In the past few years there has been tremendous progress in
football fans’ knowledge of their clubs’ finances. Some might say that this is
not a good thing and we should focus on matters on the pitch. That’s perfectly
fair, indeed I would also personally much prefer to watch a great game, such as Borussia Dortmund’s recent demolition of Real Madrid, rather than investigate the
minutiae of their balance sheets.
However, it is important that fans are aware of what is
going on at their club, so that they understand the board’s strategy and any
constraints that impact their activities, e.g. why a club might sell its best
players every summer or why a club does not splash out on the world-class
striker that might take them to the next level.
Traditionally, supporters have concentrated on a club’s
profit and loss account, which is not surprising, because: (a) that is what the
media tends to report – on the back of press releases from the clubs; (b) it is
intuitively easy to understand, being essentially revenue less expenses (mainly
player wages).
Nevertheless, the reported figure is an accounting profit,
which is not necessarily a “real” profit, as it is based on the accountant’s
accruals concept and this can be very different from actual cash movements.
This was noted recently by, of all people, Simon Jordan, the former Crystal
Palace chairman, on Sky’s excellent Footballers’ Football Show, as he claimed
that the reported profit at football clubs was depressed by non-cash items.
"Jordan: The Comeback"
The perma-tanned, Spandau Ballet look-alike, actually has a
point. As the old saying goes, turnover is vanity, profit is sanity, but cash
is king. The main reason that football clubs like Portsmouth fail is cash flow
problems. It does not matter how large your revenue is (or your profits are),
if you do not have the cash to pay your players, suppliers or the taxman, then
you are going to crash into the rocks.
Therefore, this blog is going to focus on the cash flow at
each of the Premier League clubs in 2011/12 (the last season where all clubs
have published detailed accounts). It will start with the familiar profit and
loss account, highlighting the accounting shenanigans, and then reconcile this
with the cash flow statement.
We shall then examine how football clubs really spend their
money, revealing the different business models that are employed and explaining
why certain clubs act as they do, including a review of the top seven clubs in
the league (Manchester United, Manchester City, Chelsea, Arsenal, Tottenham,
Everton and Liverpool).
Profit and Loss Account
The total turnover in the 2011/12 Premier League amounted to
a hefty £2.3 billion, but still only produced an operating loss of £363
million, mainly due to wages of £1.6 billion, giving a wages to turnover ratio
of 69%. There were also other expenses of £535 million and player amortisation,
player impairment and depreciation of £544 million.
Only three Premier League clubs made operating profits last
season: Manchester United £35 million, Swansea City £18 million and Norwich
City £17 million. At the other end of the spectrum, Manchester City reported a
massive operating loss of £104 million, followed by Aston Villa £58 million and
Chelsea £46 million.
Clubs’ figures were boosted by £224 million profits on
player sales (with the largest being Arsenal’s £65 million), though there is
also £78 million net interest payable (most notably Manchester United’s £50
million), leading to £197 million loss before tax (and £179 million loss after
tax).
Cash Flow from Operating Activities
The starting point for a football club’s cash flow statement
is the operating profit (or more likely loss), which is converted into cash
flow from operating activities via two adjustments: (a) adding back non-cash
items such as player amortisation, depreciation and player impairment; (b)
movements in working capital.
(a) Non-cash Items
First of all, we need to understand how football clubs
account for transfer fees. Instead of expensing these completely in the year of
purchase, players are treated as assets, whereby their value is written-off
evenly over the length of their contract via player amortisation. As an
example, Manchester United signed Robin van Persie for £22m on a four-year
contract, so the annual amortisation is £5.5 million (£22 million divided by
four years).
Similarly, tangible fixed assets like a club’s stadium and
training ground are also depreciated, though their useful life is considerably
longer. Player impairment occurs when the club decides that the value of a
player in its accounts is too high, e.g. the player suffers a career
threatening injury, loss of form or is in dispute with the management.
Incidentally, this also highlights why profit on a player
sales is not a real cash figure, as this represents sales proceeds less the
carrying value in the books. So, if van Persie were to be sold after three
years for £7 million (i.e. £15 million lower than his £22m cost), there would
still be a reported profit of £1.5 million, as his value in the accounts would
be only £5.5 million (£22 million cost less three years amortisation at £5.5
million a year).
