Sunderland - Distant Sun

These are tough times for Sunderland. Last season was also difficult, but finished on a high with an appearance in the Capital One cup final and the “great escape” as a run of late victories avoided relegation.

However, the club is currently just outside the relegation zone, leading to the sacking of Gus Poyet. As chairman Ellis Short explained, “Sadly, we have not made the progress that any of us had hoped for this season and we find ourselves battling, once again, at the wrong end of the table. We have therefore made the difficult decision that a change is needed.”

It remains to be seen whether former Dutch national team manager Dick Advocaat is the right man for the job, but it is clear that the club is completely focused on retaining its Premier League status, especially with the blockbuster new television deal on the horizon.

Sunderland’s financials for the 2013/14 season emphasise how important the club’s top flight status is to its future, as their loss widened from £13 million to £17 million. Although revenue rose by £29 million (38%) to a record high of £104 million, this was more than offset by a £26 million increase in expenses and £6 million lower profit on player sales.

The revenue growth was very largely driven by an additional £28 million from the new Premier League television deal plus £3 million higher gate receipts, while the expenses growth came from increases in the wage bill (£12 million) and transfer costs (£10 million) via player amortisation and impairment. Profit from player sales fell £6 million from £11 million to £5 million.

Sunderland’s £17 million loss is the second worst announced to date in the Premier League for 2013/14, only behind big spending Manchester City’s £23 million. In fact, of the 17 clubs that have so far published their accounts, only four of them have reported losses with the other 13 making profits, largely due to more revenue being distributed from the central Premier League TV deal. Sunderland are the only loss-making club whose results actually worsened in 2013/14.

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 accumulated total losses before tax of £145 million, averaging £18 million a season.

In fairness, the deficits have improved over the last two seasons compared to the £32 million loss reported in 2012, though this was largely due to higher profits from player sales (£11 million in 2013 and £5 million in 2014). This also explains why the loss was “only” £10 million in 2011, as the figures were boosted by £26 million from selling players with Jordan Henderson moving to Liverpool, Darren Bent to Aston Villa and Kenwyne Jones to Stoke City.

There has been a clear improvement in money made from this activity (£38 million in the last four years compared to £11 million in the previous four years), though this is not a strategic objective according to chief executive Margaret Byrne, who outlined the club’s thinking 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.”

The other aspect of player trading 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. Indeed, the club accounts actually note that “the amortisation of transfer fees increased the loss.”

This is a little technical, but transfer fees are not fully expensed in the year a player is purchased, as the cost is written-off evenly over the length of the player’s contract – even if all the fee is paid upfront. As an example, Steven Fletcher was bought for £12 million on a four-year deal, so the annual amortisation in the accounts for him s £3 million for four years.

Essentially high player amortisation is the result of high spending on player recruitment. 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 £30 million in 2014 (including £3 million of impairment costs).

Not only is this a sizeable part (24%) of Sunderland’s total expenses of £124 million, but it is also one of the highest in the Premier League, only surpassed by the really big spenders: Chelsea, Manchester City, Manchester United, Liverpool and Arsenal (and probably Tottenham when they publish their accounts).

In fact, if we were to exclude non-cash expenses such as player amortisation and depreciation, then Sunderland’s financials would look a lot better. This can be tracked by looking at EBITDA – or Earnings Before Interest, Tax, Depreciation and Amortisation. On this metric, the club has been basically breaking even in the last few seasons with EBITDA surging to £13 million in 2014.

So everything is hunky dory then? Not so fast, big boy. As the famous investor Warren Buffett once memorably cautioned: “References to EBITDA make us shudder. It makes sense only if you think that capital expenditure is funded by the tooth fairy.” And that’s the point, as money still needs to be found for player purchases and investment in other assets (like stadium and training ground improvements).

Sunderland’s cash flow statement highlights this very clearly. Although the club’s hefty operating losses are brought into line once non-cash items like player amortisation and depreciation are added back, that still does not provide any surplus funds for capital expenditure.

Since 2007 Sunderland have made net cash payments of £144 million on players, invested £10 million in new assets and made £21 million of interest payments on loans. This has been largely funded by £132 million of borrowings either from the owner or a bank loan guaranteed by the owner. 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.”

