Probabili formazioni Liverpool-Chelsea: pronostico 8 novembre 2014

Probabili formazioni Liverpool - Chelsea, pronostico e diretta TV - Scopri i tanti giocatori assenti (infortunati e squalificati) e le ultime dai campi sul big-match Liverpool-Chelsea, in TV su Fox Sports HD alle ore 13:45 di sabato 8 novembre 2014 dallo stadio Anfield Road di Liverpool. Leggi il pronostico di Liverpool-Chelsea con quote, precedenti, statistiche, curiosità e schedine di Premier League inglese. Arbitro: Anthony Taylor. Sarà Balotelli VS Mourinho?!

Pronostico e Probabili formazioni LIVERPOOL - CHELSEA: sabato 8 novembre 2014
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Pronostico Liverpool-Chelsea 8 novembre 2014

Ecco il pronostico di Liverpool-Chelsea di sabato 8 novembre con quote e giocatori assenti (infortunati e squalificati). Scopri i precedenti e le probabili formazioni di Liverpool-Chelsea con le ultime dai campi sul big-match di Premier League inglese, i consigli per scommettere e le schedine di calcio per sabato pomeriggio.

PRONOSTICO LIVERPOOL - CHELSEA: sabato 8 novembre 2014 (Premier League)
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UEFA Prize Money - Rhapsody In Blue

The Europa League has long been regarded by leading clubs as a poor relation to the far more lucrative Champions League, but Chelsea’s prodigious efforts after parachuting in to the junior competition might just give pause for thought, as they will end up earning more from Europe this season than any other English club.

Although they earned €5 million less than Manchester United from the Champions League after exiting at the group stage, they will receive at least €6.5 million from the Europa League, even if they lose the final. If they repeat last season’s victory in the Champions League, the sum earned will rise to around €9 million.

This means that Chelsea will receive at least €40.9 million (Champions League €34.4 million + Europa League €6.5 million), rising to as much as €43.4 million if they win the Europa League. Of course, the bad news is that this will still be significantly less than last season’s €59.9 million for the Champions League triumph - though the blow will be somewhat softened by money from the UEFA Super Cup (€2.2 million) and the FIFA Club World Cup ($4 million).

The other three English Champions League qualifiers should still be smiling though, as they have all actually earned more money this season, thanks to a substantial increase in the available prize money (around 22%).

Manchester United’s income rose €4.1 million to €39.3 million, though the difference falls to €2.9 million once the €1.2 million they received from dropping down to the Europa League in 2011/12 is taken into consideration. Similarly, Manchester City’s income increased by €5.8 million to €32.4 million, reducing to €4.6 million after deducting last season’s €1.2 million from the Europa League. Finally, Arsenal will receive €34.5 million, which is €6.2 million higher than the previous season.

As an aide-mémoire, the money for UEFA’s two tournament is divided into two parts: (a) prize money based on participation and results; (b) TV (market) pool.

Prize Money – Champions League

Each of the 32 teams that qualify for the Champions League group stages is guaranteed a participation base fee of €8.6 million even if it loses every single game. There is also a performance bonus of €1 million for each victory in the group stage plus €500,000 for a draw. So if a team manages to win all six of its group matches, it will get €6 million on top of the base fee.

If a team qualifies for the first knock-out round (the last 16), it is awarded a further €3.5 million, while there are additional performance prizes for each further stage reached: quarter-final €3.9 million, semi-final €4.9 million, final €6.5 million and winners €10.5 million. So if you go all the way and win the trophy, you would earn a total of €37.4 million (not counting the TV pool share), which is up from €31.5 million in 2011/12.

Prize Money – Europe League

The principle is the same in the Europa League, though the sums involved are much smaller. Each of the 48 clubs involved in the group stages receives a participation base fee of €1.3 million. In addition, there is €200,000 for each win and €100,000 for each draw in the group stage. A new addition this season, presumably to encourage clubs to give their all, is qualification bonuses for teams that progress to the round of 32: group winners earn €400,000 and runners-up €200,000.

Turning to the knock-out stages, clubs competing in the round of 32 will receive €200,000 each, clubs in the last 16 €350,000, the quarter-finalists €450,000 and the semi-finalists €1 million. The Europa League winners will collect €5 million and the runners-up €2.5 million.

