact under the new manager (or head coach), but when results take a turn for the worse, the manager is hastily given his P45. Rinse and repeat.

None of the managers has been given enough time to build their own team, leading to an imbalanced squad. The never-ending changes destroy any continuity, prevent any long-term planning and result in a confused, often contradictory, transfer strategy.

This is perhaps best seen in the disastrous big money purchases of Jozy Altidore, a striker who scored just once in 42 league games, and Jack Rodwell, who has hardly set the world alight since his £10 million signing.

"Where's Captain Kirkhoff?"

Short’s seeming inability to hire the right staff has also been displayed in the board room, as Margaret Byrne  seemed to be out of her depth in the role of chief executive well before she had to resign following revelations about the timing and extent of her knowledge of Adam Johnson’s deeply inappropriate “relationship” with a 15-year-old girl.

At the beginning of the season the chairman ignored Advocaat’s please for a radical squad overhaul, which the Dutchman believed was essential if the club wanted to make progress. In fairness, he did splash out £15 million in the January transfer window, in order to bring in some fresh blood in the shape of Wahbi Khazri, Lamine Koné and Jan Kirchhoff. We shall soon see whether this has done the trick or whether it’s a case of “too little, too late”.

That said, history tells us that there is no guarantee that Sunderland would have bought well, even if they had “gone big” last summer. Indeed, recently they have effectively been spending to go backwards: 14th in 2013/14, 16th in 2014/15 and 17th or 18th this season.

Sunderland’s results off the pitch have been every bit as terrible as those achieved on the pitch, as seen in the 2014/15 figures. The loss increased by £8 million (49%) from £17 million to £25 million, primarily due to the wage bill soaring by £8 million (11%) to £77 million.

Revenue fell by £3 million (3%) from £104 million to £101 million with gate receipts decreasing by £4 million (26%) from £15 million to £11 million, mainly due to no repeat of the previous season’s cup run to the Capital One final. Broadcasting revenue was also down £3 million (4%) at £72 million following the lower finishing position in the Premier League. This was partly compensated by commercial income rising by £3 million (18%) from £18 million to £21 million.

It should be noted that Sunderland have changed the way that they classified revenue this year, including a restatement of the 2014 results. This has no net impact, but means that the figures reported for gate receipts in 2014 have reduced by £1.1 million, while commercial income has increased by the equivalent amount, specifically in conference, banqueting and catering.

Interest payable shot up by £3.7 million from £2.3 million to £6.0 million following a major change to the club’s borrowing arrangements with Security Benefit Corporation (SBC) replacing the previous bank loan and overdraft.

Player amortisation decreased by £3 million (10%) from £27 million to £24 million, while there was a £3 million improvement due to the club booking an impairment charge (reduction in player values) the previous season.

Sunderland’s £25 million loss is the third largest in the Premier League for 2014/15, only behind QPR £46 million and Aston Villa £28 million. So what, you might say, don’t all football clubs lose money?

Not any more. Although football clubs have traditionally made losses, the increasing TV deals allied with Financial Fair Play (FFP) mean that the Premier League these days is a largely profitable environment. In fact, just six clubs lost money in 2014/15 and two of those (Manchester United and Everton) only lost £4 million.

In stark contrast to Sunderland, their north-east neighbours Newcastle registered a £36 million profit, while Leicester City made £26 million – the season before they won the title. It really is some kind of a special “achievement” for Sunderland to lose so much money in today’s Premier League.

Of course, this is nothing new for Sunderland, as the last time that the club made a profit was way back in 2006. Since then they have lost money for nine consecutive seasons, accumulating total losses before tax of £170 million in this period, averaging £19 million a year.

Not only that, but the deficits have worsened over the last three seasons , increasing from £13 million in 2013 to £17 million in 2014, then again to £25 million in 2015. In fairness, these are not so bad as the £32 million loss posted in 2012, but that’s not really much to write home about.

If Sunderland were making losses while improving the squad, that would at least be understandable, but losing money while the team is getting worse is an awful combination.