One of Sunderland’s underlying problems is a lack of revenue growth – except for the centrally negotiated Premier League television deals. Since the club’s first season back in the Premier League in 2007/08, revenue has increased by £41 million (64%), but almost all of that (£36 million) has come from new TV deals, hence the rises in 2011 and 2014. Commercial income and gate receipts have each only grown by around £2 million (16-17%) in the same period.

Before the new TV deal in 2013/14, Sunderland’s revenue had actually declined in the last two seasons from £79.4 million in 2011 to £78.0 million in 2012 and £75.5 million in 2013.

Of course, Sunderland’s revenue did rise by an impressive £29 million to £104 million in 2013/14, but as that man Buffett said, “A rising tide floats all boats” and all Premier League clubs have seen similar increases thanks to the new TV deal. In fact, Sunderland have been overtaken by Southampton in 2013/14, which should leave the Black Cats in 12th place in terms of Premier League revenue.

Breaking the £100 million barrier is a fine achievement, but it still leaves Sunderland a long way behind the “big boys”. Five Premier League clubs generate more than a quarter of a billion of revenue: Manchester United £433 million, Manchester City £347 million, Chelsea £320 million, Arsenal £299 million and Liverpool £256 million. In other words, Manchester United earn more than four times as much as Sunderland.

Nevertheless, it might come as a surprise that Sunderland’s revenue is the 27th highest in the world, according to the Deloitte Money League, with the club only just behind the legendary Benfica. Domestically, this does not cut much ice, as the huge TV money has propelled 14 Premier League clubs into the top 30 (with all 20 in the top 40).

The higher Premier League TV deal means that broadcasting now accounts for 69% of Sunderland’s total revenue, up from 59% the previous season. Commercial income’s share has fallen from 24% to 16%, while match day has similarly dropped from 17% to 15%. Put another way, broadcasting revenue of £72 million is 4.6 times as much as match day income of £16 million.

Broadcasting revenue rose 60% (£27 million) from £45 million to £72 million, almost entirely down to the Premier League distribution. Most of this is shared evenly between the 20 clubs, namely 50% of the domestic deal and 100% of the overseas deals. However, 50% of the domestic deal depends on other factors: (a) merit payments – 25% depends on where a club finishes in the league with each place worth around £1.2 million; (b) facility fees – 25% is based on how many times a club is broadcast live.

So Sunderland have enjoyed the benefit of the 2013/14 increase, but there will be even more money available when the next three-year Premier League cycle starts in 2016/17 with the recently signed extraordinary UK deals with Sky and BT producing a further 70% uplift. My estimate is that a club that finishes 15th in the distribution table (as Sunderland did last season) would receive around £108 million a season, which would represent an additional £36 million.

Clearly, Sunderland’s big fear is that they will be relegated and therefore miss out on this amazing prize. 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.”

Even though Sunderland would be protected to some extent by the parachute payment of £24 million 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 £46 million cut in TV money. That’s a significant reduction to absorb, even if their players have a 40% wage reduction clause in their contracts, as has been widely reported. This disparity will become absolutely colossal once the new 2016/17 TV deal kicks in, e.g. around £71 million, even with an increase in the parachute payment.

Gate receipts were up a healthy 25% (£3.1 million) from £12.6 million to £15.8 million, largely due to good cup runs in both domestic competitions with Sunderland reaching the final of the Capital One Cup and the quarter-finals of the FA Cup. This was despite freezing or even cutting season ticket prices for the 2013/14 season.

This still places Sunderland in the lower half of the Premier League table when it comes to match day income and importantly is significantly less than the elite clubs, e.g. both Manchester United and Arsenal earn over £100 million here (or nearly seven 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.”

No blame can be attached to Sunderland’s supporters, as their average attendance of just over 41,000 was the 7th highest in the Premier League, only behind the usual suspects. Byrne again: “Our attendances have been steady, we’re still averaging 40,000 a game. We’re way up on other clubs.”

In fact, as at the end of March 2015, the attendances are actually up 4.5% to nearly 43,000 this season, which is an incredible statistic considering the quality of football on display.

Commercial revenue fell by 7% (£1.2 million) from £18.0 million to £16.8 million, comprising £8.4 million sponsorship & royalties, £7.5m conference, banqueting & catering and £0.9m other. Even more disappointing is the fact that Sunderland have now been overtaken by rivals Newcastle United, whose commercial income rose from £17.1 million to £25.6 million. Clearly, it is also significantly lower than the top six clubs. For example, Manchester United’s commercial revenue is up to £189 million, more than 11 times as much as Villa, followed by Manchester City £166 million, Chelsea £109 million, Liverpool £104 million, Arsenal £77 million and Tottenham £45 million.