(b) Movements in Working Capital
Working capital is a measure of a club’s short-term
liquidity and is defined as current assets less current liabilities. Changes in
working capital can cause net income (in the profit and loss account) to differ
from operating cash flow. Clubs book revenue and expenses when they occur
instead of when the cash actually changes hands, e.g. if the club buys
equipment from a supplier it would record the expense even before it pays the
cash.
If current liabilities increase during the year, the club is
able to pay its suppliers more slowly, so the club is (effectively) temporarily
holding onto cash, which is positive for cash flow. On the other hand, if a club’s
debtors increase, this means that it collected less money from its customers
than it recorded as revenue, so that would be negative for cash flow.
In most years, the working capital movements will not be
that significant, though it can be a high figure, e.g. £43 million at
Manchester City and £39 million at Chelsea.
Adding back £544 million non-cash items and £(95) million
working capital movements to the reported operating loss of £363 million does
indeed make a big difference, as the cash flow from operating activities
becomes a positive £87 million.
In fact, 12 of the Premier League clubs have positive
operating cash flow (up from 3 with operating profits) with Manchester United
leading the way with an impressive £80 million, followed by Norwich City £30
million, Arsenal £28 million and Tottenham £27 million. Even Manchester City’s
negative operating cash flow of £53 million is only about half of their £104
million operating loss, mainly because their P&L includes an enormous £83
million player amortisation, arising from their big spending in the transfer
market.
Cash Flow before Financing
The operating cash flow is in theory what is then available
to the club to spend on buying players, investing in infrastructure or paying
interest on loans and (occasionally) tax, though additional financing may be
secured to cover any shortfalls.
(a) Net Player Purchases
This represents the genuine cash payments for player
purchases less any sales and is often very different from the net spend
reported in the media, largely because of stage payments, though it can also be
affected by agents’ fees and conditional payments, e.g. based on number of
appearances or trophies won. It is the only authentic figure publicly available
for transfer fees, but it can also be misleading, as it may not cover the
entire fee due to stage payments.
Paying transfer fees in stages can be a significant source
of financing for some clubs, e.g. Juventus owed €93 million to other clubs
(“for the acquisition of players”) as of June 2012, though they were in turn
owed €41 million by other clubs.
On a cash basis, the highest net player purchases in the
2011/12 Premier League unsurprisingly came from Manchester City with £95
million (£123 million purchases less £28 million sales), followed by Manchester
United £50 million, Chelsea £46 million and (shock, horror) struggling QPR and
Stoke City, both with £23 million.
Four clubs actually made net player sales, i.e. used the
transfer market as an additional source of funds: Aston Villa £16 million,
Blackburn Rovers £12 million, Everton £11 million and Tottenham £6 million.
Arsenal just about balanced their books with £57 million
purchases and £56 million of sales, giving net player purchases of £2 million.
It is worth noting that this is considerably lower than the £65 million profit
on player sales reported in the accounts.
(b) Investment in Fixed Assets
Clubs invested £142 million in fixed assets in 2011/12,
mainly for development of the stadium and training centre, with 77% coming from
just four clubs: Tottenham £42 million, Manchester City £30 million, Manchester
United £23 million and Wolves £15 million.
(b) Net Interest Paid
This is very largely interest paid on bank loans net of any
interest received from cash balances. One figure stands out here and that is
the £46 million paid by Manchester United, which is over three times as much as
the nearest “challenger”, namely Arsenal with £13 million. Given that United
still had £437 million of gross debt at the time of the 2012 accounts, way more
than any other club in the Premier League, this is not too unexpected. It has
also not proved to be a major obstacle to United’s financial stability, as
their cash flow is more than sufficient to cover the annual interest payments.
We should also note here that interest paid is not
necessarily equal to the interest payable figure in the profit and loss
account, as interest is sometimes accrued (so not paid), thus increasing the
size of the debt, e.g. this is the case with a number of Championship clubs,
including Cardiff City, Leicester City and Ipswich Town.
(c) Tax
Even though nine Premier League clubs reported profits
before tax in 2011/12, only four (Arsenal, Manchester United, West Bromwich
Albion and Tottenham) actually paid any tax. This is a very complex subject,
but, essentially, use of prior year losses and other allowances helped prevent
tax payments.