That’s now a pretty good incentive, compared to the €3 million paid to Atlético Madrid, the 2011/12 winners. In fact, the winning club could now receive a maximum of €9.9 million, 54% up from last season’s €6.4 million.

Although the Europa League’s 2012/13 prize money is higher as a proportion of the Champions League (26% v 20%), the gap between the two is actually growing (€27.5 million v €25.1 million).

Nevertheless, it can still be a very useful boost to clubs like Chelsea that drop down from the Champions League, especially if they reach the final, which is worth either €6.5 million or €9 million (assuming €2 million for the Europea League TV pool, based on previous years). It does require Stakhanovite efforts on behalf of the playing squad, which may jeopardise their chances in their domestic league, but, as the figures above indicate, it can make a big difference.

TV Pool

In addition to these fixed sums, the clubs receive a share of the television money from the TV (market) pool, which is allocated according to a number of variables. First, the total amount available in the pool depends on the size/value of a country’s TV market, so the amount allocated to teams in England is more than that given to, say, Spain, as English television generates more revenue. Clubs can also potentially do better if fewer representatives from their country reach the group stage, as the available money is divided between fewer clubs.

In the case of the English clubs in the Champions League, the allocation works as follows:

(a) Half depends on the position that the club finished in the previous season’s Premier League with the team finishing first receiving 40%, the team finishing second 30%, third 20% and fourth 10%.

(b) Half depends on the progress in the current season’s Champions League, which is based on the number of games played, starting from the group stages.

However, the 2012/13 allocation for the element based on the previous season’s Premier League finish was changed following Chelsea’s Champions League win as follows: Manchester City (1st) 30%, Manchester United (2nd) 25%, Arsenal (3rd) 15%, Chelsea (5th) 30%. So, the first three clubs lost a portion of their TV pool following Chelsea’s remarkable success.

TV Pool – Allocation

The TV pool allocation methodology can produce some results which seem strange at first glance, e.g. Manchester United and Arsenal were both eliminated at the last 16 stage, but United received €4.3 million more than Arsenal (€23.2 million v €18.9 million). 

This is entirely due to United finishing one place ahead of Arsenal in the 2011/12 Premier League, so receiving 25% of that half of the TV pool (€10.8 million), compared to Arsenal’s 15% (€6.5 million). Of course, both clubs received exactly the same (€12.4 million) for this season’s Champions League progress, which incidentally was more than the €9.3 million for Chelsea and Manchester City, who both went out at the group stage.

Thus, from a purely financial perspective, it is important not just to qualify for the Champions League, but also to qualify in as high a position as possible. Fourth place may be considered a trophy these days, but second or third place are worth even more to the bank balance.

A club’s finances are also boosted if the club finishing fourth fails to win the qualifier for the group stage, as this would mean that the TV pool would then be split between only three teams instead of four. In the same way, it is better financially if the other English clubs do not progress as far as your team.

Note that these calculations assume that the total English TV pool is the same as last season, based on the Sky/ITV deal being more or less the same size, though there are some indications that it might be slightly lower.

However the money is split, there is no doubt that all the English clubs playing in the Champions League have a considerable monetary advantage over the rest of the Premier League, as can be seen by the above analysis of Media revenue from last season – and that was before the 2012/13 increases. As The Clash once sang, it is indeed a “Safe European Home”, at least for a privileged few.

Show Me The Money

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.

UEFA's FFP Regulations - Play To Win

So the transfer window is finally over after the customary twists and turns and, as always, has raised some intriguing questions. Perhaps most perplexing is the decision of previously big spending Manchester City to slam on the brakes (by their own recent standards) much to the disappointment of manager Roberto Mancini. On the fairly safe assumption that this is not due to Sheikh Mansour struggling for cash, the culprit is likely to be UEFA’s Financial Fair Play (FFP) regulations, a particularly delicate issue for the blue side of Manchester.