 The disparity is most evident when comparing the shirt sponsorship deals. Sunderland have a deal with Bidvest, one of the largest food services companies in the world, which is worth £5 million a year and runs until the end of the 2014/15 season. This looks very low compared to the major clubs, who continue to increase their deals, e.g. Manchester United and Chelsea have both announced huge new deals recently, United for £47 million with Chevrolet and Chelsea for a reported £38-40 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 deals.

After a significant decrease the previous season, the wage bill rose 20% (£11.7 million) from £57.9 million to £69.5 million on the back of a substantial rise in headcount from 991 to 1,102 (administration/operations +71, football +22, match day staff +18). The increase reflected the large number of players recruited by Paolo Di Canio in his six-month reign, though it is possible that the wages will come back down in the 2014/15 figures, following numerous departures in the summer.

It is unclear how much has been included for the pay-outs to Di Canio (or indeed to Martin O’Neill in the previous season’s accounts, but this factor has presumably also inflated the reported wage bill.

Despite the higher wage bill, the important wages to turnover ratio was actually reduced from 77% to 67%, which is the lowest it has been at Sunderland for some time. Nevertheless, this is still the second worst in the Premier League (of those clubs that have published their accounts), so there is still work to do here.

This will be a tough challenge, though it should be noted that the 2013/14 increase has taken the wage bill above both Everton and Stoke City. Clearly, Sunderland’s wages are significantly lower than the likes of Manchester United £215 million, Manchester City £205 million and Chelsea £193 million, but it should be enough for them to be in a comfortable mid-table position, as opposed to being involved in a relegation battle.

Since they returned to the Premier League in 2007, it feels like there have been three distinct phases in Sunderland’s transfer activity: first there was significant net spend of £73 million in the first 3 seasons in order to strengthen the squad; then the taps were partly turned off with £9 million of net sales in the next two seasons; finally a lot of money was needed to fund the plans of O’Neill and Di Canio with net spend of £38 million in the last three seasons.

This recent spending is described by the club as “significant investment” in the accounts and it does not look too bad compared 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 in the same ball park as Southampton (£44 million), who have flourished this season.

No, Sunderland’s basic problem is they have bought badly with a vast quantity of bang average players arriving for inflated fees (Jack Rodwell, Ricky Alvarez, Jozy Altidore, etc). Former football agent, Robert De Fanti, had a fairly disastrous record in player recruitment, but this has been an issue at the Stadium of Light for many years. Current Sporting Director Lee Congerton will hope to do better than his predecessors, but only time will tell whether this year’s model will succeed where others have failed.

Debt has risen by £15 million from £79 million to £94 million following a similar increase in the owner loans to £28 million. The majority of the debt is external with an overdraft of £39 million (under-written by Ellis Short) and a bank loan of £28 million (secured on the stadium, interest at LIBOR plus 3%). The bank loan was repayable on August 2014 and has since been refinanced.

Debt has almost doubled 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.”

More encouragingly, the net amount owed on transfer fees to other football clubs has significantly reduced from £20.6 million to £8.1 million, as have the contingent liabilities (potential payments that depend on number of appearances, surviving in Premier League, etc) from £10.1 million to £8.1 million – and the club states that “some of these are extremely remote”.

If Sunderland do manage to stay up, then they will benefit from the Premier League’s new Financial Fair Play legislation, which ensures that the majority of the increased money from the new TV deal remains within the club and does not simply go to higher player wages (and agents’ fees), as has invariably been the case with previous increases. Ellis Short was apparently one of the prime movers behind the rule that states that clubs whose player wage bill is more than £52 million will only be allowed to increase their wages by £4 million per season for the next three years.

"You gotta fight for your right to party"

However, this restriction only applies to the income from TV money, so any additional money from the higher gate receipts, new sponsorship deals or profits from player sales can still be spent on wages, which does place more pressure on the club’s commercial arm to deliver the goods.