This unwanted consistency is reflected in Sunderland having the fourth highest loss (£88 million) in the Premier League over the last four years, only behind big-spending Manchester City £163 million and those well-known financial basket cases QPR £143 million and Aston Villa £101 million.

Furthermore, Sunderland is one of only three clubs to have reported losses in each of the last four seasons. The other members of this unholy trinity were, of course, QPR and Villa.

Profit from player sales can have a major influence on a football club’s bottom line, as best shown in 2014/15 by Liverpool, whose numbers were boosted by £56 million from this activity, largely due to the sale of Luis Suarez to Barcelona.

Sunderland reported less than £4 million here, £1 million below the previous season, though this was actually better than eight other Premier League clubs.

However, Sunderland have only made £38 million from player sales in the last nine seasons, including a £3 million loss in 2012. Two years have bucked the trend: (a) 2011- £26 million from selling Jordan Henderson to Liverpool, Darren Bent to Aston Villa and Kenwyne Jones to Stoke City; b) 2013 - £11 million from selling Simon Mignolet to Liverpool and Ahmed Elmohamady to Hull City.

This helps explains why the reported losses were “only” £8 million in 2011 and £13 million in 2013. Excluding player sales, the losses those years were every bit as bad as the other years.

Former chief executive Margaret Byrne outlined the club’s thinking on player sales a couple of years ago: “We’ll be reporting another big loss this year. We don’t want to do that, but we’ve taken a decision not to sell our best players. We had lots of offers in the summer that would certainly have put us in a much better position, but Ellis said that we’re not selling them. Of course you could be a profitable club and sell your best players, but it’s a relegation model. We want to keep our assets and not sell them.”

Another way of looking at this is that Sunderland have not really had any players that other clubs would be interested in buying, at least for decent money, though next year’s accounts will include the profitable sale of Connor Wickham to Crystal Palace for around £7 million.

To get an idea of underlying profitability, football clubs often look at EBITDA (Earnings Before Interest, Depreciation and Amortisation), as this strips out player trading and non-cash items. This has actually not been too bad at Sunderland, as the club has been basically breaking even or better in the last few seasons, though it did fall from £13 million to £4 million in 2015.

However, everything is relative, the point here being that Sunderland’s EBITDA is one of the lowest in the top flight, only ahead of Swansea City, Aston Villa and QPR. To place it into perspective, Newcastle United’s EBITDA was over ten times as high at £43 million.

One of Sunderland’s fundamental problems is a lack of revenue growth – except for the centrally negotiated Premier League television deals. In fact, Sunderland’s revenue has decreased in three of the last four seasons (2012, 2103 and 2015).

Since the club’s first season back in the Premier League in 2007/08, revenue has increased by £37 million (59%), but almost all of that (£33 million) has come from new TV deals, hence the rises in 2011 and 2014. In the same period, commercial income has only grown by £7 million (albeit representing a 48% rise), while gate receipts have actually fallen by £3 million (21%).

Sunderland’s under-performance in 2014/15 is particularly telling, as they are one of only six Premier League clubs whose revenue fell last season: their 3% decline was only “beaten” by Manchester United, but the Red Devils’ decrease was driven by the absence of European competition. Granted, there is less chance for clubs to massively grow revenue in the second year of a TV deal, but it is obviously disappointing when revenue actually falls.

Following this decrease in 2014/15, Sunderland’s revenue of £101 million was the 15th highest in the Premier League, only ahead of Stoke City £100 million, WBA £96 million and the three clubs relegated that season (QPR £86 million, Hull City £84 million and Burnley £79 million).

Clearly, Sunderland are miles behind those clubs that Big Sam affectionately refers to as the “big boys”: Manchester United £395 million, Manchester City £352 million, Arsenal £329 million, Chelsea £314 million and Liverpool £298 million. That said, you only have to look at Leicester City (£104 million) to see what can be achieved with low revenue.