Given that looming threat, it is equally puzzling to see that Chelsea, who have had their own problems in reaching self-sustainability, have once again started to splash the cash, laying out £32 million on the supremely talented Eden Hazard and £25 million on the precocious Oscar – all in apparent blithe disregard of FFP. It therefore might be interesting to revisit these rules in an attempt to understand clubs’ behaviour in the new era of tighter financial regulation. Will they have a profound impact on the face of European football or merely act as a “speed bump”, as predicted by Premier League chief executive Richard Scudamore?

At its simplest FFP is trying to encourage clubs to live within their means, i.e. not spend more money than they earn. This is UEFA’s response to the poor financial health of many clubs, as evidenced by their most recent benchmarking report, which revealed that in 2010 over half of Europe’s top division clubs lost money with total losses surging 30% to €1.6 billion and debts standing at €8.4 billion. Many clubs have experienced liquidity shortfalls, leading to delayed payments to other clubs, employees and tax authorities.

"Eden Hazard - everything counts"

Gianni Infantino, UEFA’s general secretary, described this as “really the last wake-up call.” He added, “There was a great risk of crisis, of the bubble bursting. You can see from the losses and the debts that the situation is not healthy and we cannot go on like this. We had to do something and financial fair play is the way we designed it.” UEFA’s president, Michel Platini, is even more evangelical, considering FFP “vital for football’s future.”

The aim is to introduce more discipline within club finances, encourage responsible spending and investment and to curb the excesses and individual gambling on success, which has brought many clubs into financial difficulties.

While Infantino conceded that over-spending “may be sustainable for a single club, it may be considered to have a negative impact on the European club football system as a whole.” He explained, “The problem is that all clubs try to compete. A few of the biggest can afford it, but the vast majority cannot. They bid for players they cannot afford, then borrow or receive money from their owners, but this is not sustainable, because only a few can win.” In other words, the richest clubs drive up players’ salaries and transfer costs, forcing smaller clubs to over-stretch their budgets to compete.

We’ll explore the moral issues surrounding FFP later, but let’s first look at how it will work in practice. The first point to note is that clubs do not actually have to break-even in the early years of FFP to meet the target, thanks to the concept of “acceptable deviations”, which is one way UEFA has attempted to facilitate the move towards a sustainable model.

The first season that UEFA will start monitoring clubs is 2013/14, but this will take into account losses made in the two preceding years, namely 2011/12 and 2012/13. Wealthy owners will be allowed to absorb aggregate losses of €45 million (£36 million), initially over those 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 (£24 million) from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount).

This approach was explained by Infantino, “You can have losses for one year, because perhaps you had one bad season and you did not qualify (for Europe). So we are looking at losses over a multi-year basis. So one year you can make a loss, but not over three years.” This makes sense, though some clubs might simply make operating losses every year and get within the break-even target by hefty player sales in one year.

UEFA’s willingness to give the clubs every chance to meet FFP is also seen by the decision to have only two years in the first monitoring period, as this means that the annual average loss can be higher than future monitoring periods.

"Santi Cazorla - you don't have to spend big"

It is important to note that these are the acceptable deviations only if the owner is willing and able to put money in. If not (as is the case for many clubs), then they are significantly lower at just €5 million (£4 million). For the likes of Abramovich and Mansour, this will obviously not be an issue, but their ability to cover large deficits will be much reduced, as noted by Infantino, “I wouldn’t say the era is dead, but I would say what is over is the sugar daddy who can put hundreds of millions into the clubs. This will no longer be possible.”

Note that the rules do not actually force a club to become profitable. All that UEFA are saying is that clubs will not be allowed to compete in their competitions (Champions League and Europa League) if they do not break-even, but clubs making losses could continue to compete in their domestic league. The first sanctions for clubs not fulfilling the break-even requirement can be taken during the 2013/14 season and the first possible exclusions relating to break-even breaches would be for 2014/15 season.

OK, that’s the theory, so what’s the current state of play for the leading English clubs?

The last published accounts available are those for the 2010/11 season, in other words the one before the first season included in the FFP calculation. Nevertheless, this should still give us a strong indication of how close clubs are to meeting the FFP target.

Taking those clubs that qualified for Europe this season as our examples, four clubs made a pre-tax profit (Newcastle £33 million, Manchester United £30 million, Arsenal £15 million and Tottenham £402,000), while three clubs reported large losses (Manchester City £197 million, Chelsea £67 million and Liverpool £49 million). So, on first glance, those three face a severe challenge to get their finances in order to meet FFP.