Something needs to be done to reduce the club’s reliance on Ellis Short, who has owned the club outright since May 2009, since when he has injected nearly £130 million of free funding into Sunderland. The accounts show that he has capitalised around £100 million of loans (£48.5 million in 2009, £19.0 million in 2010 and £33.4 million in 2013) and provided a further £27.7 million of unsecured, interest free loans with no set repayment date.

This will be largely linked to whether Sunderland achieve the immediate objective of avoiding relegation. If they do, then the new Premier League TV money should allow them to reduce their debts, but it will be up to the club to show that they have learnt from their previous mistakes, in terms of both player recruitment, which has hit them hard both on and off the pitch, and managerial upheaval. As a wise person once said, “Just because everything is different doesn’t mean anything has changed.”

Aston Villa - Lost In The Supermarket

For a club of Aston Villa’s rich history, the past few years have been profoundly depressing, as they have spent most of that time at the wrong end of the Premier League table, desperately trying to avoid relegation. Their managerial merry-go-round has failed to improve matters, merely bringing their own version of doom (Alex McLeish) and gloom (Paul Lambert).

This has been matched by a dismal performance off the pitch with the club bleeding money through some hefty losses, financed by the American owner Randy Lerner pumping vast sums of money into Aston Villa – with no tangible success. Little wonder that this toxic combination has caused Lerner to put the club up for sale.

However, the mood has been a bit better at Villa Park since the enthusiastic Tim Sherwood was appointed manager last month. There are also some signs that there might be light at the end of the tunnel from a financial perspective, as Villa reported record revenue of £117 million in 2013/14, which helped them reduce their loss before tax by a hefty £48 million from £52 million to just £4 million. We shouldn’t go overboard here, as Villa still lost money, but it’s a step in the right direction.

The smaller loss was largely driven by the new Premier League television deal, which was worth an additional £28 million to Villa, but there was some useful revenue growth in commercial income £3 million and player loans £4 million. Expenses were also cut, notably player trading costs by £10 million (amortisation £4 million and impairment £6 million), wages by £3 million and  exceptional items (staff termination and onerous contract costs) by £2 million.

The improvement was neatly summarised by chief financial officer, Robin Russell: “By controlling costs we have been able to take advantage of the new Premier League broadcasting deal to bring the club closer to self-sufficiency.”

Russell added, “We are very pleased to be able to report improved results after a period of heavy financial losses.” You can say that again. Since Lerner bought Villa in July 2006, the club has accumulated losses before tax of £222 million – nearly a quarter of a billion pounds. In the five years between 2009 and 2013 alone the club lost £207 million, averaging £41 million a year. That’s an awful lot of money to finish 15th or 16th.

The best result in this period was a loss of “only” £18 million before tax in the 2011/12 season, but this was boosted by £20 million of exceptional items and £27 million profits from player sales, so the underlying figures were just as terrible as the other years.

The £20 million exceptional item refers to the once-off waiver of interest on £107 million of loans provided by Lerner. Although the club had been booking around £6 million of interest payable to the owner under the terms of the loan agreement, he never actually took a cash payment.

On the other side of the coin, Villa also booked £26 million of exceptional costs between 2011 and 2013, including £12 million in 2012 alone. These could justifiably be described as the costs of mis-management, as these include termination payments made to sacked coaching staff and the accounting cost of reducing the value of poor player purchases. There’s a price to pay for constantly bringing in new managers, who will want to recruit their own players, while getting rid of the deadwood accumulated by the previous regime. As Orange Juice one sang, you have to “rip it up and start again.”

The 2011/12 season was also enhanced by a record-breaking £27 million profit on player sales, largely due to the big money moves of Stewart Downing to Liverpool for £20 million and Ashley Young to Manchester United for £17 million. In fact, this activity had been fairly lucrative for Villa, earning them £79 million in the five years up to 2012. However, in the last two seasons the well has run dry with the club earning less than £2 million from player sales. The club argued that this was due to “the squad being rebuilt”, but a less charitable interpretation might be that there were few players worth buying.

Only four of the 15 Premier League clubs that have so far published their 2013/14 accounts have reported a loss, which places Villa’s improvement into context. The only clubs to have reported higher deficits than Villa are Manchester City (£23 million), Sunderland (£17 million) and Cardiff City (£12 million), who all have their own specific issues.