Perhaps surprisingly, Sunderland’s revenue is the 25th highest in the world according to the annual Money League. As Deloitte observed, “This is again testament to the phenomenal broadcast success of the English Premier League and the relative equality of its distributions, giving its non-Champions League clubs particularly a considerable advantage internationally.”

That’s obviously a fine accomplishment, but it does not really help Sunderland much domestically, as no fewer than 17 Premier League clubs feature in the top 30 clubs worldwide by revenue.

Even so, Sunderland generate more revenue than famous clubs like Napoli, Valencia, Sevilla, Hamburg, Stuttgart, Lazio, Fiorentina, Marseille, Lyon, Ajax, PSV Eindhoven, Porto, Benfica and Celtic. Yes, that list includes Sevilla, who have just qualified for their third consecutive Europa League final, having won the last two editions.

All that lovely Premier League money means that 68% of Sunderland’s revenue comes from broadcasting, though this is slightly lower than the previous season (69%). Commercial income’s share has risen from 17% to 21%, while match day is down from 14% to 11%.

This revenue mix might sound concerning, but it is fairly common in the Premier League. For example, in 2014/15 nine clubs in the top flight were dependent on TV for more than 70% of their revenue, with four clubs earning at least 80% of their revenue from broadcasting, namely Burnley, Swansea City, Hull City and West Brom.

Sunderland’s share of the Premier League television money fell by £2 million from £72 million to £70 million in 2014/15, partly due to smaller merit payments for finishing two places lower in the league, and partly due to only being shown live on TV 11 times (compared to 13 the previous season), which reduced the facility fee.

The Premier League deal is the most equitable in Europe with all other elements distributed equally (the remaining 50% of the domestic deal, 100% of the overseas deals and central commercial revenue), but poor performance can still adversely impact a club’s revenue.

For example, if Sunderland had maintained their 10th place finish in the four seasons since 2010/11, they would have pocketed an additional £21 million. This highlights the tricky balance between controlling expenditure and investing for success. Spending money is obviously not a guarantee, but a safety first approach can end up leaving cash on the table.

Note: the broadcasting revenue of £69.1 million in Sunderland’s accounts is lower than the £69.9 million distribution advised by the Premier League. One possible explanation for this discrepancy is that Sunderland might have included the £4.4 million of Premier league commercial revenue in commercial income, even though most other clubs classify it as broadcasting income. Incidentally, this would also account for some of the reported growth in commercial income.

"Cool for Cattermole"

Clearly, Sunderland’s big fear is that they will be relegated and therefore miss out on the huge TV distributions. As Ellis Short noted in the accounts: “The directors consider the major risk of the business to be a significant period of absence from the Premier League.”

There is never really a good time to be relegated, but this is definitely one season where clubs want to avoid the dreaded drop, as the TV money goes stratospheric in 2016/17. My estimates suggest that Sunderland’s 16th place would be worth an additional £31 million under the new contract, taking their annual payment up to an incredible £101 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).

This assessment was reinforced by Allardyce: “It’s about protecting Premier League status, because, if the club wants to move forward, it can’t have the financial devastation relegation will bring. It needs the pot of money the new television deal will bring in the summer.”

Even though Sunderland would be protected to some extent by the £25 million parachute payment that is added to the £1.9 million given to all Championship clubs from the Football League’s own TV deal, they would still have to contend with a £43 million cut in TV money if relegated.

Obviously, this would be considerably higher than those Championship clubs without parachute payments, who only receive £5 million, including a solidarity payment from the Premier League of £2.3 million.

This disparity will become absolutely colossal once the new 2016/17 TV deal kicks in, e.g. around £63 million, even after an increase in the parachute payments. That’s a significant reduction to absorb, even if players have relegation clauses in their contract (there are conflicting reports in the media about whether that is the case at Sunderland).

As noted above, from 2016/17 parachute payments will be higher, though clubs will only receive these for three seasons after relegation. My estimate is £75 million, based on the percentages advised by the Premier League (year 1 – £35 million, year 2 – £28 million and year 3 – £11 million). Up to now, these have been worth £65 million over four years: year 1 – £25 million, year 2 – £20 million and £10 million in each of years 3 and 4.