However, there are two major adjustments that need to be made to a club’s statutory accounts to get to UEFA’s break-even template: (a) remove any exceptional items from 2010/11, as they should not re-occur (by definition); (b) exclude expenses incurred for “healthy” investment, such as improving the stadium, training facilities or academy, which would lead to losses in the short-term, but will be beneficial for the club in the long-term.

Let’s be very clear here: so-called exceptional costs will be included in the break-even calculation, but it is unlikely that they will be at similar high levels to 2010/11, when clubs could take the opportunity to clean house in the last accounts not to be included for FFP.

This was a significant factor for all three clubs that reported large losses with Liverpool booking £59 million (mainly writing-off stadium development expenses), Chelsea £42 million (largely management compensation paid to the sacked Carlo Ancelotti and the cost of buying-out André Villas-Boas from Porto) and Manchester City £34 million (mostly writing-down the remaining book value of certain players).

Excluding exceptional items, Liverpool would have reported a £10 million profit, while the losses at Chelsea and Manchester City would have come down to £26 million and £163 million respectively, so things would already look better for them in a “normal” year (though Chelsea’s manager pay-offs have been a fairly regular occurrence and the 2011/12 figures will again be hit, this time by AVB’s departure).

Next, there can be significant costs excluded for the FFP calculation, which is best illustrated by looking at Arsenal’s accounts. The costs of building the Emirates stadium are deducted, namely the depreciation charge on the tangible fixed assets of £12 million and possibly interest on the bonds of £14 million (though the latter is a bit questionable, now that the asset has been constructed). In addition, they will be able to deduct costs on youth and community development. Unfortunately, these are not separately identified in club accounts, but we can estimate £10 million and £2 million respectively for these activities. So, in total Arsenal’s relevant expenses for the FFP break-even calculation will be around £39 million lower than the published accounts.

However, Arsenal will presumably also have to exclude the £13 million profit from their property development business, as revenue and expenses from non-football activities are not relevant for FFP - unless it is allowed, because it is "in close proximity to the club's stadium". In our calculations, we shall adopt a conservative approach and exclude it.

Not all interest expenses can be excluded, e.g. Manchester United’s annual £40-45 million is taken into consideration, as their debt was incurred to help finance the Glazer’s leveraged takeover, as opposed to positive investment in the club. Incidentally, if the club ever pays dividends to their owners, these would also be included. Fortunately for United, these hefty interest payments are more than covered by their huge operating profits.

After all these adjustments, most of the English clubs look to be well placed for FFP. Even Chelsea’s FFP loss has come down to only £8 million, which is well within the acceptable deviations and helps explain why they felt that they could continue spending in this summer’s transfer window, especially as their income will be boosted by more revenue from their Champions League triumph.

The only club that looks vulnerable is Manchester City, whose loss for FFP is still a frightening £142 million. Indeed, the club’s sporting director Brian Marwood admitted, “We’ve got a huge amount of work ahead of us to make sure we are sustainable.” They will benefit from rapid revenue growth, both in terms of distributions from the Champions League and (especially) new commercial deals, but the chances are that their losses will still be well beyond UEFA’s limits in the short-term.

"Roberto Mancini - it's not about the money, money, money"

However, a safety net might be provided by yet another exemption in the FFP rules, whereby UEFA will not apply sanctions, if: (a) the club is reporting a positive trend in the annual break-even results; (b) the aggregate break-even deficit is only due to the annual 2011/12 break-even deficit, which is in itself due to player contracts signed before 1 June 2010 (thus excluding wages for the likes of Carlos Tevez, Gareth Barry, Vincent Kompany, Joleon Lescott and Kolo Toure). Even that might not be enough, though UEFA will surely take note of City’s £100 million investment in their academy, plus their relative restraint in the transfer market this summer.

The other point that should be highlighted is the potential importance of profits on player sales to a club’s accounts, e.g. Liverpool’s 2010/11 figures were boosted by £43 million (mainly Fernando Torres to Chelsea) and Newcastle’s by £37 million (largely Andy Carroll to Liverpool). Excluding these sales, Liverpool’s FFP result would actually have been a £20 million deficit, so it’s not quite plain sailing for them.