After all this expenditure, we have cash flow before
financing, which is perhaps the purest reflection of how a club has run its
business. By this metric, the newly promoted Norwich City and Swansea City
shine with positive cash flow of £18 million and £6 million respectively. Most
clubs clearly strive to break-even with many hovering around zero net cash
flow.
Interestingly, and maybe disappointingly, the three clubs
with the largest negative cash flows feature strongly at the top of the league:
Manchester City £(184) million, Chelsea £(72) million and champions elect
Manchester United £(41) million.
Financing
However, that is before financing and this is where the
owners play their part, either via issuing share capital (Manchester City £169
million) or making additional loans (Chelsea £71 million, subsequently
converted to capital). Other clubs required funds from their benefactors, notably
QPR £39 million, Bolton Wanderers £24 million, Liverpool £24 million and
Blackburn Rovers £16 million.
On the other hand, some clubs actually used funds to reduce
debt, including Wigan £39 million (converted to share capital), Manchester
United £29 million, Newcastle United £11 million, Arsenal £6 million and
Norwich City £5 million.
Cash Flow after Financing
After this financing, we can see that almost all clubs are
within the range of £18 million positive cash flow and a manageable £18 million
negative cash flow. The one exception is Manchester United, which is a special
case as a result of the Glazers’ leveraged buy-out. In 2011/12 alone,
United paid £85 million to support this transaction: £46 million interest, £29
million loan repayments and £10 million dividends to the owners.
Let’s look at how cash flow has impacted the actions of the
seven leading clubs in the Premier League.
Arsenal
Long admired for their financial prowess, Arsenal have
consistently reported large profits. Not only did they register the highest
profit before tax (£37 million) in the Premier League in 2011/12 on the back of
£235 million turnover (3rd highest in England, 6th highest in the world), but
they have also made an incredible £190 million of profits in the last five
years. Indeed, the last year that they made a loss was a decade ago in 2002.
However, much of this excellent performance has been down to
profits from player sales (e.g. £65 million in 2011/12) and property
development (e.g. £13 million in 2010/11), while the operating profit has been
steadily declining with the club actually reporting an operating loss of £16
million last season.
That said, once sizeable non-cash expenses (amortisation and
depreciation) and working capital movements are added back, the cash flow from
operating activities was £28 million, which was actually the third best in the
Premier League.
The problem is that Arsenal have spent very little of this
on improving their squad: in 2011/12 the net expenditure on player purchases
was just £1.8 million – only four clubs spent less than the Gunners. Most of
the available funds have instead gone towards financing the Emirates Stadium:
£13.1 interest and £6.2 million on debt repayments. A further £8.6 million was
invested in fixed assets for enhancements to Club Level, more “Arsenalisation”
of the stadium and new medical facilities and pitches at the London Colney
training ground.
Arsenal have cleared all their property development debt,
but still had £253 million of gross debt arising from long-term bonds that
represent the “mortgage” on the stadium (£225 million) and the debentures held
by supporters (£27 million). Once cash balances of £154 million were deducted,
net debt was only £99 million, but the interest/debt payment schedule remains
punishing.
Despite the high interest charges, it is unlikely that
Arsenal will pay off the outstanding debt early. The bonds mature between 2029
and 2031, but if the club were to repay them early, they would then have to pay
off the present value of all the future cash flows, which is greater than the
outstanding debt.
Another logical result of Arsenal’s years of reported
profits is that they are one of the few Premier League clubs that pay
corporation tax: £4.6 million last season (the highest in the league).
"Mind over Money"
So Arsenal’s self-sustaining approach is clearly evident in
the cash flow statement, though they did have a small negative cash flow after
financing in 2011/12 of £6.6 million. The supporters would almost certainly
prefer to see the club spending more on players, rather than areas off the
pitch, but the reality is that the debt and interest payments are not going
away anytime soon.
This was made very clear by Arsène Wenger, “We want to pay
the debt back from building the stadium and that’s around £15 million, so it’s
normal that at the start we have to make £15 million or we lose money.” In
fact, as we have seen, it’s more like £19 million, but the point remains valid.
However, the lack of investment in the squad is still
galling, especially with Arsenal’s cash balances standing at £154 million last
summer (almost as much as the rest of the Premier League clubs put together)
following many years of positive cash flow, e.g. 2010/11 £33 million, 2009/10
£28 million, 2008/09 £6 million, 2007/08 £19 million and 2006/07 £38 million.