So, 11 clubs have made money (so far), largely off the back of the new Premier League TV deal. In fact, five clubs have made profits of more than £10 million: Manchester United £41 million, Everton £28 million, Chelsea £19 million, WBA £13 million and West Ham £10 million.

Revenue rose 39% (£33.2 million) from £83.7 million to £116.9 million in 2013/14, mainly coming from broadcasting, which was up 59% (£26.9 million) from £45.8 million to £72.7 million. Fees for player loans rose by £3.7 million from £2.0 million to a noteworthy £5.7 million, while commercial income was also up 12% (£2.8 million) from £22.9 million to £25.7 million. Gate receipts were virtually unchanged at around £13 million.

Villa’s revenue has also grown by 39% since 2009, which is another way of saying that there was zero revenue growth between 2009 and 2013. Revenue had risen from £84 million in 2009 to £92 million in 2011, but there was a reduction in revenue in 2012, largely thanks to worse performance on the pitch (dropping from 9th to 16th place in the Premier League and early exits from the cup competitions).

It should be noted that Villa changed the way they split their revenue among the various streams in 2013, so they restated the 2012 comparative, but not prior years. This means that the apparent reduction in match day income and consequent increase in commercial income since 2011 are misleading.

In 2012/13, the last season where we have accounts for all clubs, Villa’s revenue of £84 million was the 10th highest in the Premier League. Their £33 million growth to £117 million in 2013/14 has been matched by most other clubs, though they have overtaken West Ham.

There are two ways of looking at this. On the one hand, Villa will struggle to compete at the highest level, as there is a financial chasm between them and the top six clubs: Manchester United £433 million, Manchester City £347 million, Chelsea £320 million, Arsenal £299 million, Liverpool £256 million and Tottenham £181 million. United generate almost four times as much money as Villa – their revenue is an incredible £316 million more (for one season). On the other hand, Villa in turn earn more than clubs like Southampton, Swansea City and Stoke City, so really should be performing better than them.

In fact, Villa are the 22nd highest club in the Deloitte Money League, just ahead of famous clubs like Marseille, Roma and Benfica. Great stuff, but the problem is that every other Premier League club is also in the top 40 with 14 of them in the top 30, hence the club’s struggles in England’s top flight.

Note that the Deloitte Money League excludes revenue from player loans, so they have reduced Villa’s revenue of £117 million by £6 million to £111 million in their classification.

Villa’s reliance on TV money has become clearer than ever in 2013/14 with broadcasting accounting for 65% of total revenue (excluding player loans), up from 56% the previous season. In this way, commercial income has fallen from 28% to 23% and match day from 16% to 12%.

So Villa’s Premier League television money increased by 62% (£28 million) from £45 million to £73 million in 2013/14. The distribution in the Premier League is the most equitable in Europe with much of the money distributed evenly between the 20 clubs. That is the case for 50% of the domestic deal and 100% of the overseas deals.

However, 50% of the domestic deal depends on other factors: (a) merit payments – 25% depends on where a club finishes in the league with each place worth around £1.2 million; (b) facility fees – 25% is based on how many times a club is broadcast live. This has really hurt Villa’s revenue over the last few seasons, as they have dropped down the table.

As an example, if Villa had finished 6th in 2013/14, as they did between 2007/08 and 2009/10, they would have received around £90 million, i.e. £17 more than their £73 million. In fact, if Villa had maintained their run of 6th place finishes in the four seasons since 2009/10, they would have pocketed an additional £42 million. This highlights the tricky balance between sustainable spending and investing for success. Spending money is obviously not a guarantee, but a safety first approach can leave money on the table.

Of course, there will be even more money available when the next three-year Premier League cycle starts in 2016/17 with the recently signed extraordinary UK deals with Sky and BT producing a further 70% uplift. My estimate is that a club that finishes 14th in the distribution table (as Villa did in 2013/14) would receive around £110 million a season, which would represent an additional £37 million.

The danger for Villa is that they would miss out on this bonanza in the worst case scenario of relegation to the Championship. New chief executive Tom Fox has stated that “relegation should not be in the lexicon of Aston Villa”, but at this stage of the season this eventuality cannot be ruled out.

Even though Villa would be protected to some extent by the parachute payment of £24 million that would be 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 £46 million cut in TV money. That’s a lot to absorb, even if players have relegation clauses in their contracts. Furthermore, Villa would have to quickly bounce back, as the disparity will become absolutely colossal once the new 2016/17 TV deal kicks in, e.g. around £72 million, even with an increase in the parachute payment.