Gate receipts were down by 26% (£3.8 million) from £14.6 million to £10.8 million, largely due to five fewer home matches, as there were good cup runs in both domestic competitions the previous season with Sunderland reaching the final of the Capital One Cup and the quarter-finals of the FA Cup. In addition, season ticket prices were cut for the 2014/15 season.

This places Sunderland in the lower half of the Premier League table when it comes to match day income and is significantly less than the elite clubs, e.g. Arsenal earn £100 million here (or more than nine times as much as Sunderland).

Realistically, this is always going to be the case, as Sunderland’s ability to charge higher ticket prices and earn from corporate hospitality is far lower than major clubs. As Byrne said, “You have to look at the area. A restaurant in London is more expensive than a restaurant in Sunderland.”

Indeed, season ticket prices were frozen for the 2015/16 season and reduced for 2016/17 with adult season tickets starting at £350 (which averages £18 a game) and the most expensive just £475.

Byrne explained, “Keeping the cost of watching football at a realistic level is something that is very topical at present, but for us it has always been top of our agenda. We know that the fans are what make this football club great and we hope that as many fans as possible will continue to have the opportunity to come to games and support the team.”

Sunderland’s fans have indeed kept the faith, as their average attendance of over 43,000 (up 2,000 in 2014/15) was the 6th highest in the Premier League, ahead of clubs like Chelsea, Everton and Tottenham.

In fact, average attendances have actually risen three years in a row from 39,000 in 2011/12, which is an incredible statistic considering the quality of football on display. As former manager Roy Keane observed, “Sunderland is a brilliant football club and there are some of the best supporters in the world up there.”

Sunderland’s commercial income rose by 18% (£3.3 million) from £17.9 million to £21.2 million, comprising £10.2 million sponsorship and royalties, £9.2 million conference, banqueting and catering, £0.8 million retail and merchandising and £1.0m other.

That was the 11h highest in the Premier League, just behind West Ham £22 million and Newcastle United £25 million. Clearly, it is significantly lower than the top six clubs: Manchester United £197 million (around ten times as much as Sunderland), Manchester City £173 million, Liverpool £116 million, Chelsea £108 million, Arsenal £103 million and Tottenham £60 million.

The disparity is most evident when comparing the shirt sponsorship deals. In  2014/15 Sunderland had a deal with Bidvest, one of the largest food services companies in the world, which was worth £5 million a year. This has been replaced with a two-year deal with Dafabet, an eGaming operator, also for £5 million a season. This looks very low compared to the major clubs, e.g. Manchester United have a £47 million with Chevrolet and Chelsea £40 million with Yokohama Rubber.

It’s a similar story with Sunderland’s kit supplier, Adidas. Although this deal is a long-term partnership, extended until the summer of 2020, it’s unlikely to be worth more than £1-2 million a season, compared to, say, Manchester United’s Adidas deal, which will be worth an astonishing £75 million a year from the 2015/16 season.

In fairness, most clubs outside of the absolute elite have struggled to secure such massive deals and Sunderland would have to enjoy a sustained run of success to substantially improve their commercial agreements.

Sunderland’s wage bill rose 11% (£7.6 million) from £69.5 million to £77.1 million in 2014/15 on the back of a rise in full-time headcount from 272 to 287 (players and scholars down 3 from 68 to 65, other employees up 18 from 204 to 222).

It is not known for certain whether this also includes a severance payment to Gus Poyet, who was sacked in March 2015 (or indeed to Paolo Di Canio the previous season), but this factor has presumably also inflated the reported wage bill.

It is equally unclear how much Sunderland are contributing to the salaries of the numerous players they have out on loan, e.g. Liam Bridcutt at Leeds United, Steven Fletcher at Marseille, Danny Graham at Blackburn Rovers, Sebastian Coates at Sporting and Will Buckley at Birmingham City.