By the way, Arsenal’s FFP figures for 2011/12 and 2012/13 should be hugely positive, thanks to major profitable sales of Cesc Fabregas, Samir Nasri, Robin Van Persie and Alex Song. This has been a key element of Arsenal’s self-sustaining strategy in recent years.

Of course, Manchester City are by no means the only major club that face a major challenge to meet FFP (though you might think so from the media) with the leading Italian clubs also having much to do, especially Milan, Inter and Juventus, whose last reported losses averaged more than £70 million (before FFP adjustments). Indeed, Milan vice-president Adriano Galliani admitted, “FFP hurts Italy. There will no longer be patrons that can intervene. Until now people like Berlusconi and Moratti would be able to support us, but with the fair play it will no longer be possible.”

This helps explain much of this summer’s activity in Serie A, especially at Milan, who have effectively been forced to sell Zlatan Ibrahimovic and Thiago Silva to the nouveaux riches at Paris Saint-Germain, while spending very little on replacements. Clearly, there are other factors here, not least the economic crisis in Italy and Fininvest’s own financial difficulties, but FFP certainly played a part in this strategy. In addition, it provides a rationale for Inter selling a 15% stake in the club to China Railway for €75 million, as this will help fund a new stadium with these costs being excluded for the purposes of FFP.

"Robin Van Persie - jumping someone else's train"

At the other side of the spectrum, clubs like Real Madrid and Bayern Munich will have absolutely no problems with FFP, as they are consistently profitable year-after-year. Bayern have been well-known supporters of FFP, but even Jose Mourinho has commented on the likely impact, “The club produces its money by itself, so Real Madrid will be in a much better position when FFP comes.” Barcelona’s figures are a bit more up and down, but they recently announced record profits of €49 million for 2011/12, so they’re also looking good.

The stated objective of UEFA’s regulations is, “to introduce more discipline and rationality in club finances and to decrease pressure on players’ salaries and transfer fees” and it is true that there has been a general reduction in transfer spending in European football, particularly Italy and Spain.

However, the £490 million spent by Premier League clubs on transfers in this summer is actually slightly higher than last summer and second only to the £500 million record outlay in 2008. Of course, it is arguable that this expenditure would have been higher without the presence of FFP, but what does seem clear is that some clubs have opted to try to increase revenue rather than cut costs – a classic example of the economic law of unintended consequences.

Thus, most leading clubs have managed to substantially grow their revenue since UEFA approved the FFP concept in September 2009, e.g. the revenue at Barcelona, Real Madrid and Manchester United rose £76 million, £71 million and £53 million respectively, though the 76% increase in Manchester City’s revenue from £87 million to £153 million is perhaps even more striking (with much more to come).

Let’s look at how clubs have grown (and will hope to grow) their revenue streams in future.

The main driver of higher revenue in England has been the Premier League television deal. For an individual club, this is partly down to its own success on the pitch, but is far more due to the ever-increasing amounts negotiated centrally.

This is because the distribution methodology is fairly equitable with the top club (Manchester City) receiving around £60.6 million, while the fourth club (Tottenham) gets £57.4 million, just £3.2 million less. You will see that the lion’s share of the money is allocated equally to each club, meaning 50% of the domestic rights (£13.8 million in 2011/12) and 100% of the overseas rights (£18.8 million), with merit payments (25% of domestic rights) only worth £757,000 per place in the league table and facility fees (25% of domestic rights) fairly similar, based on the number of times each club is broadcast live.

What has really helped clubs’ top line is the Premier League’s ability to secure top dollar deals for its TV rights, as once again shown with the amazing £3 billion Premier League deal for domestic rights for the 2014-16 three-year cycle, representing an increase of 64%. If we assume (conservatively) that overseas rights rise by 40%, that would mean that the total annual TV deal from 2014 would be worth £1.7 billion compared to the current £1.1 billion.

Under current allocation rules, that would imply an additional £30 million revenue a season for the leading English clubs, not only strengthening their ability to compete with overseas clubs, especially Madrid and Barcelona, who benefit from massive individual TV deals, but also providing a significant boost in their FFP challenge in the future – assuming that they don’t simply pass all the extra money into the players’ bank accounts.