Gate receipts fell very slightly by 1% (£0.2 million) from £13.0 million to £12.8 million in 2013/14. This is around mid-table in the Premier League, but importantly is significantly lower than the elite clubs, e.g. both Manchester United and Arsenal earn over £100 million from match day income (or eight times as much as Villa). A small part of this will be due to the different ways clubs interpret match day income, but there is undoubtedly an enormous difference.

Villa’s average league attendance of 36,081 was the 9th highest in the Premier League, which is an impressive achievement considering their problems on the pitch, but it is only 84% of the 43,000 capacity at Villa Park. Only two other clubs in the Premier League had a percentage sold lower than 90%: Sunderland 84% and Cardiff City 83%.

Villa’s attendance actually increased in the last two seasons, having steadily declined from the 40,000 peak in 2007/08, though it has once again fallen this season to around 33,000 (as of 20 March 2015). That represents an 18% fall and 7,000 fewer fans (or customers, to put it into financial terms). This has clearly hit the club’s finances, as has the limited progress in cup competitions, e.g. in 2009/10 Villa reached the Carling Cup final and the FA Cup semi-final, which had a beneficial impact on match day revenue.

Commercial revenue rose by an encouraging 12% (£2.8 million) from £22.9 million to £25.7 million, comprising £9.4 million sponsorship and £16.3 commercial income. This is almost exactly the same as Newcastle United’s £25.6 million, but (stop me if you’ve heard this one before) is significantly lower than the top six clubs. For example, Manchester United’s commercial revenue is up to £189 million, more than seven times as much as Villa, followed by Manchester City £166 million, Chelsea £109 million, Liverpool £104 million, Arsenal £77 million and Tottenham £45 million.

The disparity is most evident when comparing the shirt sponsorship deals. Villa have a two-year deal with Dafabet, an Asian online betting website, worth £5 million a year that runs until the end of this season. This looks very low compared to the major clubs, who continue to increase their deals, e.g. Manchester United and Chelsea have both announced huge new deals recently, United for £47 million with Chevrolet and Chelsea for a reported £38-40 million with Yokohama Rubber.

It’s a similar story with Villa’s kit supplier, Macron, who have a four-year deal worth £15 million (£3.75 million a year), running until the end of the 2015/16 season. Not bad, but it pales into significance next to match Manchester United’s “largest kit manufacture sponsorship deal in sport” with Adidas, which is worth £750 million over 10 years or an average of £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 Villa would have to enjoy a sustained run of success to substantially improve their commercial deals.

They are placing a lot of hope in Tom Fox, who was previously the chief commercial officer at Arsenal. Although he has arrived with a solid reputation on the back of signing two substantial sponsorship deals with Emirates and Nike, some fans of the North London club were disappointed in his lack of progress in securing secondary sponsors. He will have to go some to significantly grow Villa’s commercial income, though there has been talk of selling naming rights to the famous Holte End stand.

Villa cut their wage bill by 4% (£2.5 million) from £71.9 million to £69.3 million in 2013/14, reducing the wages to turnover ratio from 86% to 59%. In fact, wages have fallen by 17% (£14 million) from the peak of £83.4 million in 2011. Since then Villa have “rationalised the playing squad” and exercised “tight control of players’ wages”, so that the wage bill has been held at around £70 million, despite £25 million of revenue growth in the same period. To be fair, the wages to turnover ratio was an unsustainable 91% in 2011.

In 2012/13 Villa’s wage bill was the 8th highest in the Premier League, only behind the usual suspects plus the basket case known as QPR. However, they are one of the few clubs not to substantially increase their wages in line with the new Premier League TV deal, so in 2013/14 they have been overtaken by Sunderland and largely caught up by the likes of Everton, WBA, West Ham and Swansea City. Of course, the “big boys” are nearly out of sight: Manchester United £215 million, Manchester City £205 million, Chelsea £193 million, Arsenal £166 million and Liverpool £144 million.

It is instructive to compare Villa’s wages with Tottenham, a club with similar aspirations. Back in 2008, both clubs had a wage bill around £50 million before Villa initially surged ahead in the next two seasons. However, Villa’s relative austerity since then has resulted in Tottenham’s wages being £24 million higher in 2012/13 and I suspect the gap will be even higher when Spurs publish their 2013/14 accounts.