In the future, cash should be boosted by commercial income
rising with the recent Emirates shirt sponsorship agreement and a new kit
supplier deal, but Champions League qualification will also be important.
Manchester City
Despite rapidly growing their revenue to £231 million (4th
highest in England), City still reported a pre-tax loss of £99 million, largely
because of a £202 million wage bill, though in fairness this was nearly £100
million better than the previous year’s £197 million loss. The improvement is
due to success on the pitch (2011/12 Premier League winners and Champions
League qualification) and new sponsorship agreements, especially the Etihad
deal.
City can add back £90 million for non-cash expenses, mainly
£83 million player amortisation, but they also have £39 million negative
working capital adjustments, due to an increase in debtors, leading to £53
million negative operating cash flow (the worst in the league).
Nevertheless, City spent much more than anybody else on
player purchases (net £95 million) and £30 million on fixed assets, mainly on
the Etihad Campus, including the City Football Academy, plus some stadium
refurbishment.
"The minute you walked in the joint..."
They also have to pay £6 million interest, despite no debt
from the owners Abu Dhabi United Group, as the club still has some old loan
notes and finance leases.
That business model produces an enormous negative cash flow
before financing of £184 million, which is then almost entirely covered by
financing from the owner in the form of new share capital.
In the future, City should continue to grow their commercial
income, while we have also seen a slowing of their player investment in the
light of UEFA’s Financial Fair Play regulations.
Chelsea
Very similar to Manchester City’s strategy, but the football
club actually reported a £1.4 million profit in 2011/12 after their Champions
League success, though this was also due to an £18.4 million exceptional gain
after the cancellation of preference shares owned by British Sky Broadcasting
and £29 million profit on player sales. Net turnover rose to £256 million, but
the £176 million wage bill was only surpassed by Manchester City, giving rise
to an operating loss of £46 million.
Chelsea’s large non-cash expenses of £61 million are added
back, but they also have £43 million negative working capital adjustments,
mainly due to a large decrease in creditors, leading to £27 million negative
operating cash flow.
Again, they spent heavily on players (net £50 million) and
invested £5 million in fixed assets. Cash was also boosted by £6 million from
the acquisition of a subsidiary, Chelsea Digital Media Limited, which was
transferred from a joint venture to a 100% owned subsidiary.
"From Russia with Money"
All that produced a hefty negative cash flow before
financing of £72 million, the second worst in the league, which was covered by
an additional loan from the parent company, Fordstam Limited, owned by Roman
Abramovich. As per previous years, this loan was subsequently converted into
share capital, so the football club has no debt.
That said, it is not really true to say that Chelsea is
debt-free, as these loans still exist in the holding company, amounting to £895
million as at June 2012. They are interest free, but are repayable with 18
months notice. It must be considered unlikely that Abramovich would ever call
in this debt, but it is theoretically possible.
It looks like Chelsea are trying to reduce their wage bill
to ensure they break-even, but their revenue will be under some pressure, as
last season was boosted by the Champions League triumph, though new commercial
deals were signed in 2012/13, notably Gazprom and Audi.
Liverpool
Despite their accounts only covering 10 months, due to a
change in accounting date, Liverpool’s reported revenue of £169 million was
still the 5th highest in England. Deloitte estimated that it would be £189
million for a full year. However, the Reds’ loss of £41 million was the second
worst in the country, due to a £109 million wage bill (£131 million on an
annualised basis) and £10 million of termination payments to coaching staff.
The £35 million operating loss was improved by adding back
£46 million non-cash items (mainly £34 million player amortisation, but also
including £9 million for player impairment), offset by £12 million working
capital movements, to give negative operating cash flow of around £1 million.
Only five clubs had higher net player purchases than
Liverpool’s £14 million, though this still placed them behind QPR and Stoke
City, both with £23 million. This figure is a little misleading, as Liverpool
spent relatively high on player purchases (£45 million), but largely
compensated for this expenditure with £31 million from player sales.
"May you live in less interesting times"
Liverpool also made £3.7 million interest payments, though
this was significantly lower than the sums paid during the dark days of the
Hicks and Gillett era, which were as high as £45 million in 2010.