The important wages to turnover ratio increased from 67% to 76%, which is the second highest (worst) in the Premier League, only behind QPR. This highlights how out of control the wage bill has been at Sunderland. For some context, high-flying Leicester’s ratio was 55%.

Furthermore Sunderland’s wage bill of £77 million was the ninth highest in the top tier, ahead of clubs like West ham £73 million, Southampton £72 million and, yes, Leicester City £57 million, so it’s fair to say that the club has massively under-performed against its expenditure.

Evidently, Sunderland’s wages are significantly lower than the likes of Chelsea £216 million, Manchester United £203 million, Manchester City £194 million and Arsenal £192 million, but they should be enough for them to be in a comfortable mid-table position, as opposed to being involved in a relegation battle.

All that being said, Sunderland’s 11% wages growth in 2014/15 was by no means one of the largest in the Premier League with no fewer than 10 clubs reporting higher percentage increases.

In line with the overall wage increase, the highest paid director, presumably Margaret Byrne, saw her remuneration jump 10% from £663k to £726k. As a local comparison, Lee Charnley only earned £150k at Newcastle.

The wage bills of the mid-ranking clubs seem to be converging around the £70 million level: West Ham £73 million, Southampton £72 million, Swansea £71 million, WBA £70 million, Crystal Palace £68 million, Stoke City £67 million and Newcastle £65 million. However, Sunderland’s wage bill was a touch higher at £77 million, though they have not really made the best use of their additional funds.

Another aspect of player costs that has had a disproportionate impact on Sunderland’s bottom line is player amortisation, which is the method that football clubs use to account for transfer fees. Sunderland have spent a fair bit of money bringing players into the club, which has been reflected in player amortisation rising from just £2 million in 2006 to £24 million in 2015 (though this was £3 million lower than the previous season).

As a reminder of how this works, transfer fees are not fully expensed in the year a player is purchased, but the cost is written-off evenly over the length of the player’s contract via player amortisation. As an illustration, if Sunderland were to pay £10 million for a new player with a five-year contract, the annual expense would only be £2 million (£10 million divided by 5 years) in player amortisation (on top of wages).

Not only is player amortisation a sizeable element (20%) of Sunderland’s total expenses of £124 million, but it is also the 8th highest in the Premier League, only surpassed by the really big spenders, e.g. Manchester United’s player amortisation is around four times as much, with the massive outlay under Moyes and van Gaal driving their annual expense up to £100 million.

Since they returned to the Premier League in 2007, it feels like there have been three distinct phases in Sunderland’s transfer activity: initially there was substantial average net spend of £24 million in the first 3 seasons in order to strengthen the squad; then the taps were partly turned off with average net sales of £4 million in the next two seasons; finally a lot of money was needed to fund the plans of four different managers with average net spend of £18 million in the last four seasons.

This recent spending is described by the club as “significant investment in the playing squad” in the accounts and it does indeed compare favourably to other Premier League clubs in the same period. Obviously, it is far below the money shelled out by the elite clubs, but it is actually the 8th highest net spend over the last four seasons.

No, Sunderland’s basic problem is they have bought badly with a vast quantity of bang average players arriving for inflated fees. Don’t take my word for it, but listen to the last two managers. First up, Dick Advocaat: “The last five years have not been so great,” said Advocaat. “We bought players who the club is still paying (transfer fee installments and wages) and they are not even here anymore. There have been a lot of mistakes here in the past.”

Big Sam has been singing from the same song sheet: “Going forward, we need to spend the money very wisely. That is my responsibility with Ellis, when we stay in the Premier League, to say ‘We will not waste money, as it has been wasted by past managers’.”

Gross debt has risen by £47 million from £94 million to £141 million. The amount owed to Ellis Short (via his company Drumaville Limited) has increased from £28 million to £58 million, but the majority of the debt is external with £83 million owed to Security Bank Corporation (SBC), owned by Guggenheim Partners, including a £68 million loan and a £15 million revolving credit facility.