With revenue from the Premier League much of a muchness for the leading English clubs, the importance of finishing in the top four and qualifying for the Champions League is very evident. Although it may not be a huge percentage of a club’s total revenue, it is clearly a significant competitive advantage.

The Europa League is small compensation financially, as can be seen by the sums received in last year’s campaign, where Stoke City’s €3.5 million (the highest for an English club) was considerably lower than the sums received by the Champions League entrants: Chelsea €60 million, Manchester United €35 million, Arsenal €28 million and Manchester City €27 million.

This is the great dilemma for clubs like Manchester City. For their commercial strategy to work, they absolutely have to be playing in the Champions League, but the expenditure required to get there places them at great risk of failing UEFA’s regulations. It’s a vicious circle, made worse by the possibility of exclusion from Europe’s flagship tournament, which would then make it even more difficult to meet the FFP target, as the club would lose at least £25 million revenue.

In terms of match day revenue, here are a number of ways of increasing revenue, the best of which is to be successful, which should result in more games played, due to cup runs, Champions League, etc. A somewhat less palatable tool has been for clubs to raise ticket prices, though the current economic climate means that this has slowed right down this season with prices frozen at Arsenal, Chelsea, Liverpool and Manchester United. Championship side Derby County has even introduced demand based pricing services for single match tickets for the 2012/13 season.

Of course, a real quantum leap in match day revenue can only be achieved via stadium expansion or building a new stadium. This can be very clearly seen with Arsenal’s revenue rising by nearly £50 million a season since they moved from Highbury to the Emirates. It’s not just the higher capacity, but also many more premium customers and indeed higher prices. The Glazers’ willingness to raise ticket prices plus the completion of the upper quadrants at Old Trafford (and, yes, more of the “prawn sandwich” brigade) has also helped Manchester United to substantially increase their match day revenue to well over £100 million.

This has resulted in United and Arsenal both earning much more than their peers per game: £3.7 million and £3.3 million compared to Chelsea £2.5 million, Tottenham £1.6 million and Liverpool £1.5 million. This explains why all of those clubs have been looking at stadium moves for some time, though their struggles have highlighted how difficult this is. On the bright side, if they found the right site, any costs associated with a move could be excluded for FFP – though there would then be the small matter of actually finding the money to finance the project.

Another interesting factor here is that the FFP regulations explicitly include membership fees within relevant income, which is a major benefit to clubs like Barcelona and Real Madrid, who take in around £20 million a year from their members. Arguably, this is a form of capital injection from the club’s owners, so should not be treated as relevant revenue, but UEFA have decided that this is different from one large payment from a wealthy owner.

Traditionally English clubs have not focused much on the commercial side of operations, as they have been able to sit back and rely on the TV money, but that has been changing. Many have made great strides recently, most notably Manchester United who have broken the £100 million barrier, but they are still left in the shade by their continental peers, especially Bayern Munich £161 million, Real Madrid £156 million and Barcelona £141 million.

Nevertheless, there has been a significant increase in the value of shirt sponsorship deals in England with Liverpool and Manchester City both going from £7.5 million deals to £20 million with Standard Chartered and Etihad respectively. Tottenham have introduced an innovative split of their shirt sponsorship between software company Autonomy (now Aurasma, one of their products) for the Premier League and asset management group Investec for all cup competitions worth a total of £12.5 million, much better than the previous £8.5 million deal with Mansion.

However, United are still undoubtedly the daddy when it comes to sponsorship deals. They switched to Aon from AIG in 2010/11, increasing the annual value from £14 million to £20 million, but have recently announced a truly spectacular deal with Chevrolet. Not only will this rise to an astonishing £45 million ($70 million) in 2014/15, but the sponsor will also actually pay them £11 million in each of the previous two seasons – while Aon are still the sponsors. Amazing stuff, but this is the club that has racked up numerous secondary sponsors and persuaded DHL to pay £10 million a season to sponsor their training kit.