There is one myth that should be nailed, namely that Randy Lerner has not funded transfers since the profligate Martin O’Neill era. It’s true that there was a slowdown in the following two seasons, but Villa have a net spend of £49 million in the last three seasons, averaging £16 million a  year. This compares pretty favourably with the £84 million O’Neill spent in four seasons or £21 million a year. As the wonderfully named director General Charles Krulak explained: “The idea that Randy had not put money into the club and that Paul Lambert’s hands were tied is simply not true. It’s hogwash.”

Obviously this £49 million net spend is way below the expenditure in the same period by the leading clubs such as Manchester United £222 million, Manchester City £164 million and Chelsea £132 million, but it was still the 8th highest in the Premier League and fans are entitled to expect a bit more bang for their buck. In fairness, the figures are a little misleading, as only one player, Christian Benteke, arrived for a sum above £5 million, so the suspicion is that many ordinary purchases have been made. As the club’s accounts once put it: “The acquisition of players and their related payroll costs are deemed the core activity risk and… the directors are mindful of the pitfalls that are inherent in this area of the business.”

Villa’s net debt was slashed by £87.5 million from £189.5 million to £102.0 million, mainly due to Lerner converting £90 million of loan notes into share capital in December 2013, “reducing the club’s debt load and accelerating the process towards long-term stability and financial self-sufficiency.” Gross debt of £104 million mainly comprises owner debt of £86 million (£69 million owed to the parent undertaking and £17 million of loan notes), though the bank loan and overdraft is up from £13.6 million to £18 million.

Potential additional transfer fee payments (based on contractual conditions such as number of appearances and retention of Premier League status) decreased from £8.4 million to £4.2 million, though there are now also contingent liabilities of £2.75 million payable upon the change of ownership of the football club.

Although Randy Lerner did not inject any additional funds into Villa in 2013/14, he has been a most generous owner. On top of the initial £66 million paid to acquire the club in 2006, he has put in the best part of £300 million, split between £125.5 million of share capital, £114.5 million of loan notes and £46 million loans from the parent undertaking. In addition, he has cancelled repayment of £97.5 million of loans.

According to the club, Villa  should have no problems with Financial Fair Play: “In terms of regulations, players’ payroll for the year complies with the Premier League’s Short Term Cost Control Rules and forecast results for the three years ending 31 May 2016 currently meet the Premier League’s Profitability and Sustainability Rules.”

Villa will have to be aware of the restriction whereby clubs whose player wage bill is more than £52 million will only be allowed to increase their wages by £4 million per season for the next three years. This only applies to the income from TV money, so if Villa want to “go for it” and substantially increase their wages, they will have to grow revenue via new sponsorship deals, higher gate receipts or profits from player sales.

It is difficult to know what Villa can do to improve their situation. Initially under Lambert, they appeared to be following a youth policy, but that appears to have been largely abandoned. There are a couple of youngsters like Jack Grealish, Callum Robinson and Lewis Kinsella coming through, but Villa’s academy does not seem to be as successful as it has been in the past in producing talented youngsters.

"Big Ron"

Randy Lerner appears to have had enough, which is hardly surprising after he has spent so much for so little return on the pitch. Effectively, Villa are back to where they were when he acquired them. In May 2014, he put the club up for sale and you could feel the man’s pain: “I have come to know well that fates are fickle in the business of English football. And I feel that I have pushed mine well past the limit. I owe it to Villa to move on, and look for fresh, invigorated leadership, if in my heart I feel I can no longer do the job.”

He put the prospective sale on the back burner last summer, basically after no buyer could be found, but there are whispers that talks are ongoing with potential purchasers. Any deal would surely only take place in the summer after Villa’s fate is known, as relegation would severely impact the price.

The club has gambled on reducing the investment in the playing squad, especially with the tightly controlled wage bill, as it focuses on a sustainable future, which is an admirable strategy – so long as it does not backfire and result in the dreaded relegation. Tom Fox summed up the club’s (modest) ambition: “We’ve got by far the best house on the worst street in town. Our aim is to get to be the smallest house on the best street and try to build it up from there.” After many managerial debacles, Villa’s supporters will hope that Tim Sherwood is indeed the right man for the job.