The loan is long-term, expiring on 27 August 2019, and carries an interest rate of 7.5% plus LIBOR. This is a fairly high interest rate, which is a good indication of what lenders think of Sunderland’s financial status. It is also higher than the previous bank loan (LIBOR plus 3%).

In fact, Sunderland’s net interest payable of £6 million was the third highest in the Premier League in 2014/15, only surpassed by Manchester United and Arsenal. In stark contrast, Newcastle United had zero interest payments, as all their debt is owed to Mike Ashley and is interest-free.

Debt has almost tripled from £48 million in 2009 and this is a sizeable burden for a football club of Sunderland’s size, so it is likely that much of the extra TV money will be used to reduce this to a more manageable level. This was more or less confirmed by Byrne: “This TV deal gives the club a chance to get our books in order.”

Incredibly, the debt would have been even higher at £242 million if the shareholders had not converted £101 million into equity over the last few years.

In addition, the net amount owed on transfer fees to other football clubs has more than doubled from £8 million to £18 million, while the contingent liabilities (potential payments that depend on number of appearances, surviving in Premier League, etc) have also increased from £8 million to £12 million – though the club states that “some of these are extremely remote”.

Only three Premier League clubs had more debt than Sunderland in 2014/15: Manchester United, who still have £444 million of borrowings even after all the Glazers’ various re-financings; Arsenal, whose £232 million debt effectively comprises the “mortgage” on the Emirates stadium; and QPR £194 million, though the West London club have recently converted £181 million into capital.

The accounts also refer to a legal case that might require the club to pay £7.6 million. This presumably refers to the Ricky Alvarez saga, where the midfielder was signed on loan with a purchase clause if Sunderland avoided relegation. Although this obviously happened, the club argued that the agreement was invalid, as Inter, his owners, had refused to allow the player to undergo knee surgery. Sunderland’s lawyers believe the club has a strong case, but there are rumours that FIFA will find against them.

Even though Sunderland make hefty operating losses, these are brought into line once non-cash items like player amortisation and depreciation are added back. However, that still does not provide enough surplus funds, so the club continues to require financing from either the bank or the owner if it wishes to spend reasonable sums on player investment.

As Margaret Byrne put it: “Because we’re not producing profits, every time we buy a player, Ellis (Short) is virtually buying that player for the club himself. We’re really lucky to have his backing and support.”

Interestingly, £20 million of the SBC loan has been classified as an investment, representing cash held as security in relation to the facility with SBC.

Since 2007 Sunderland has had £241 million cash available to spend, but almost all of this has come from increasing debt, £159 million from the owners and £59 million from the bank, with only £23 million generated from operating activities.

Over 70% of this (£173 million) was spent on player purchases (net), £24 million on interest payments, £20 million on investments and £11 million on infrastructure investment. The remaining £13 million simply increased the cash balance.

The big question at Sunderland is how long will Ellis Short be willing to bankroll the club?

The accounts state that the owner is willing and able to continue to support the club’s operations “for the foreseeable future”, while Short himself spoke of his vision for Sunderland: “No-one who knows me or knows anything about me would say that I have no ambition for the club. That ambition certainly has not been realised yet, but it does not mean that I don’t have it.”

"Life through a Lens"

As we have seen, the reliance on Short has been somewhat reduced, but only by the club taking on expensive debt with Security Benefit Corporation. Intriguingly, the terms of their loan include warrants that entitle SBC to purchase a minority interest in Sunderland’s share capital. Some have taken this as the first sign that Short might be seeking a way out, though this has been privately denied.

In any case, it is not that easy to sell a football club that is facing the threat of relegation, as Short’s compatriot Randy Lerner has found to his cost at Aston Villa.

Much is hanging on the club managing to avoid the drop, not least the future of Sam Allardyce. Although he has a contract running until 2017, he has hinted that his future at Sunderland depends on them surviving in the Premier League.

If the club does succeed, then they will have to change their strategy. There is no need to go crazy; they simply have to keep faith with the manager and provide him with a reasonable budget. It would then be up to Allardyce to spend the money shrewdly, if Sunderland want to achieve more than Premier League survival.