Even the noble Barcelona have been forced to take shirt sponsorship, switching from the unpaid UNICEF to a very lucrative £24 million a year with the Qatar Foundation. Other clubs have also been keen to get in on the act with Newcastle’s £10 million Virgin Money deal being £7.5 million higher than Northern Rock and Sunderland’s barely credible £20 million Invest in Africa deal being just the £19 million more than the previous Tombola deal.

All of this is leaving Arsenal way behind the rest with a measly £5.5 million Emirates deal, a legacy of a deal that helped finance the stadium construction. There will no doubt be a major increase in 2014 when the deal runs out, but you can’t help thinking that the club’s commercial team should have done more, especially when you compare their tiny revenue growth to United’s.

"John W Henry - FFP's No. 1 fan?"

Similarly, clubs have done well in improving their kit supplier deals, e.g. Liverpool’s £25 million kit deal with Warrior is more than twice the amount received from Adidas and is about the same level as Manchester United, Real Madrid and Barcelona. United themselves are in discussions to extend their deal with Nike, looking for an increase of at least £10 million a season.

Merchandising, retail, hospitality and overseas tours can all swell the coffers, but the Holy Grail for football clubs is stadium naming rights. The only club that has (reportedly) inked such a deal for a meaningful sum is Manchester City, as an element of their long-term Etihad sponsorship, while clubs like Chelsea have to date failed to secure a deal, despite many years of searching.

Many have expressed scepticism over City’s Etihad deal, including Liverpool’s owner John W Henry, who asked, “How much was the losing bid?” and Arsenal manager Arsene Wenger, “If FFP is to have a chance, the sponsorship has to be at the market price. It cannot be doubled, tripled or quadrupled, because that means it is better we don’t do it and leave everybody free.”

UEFA tackle such deals by assessing whether they represent “fair value” and then deducting any excess (not the entire agreement) from the club’s income for the purposes of the FFP break-even calculation. Given the rate of change of such sponsorship deals, my view is that they are unlikely to exclude this deal.

"Arsene Wenger makes his point"

If they do, the lawyers will be out in force, asking UEFA to also look at other clubs, such as Chelsea’s sponsorship deal with Russian energy company Gazprom, who bought Roman Abramovich’s stake in Sibneft in 2005. Questions could even be asked of squeaky-clean Bayern Munich, where two of the most prominent sponsors, Adidas and Audi, each own around 10% of the club.

Clearly, any egregious attempts to get round the regulations, such as an owner buying £200 million of replica shirts or paying £50 million for a super-VIP executive box, will be thrown out, but, as we have seen, there is still scope for some serious revenue improvement in commercial operations.

There have been some interesting developments that clubs may use to boost revenue, such as Real Madrid’s $1 billion resort island in the United Arab Emirates and Trabzonspor’s plan to build a hydroelectric power station. On the face of it, any revenue from such activities would have to be excluded from FFP, as “it is clearly and exclusively not related to the activities, locations or brand of the football club.” However, the same clause does confusingly allow the inclusion of revenue from non-football operations if those operations are “clearly using the name/brand of a club as part of their operations” with no reference to location. Another one for the lawyers.

UEFA’s hope, of course, was that FFP would act as a soft wage cap, though there has been little sign of this up to now at the leading English clubs, especially Manchester City where wages have surged from £36 million to £174 million in just four years, resulting in a wages to turnover ratio of 114%. As well as recruiting new players, the wage bill is under pressure from better deals for current players (to avoid sales on a Bosman) and bonus payments (which can sometimes end up costing more than the additional revenue from success on the pitch).

Some clubs have spent a lot of time trying to reduce their wage bill by offloading deadwood, but this is easier said than done, given the high wages they tend to be on, leading to cut-price sales or elaborate loan deals where much of the wages are subsidised (raising more questions in terms of FFP).

Although English clubs have high wage bills, they are not actually the highest in Europe, an “honour” that belongs to Barcelona and Real Madrid. A root cause of the Italian clubs’ problems with FFP can be seen with the bloated wage bills at Milan and Inter, hence the release of so many experienced (expensive) players in the last two seasons. However, it is difficult to compare across countries because of differing tax rates, which mean that clubs in England and Italy have to pay higher gross salaries for their players to receive the same net salary.