The £21 million negative cash flow before financing was
fully covered by additional bank loans, leading to a small positive cash flow of
£2 million.
Liverpool’s debt in the last annual accounts was £92
million, split between £70 million bank loans and £22 million to the owners
Fenway Sports Group, but since then John W. Henry and his fellow investors have
put in £47 million to reduce bank debt in August. These loans are
interest-free, so interest payments should further reduce (at least until new
loans are taken out for stadium development).
Redevelopment of Anfield should boost match day revenue in
the future, though it will require substantial funding. In the meantime,
Liverpool continue to sign impressive commercial deals, e.g. Chevrolet and
Paddy Power, though lack of qualification for the Champions League places them
at a severe financial disadvantage to other leading clubs.
Tottenham Hotspur
Tottenham made a £7.3 million loss before tax after revenue
fell to £144 million (from £164 million the previous year), due to only
qualifying for the Europa League instead of the more lucrative Champions
League. The wage bill was held at £90 million, leading to an operating loss of
£11 million.
Adding back £35 million for player amortisation and
depreciation plus £3 million for working capital movements, due to a rise in
creditors, means that cash flow from operating activities was a healthy £27
million.
This was boosted by net player sales of £6 million (player
sales £33 million, purchases £27 million) with Spurs being one of only four
Premier League clubs to generate cash from this activity.
"Stadium Arcadium"
At the moment Spurs are investing almost all their surplus
cash in fixed assets, having spent £42 million last season on plans for a new
stadium (Northumberland Development Project) and the new training centre in
Enfield. This was more than any other Premier League club spent on
infrastructure in 2011/12. In addition, they paid £4.5 million interest, as
debt climbed to £86 million, made up of bank loans and securitisation funds.
After the significant investment off the pitch Tottenham’s
cash flow before financing was a negative £13 million, partly financed by £8
million additional bank loans, leading to negative net cash flow of £5 million.
Tottenham’s financial future will be dictated to a very
large extent by what happens with the stadium development, though they would be
greatly helped if they could again qualify for the Champions League. The club
estimated that the 2011/12 Europa League campaign brought in £31 million less
revenue than the previous season’s foray into the Champions League.
Everton
Everton made a loss of £9 million from revenue of £81
million and a wage bill of £63 million (10th highest in the Premier League).
The operating loss of £19 million was improved by adding back £14 million of
player amortisation and depreciation less a working capital adjustment of £2
million, giving a negative cash flow from operating activities of £7 million.
Everton’s need to box clever is highlighted by the fact that
even after net player receipts of £11 million (sales £23 million, purchases £13
million), they do not quite manage to break-even with negative cash flow after
financing of £2 million. All other things being equal, they need to sell a
player every season to stay afloat.
This is due to £4 million interest payments and £0.9 million
repayment on assorted loans. The club’s debt stands at £49 million with an £11
million overdraft plus £24 million loan notes (borrowed against future season
ticket sales) and £14 million loans (borrowed against future TV money). The
lending arrangements with Barclays Bank expire on 31 July 2013, so these will
have to be renegotiated in a few months.
Manchester United
Despite having the highest revenue in England (£320 million)
and incidentally the 3rd highest in the world (only beaten by Real Madrid and
Barcelona), United made a £5m loss before tax in 2011/12. This had very little
to do with the club’s underlying business, as United’s £35 million operating
profit was actually the highest in the Premier League, even after a £162
million wage bill.
No, the negative bottom line is due to £50 million net
interest payable which is the consequence of the Glazer family’s leveraged
takeover that placed over half a billion pounds of debt on the club’s balance
sheet in 2005.
In fact, after adding back £46 million of player
amortisation and depreciation less a minor working capital adjustment, United’s
cash flow from operating activities is a highly impressive £80 million (in the
previous year this was an almost unbelievable £125 million). To place that into
context, this is £53 million more than the widely praised Arsenal. Quoting
Staines’ finest, Hard-Fi, United are a veritable “cash machine”.
Over the last few years, relatively little of this wealth
has been spent on improving the squad. Indeed, between 2009 and 2011, United
actually had net sales proceeds of £3 million – though this was admittedly
greatly helped by Ronaldo’s £80 million sale to Real Madrid. However, in
2011/12 the Glazers turned on the taps with United allocating £50 million to
net player purchases, only surpassed by their neighbours Manchester City.
They also invested £23 million in fixed assets, mainly land
and buildings around Old Trafford.
However, what really stands out is the £46 million interest
United had to pay. This is by far the highest in the Premier League with
Arsenal the only other club having to make a double-digit interest payment (£13
million). In fact, United pay about the same amount of interest as all the
other Premier League clubs combined.
"Brass in Pocket"
A £3 million tax payment resulted in £41 million negative
cash flow before financing, while £29 million loan repayments and £10 million
dividends to the Glazers (to repay loans borrowed from the club in 2010) meant
£80 million negative cash flow after financing – the worst in the Premier
League.
It really is a game of two halves at United with £80 million
of operating cash flow converted into negative cash flow after financing of £80
million. That £160 million swing can be broadly split between £72 million
healthy spend (player purchases £50 million and property investment £23
million) and £88 million unwanted spend (interest £46 million, debt repayment
£29 million, dividend £10 million and tax £3 million).
Although debt has been significantly reduced from the
horrific £773 million peak in 2010, it still stood at £437 million (net £366
million after deducting £71 million cash) as at 30 June 2012, mainly senior
secured notes attracting interest rates between 8.375% and 8.75%.
Looked at another way, without the burden of the Glazers’
debt, United could afford to spend £80 million every season on new players. And
that is before the amazing new commercial deals with Chevrolet (shirt
sponsorship) and Aon (training ground naming rights) kick in, not forgetting
the likelihood of a major uplift when the kit supplier deal is re-negotiated
(Nike runs to July 2015).
"Come on, Alex. You can do it."
Obviously, United have not done too badly in recent years,
but they might well have done even better with those additional funds being
made available to the manager, especially in Europe, where they have struggled
for the last two seasons. Arguably, that’s the best argument in favour of the
Glazers, namely that they have made it easier for other clubs to compete.
Without their grasping presence, United would, quite literally, be laughing all
the way to the bank.
That said, there are signs that this financial burden may be
easing, as half of the proceeds from last August’s IPO were used to reduce debt
to £367 million by December 2012, so annual interest paid should fall, though
it is difficult to estimate a precise figure, given the many factors involved,
such as exchange rates on the USD element of the debt.
If the club uses the additional revenue from its own
commercial growth and the new Premier League TV deal (worth at least another
£30 million a season) for more debt reduction, then the interest payments will
become less significant, freeing up even more cash – though that might just be
used to pay the Glazers dividends…
"Running up that Hill (A Deal with God)"
Of course, the new Premier League TV deal that commences
next season will benefit all clubs in the top flight and should make a real
difference to their ability to generate cash, especially in conjunction with
the new Premier League Financial Fair Play (FFP) regulations. These state that
clubs are only allowed to make a total loss of £105 million providing this is
covered by the owner (and £90 million of that is injected into the club in the
form of equity).
Furthermore, clubs with wage bills above £52 million will
only be allowed to increase their wages by £4 million per season for the next
three years, though that restriction only applies to TV money, so clubs are
free to spend any additional income from ticket sales or commercial deals on
wage growth.
One of the objectives behind these regulations is that, in
contrast to previous deals, the increase in TV money will not simply disappear
into the players’ wage packets. This could markedly improve clubs’ cash flow,
though there is a chance that any surplus may be simply used to pay dividends
to the owners, as opposed to, say, reducing ticket prices, investing in youth
development or improving facilities for the fans.
"A Change is Gonna Come"
Similarly, UEFA’s FFP regulations will encourage clubs to
live within their means and are even more stringent. Wealthy owners will only
be allowed to absorb aggregate losses of €45 million (£38 million), initially
over two years and then over a three-year monitoring period, as long as they
are willing to cover the deficit by making equity contributions. The maximum
permitted loss then falls to €30 million (£25 million) from 2015/16 and will be
further reduced from 2018/19 (to an unspecified amount).
To coin a phrase, this will be a whole new ball game for
football clubs’ business models with the financing of large deficits by wealthy
benefactors expected to significantly reduce. Whatever happens, those wishing
to understand a football club’s finances and consequently the impact these have
on its strategy should, as always, follow the money. That means not just focusing
on the profit and loss account, but also dipping a toe into the mysterious
world of the cash flow statement.