Given the prevalence of third party ownership in many countries, there is a risk that a club’s overall wage bill could be massaged by a sponsor paying part of a player’s package. This is addressed in the FFP guidelines, but it might not be totally straightforward for UEFA to identify any such arrangements.

The impact of transfer fees on a club’s accounts is not easy to understand for many non-accountants, as the full expense is not booked immediately, but instead is written-down (amortised) evenly over the length of the player’s contract. The reasoning is that the player is an asset, but could potentially leave for nothing at the end of his contract on a Bosman, when the value would be zero. So, if a club like Chelsea signs a £40 million player on a four-year contract, the annual amortisation is £10 million, i.e. £40 million divided by four years. Incidentally, the accounting treatment is the same regardless of when the cash payment is made (all up front or in stages).

In this way, a club’s accounts will not show the full extent of major transfer activity immediately, though it will be reflected in growing player amortisation. This can be seen very clearly with Chelsea, where amortisation rocketed from £21 million to a peak of £83 million after Abramovich’s initial burst of expenditure, but then fell to £40 million after the taps were closed. Manchester City’s 2010/11 amortisation was £84 million, but they would hope that this would fall after their recent parsimony.

It stands to reason that wealthier clubs can reduce their annual amortisation by signing players on longer contracts, but this can also be achieved by extending player contracts. For example, if our £40 million player were to extend his contract after the first two years of his initial four-year contract by a further two years, the remaining £20 million valuation in the books would then be amortised by the new four years remaining (original two plus extended two), leading to annual amortisation falling from £10 million to £5 million.

The impact of third party ownership should not be underestimated here, as it enables clubs in many countries, notably Portugal and Spain, to acquire players at a fraction of their total cost. This places Premier League (and Ligue 1) clubs at a disadvantage, as they have outlawed this practice, so they have lobbied UEFA to adjust the FFP rules to take this into consideration. Apparently, they have agreed, but it is not clear how this will work in practice.

Returning to the intricacies of player trading, it is also important to note how clubs report profit on player sales, which is essentially sales proceeds less any remaining value in the accounts. This means that a club can potentially book an accounting profit on sale even when the cash value of the sale is less than the original price paid, e.g. if our £40 million player is sold after three years for £15 million, then the cash loss would be £25 million, but the accounting profit would be £5 million, as the club has already booked £30 million of amortisation.

Up to now, this has surely only interested accountants, but it’s become very relevant for FFP. Furthermore, any players developed through a club’s academy have zero value in the accounts, so any sales proceeds represent pure profit.

There are other angles addressed by the new regulations. For example, many clubs these days have an intricate inter-company structure and there were fears that a club might argue that the football club itself was profitable, while large expenses such as interest payments were paid out of a different company. Clearly, that does not make sense to any reasonable man and UEFA have caught that one, “If the licence applicant is controlled by a parent or has control of any subsidiary, then consolidated financial statements must be prepared and submitted to the licensor as if the entities were a single company.”

"Our finances are special"

On the other hand, the exclusion of non-football operations might benefit clubs like Barcelona, as they would presumably deduct the losses made on other sports, such as basketball, handball and hockey, which amounted to around €40 million in 2010/11.

Clearly, the introduction of FFP will not be without difficulties with Platini himself admitting, “It is not easy, because we have different financial system in England, France and Germany.” Just one example is the £167 million paid by the Premier League in parachute payments, solidarity payments and football development, which might be treated as £8 million of (allowable) charitable deductions for each club if they were not top-sliced from central payments.

Although the FFP regulations explicitly state that adverse movements in exchange rates will be taken into account, it is not explained how this will work. This is important for English clubs, as the weakening of the Euro means that any Sterling losses will be higher in Euro terms than when the rules were first drafted.

While the majority of clubs are in favour of FFP’s attempts to tackle football’s economic woes, there is a concern that far from making football fairer, all this initiative will achieve is to make permanent the domination of the existing big clubs: survival of the fattest, if you will. The argument goes that those clubs that already enjoy large revenue (like Real Madrid, Barcelona, Manchester United and Bayern Munich) will continue to flourish, while any challengers will no longer be able to spend big in a bid to catch up.

In almost any business, you have to invest before the revenues start flowing and in football this means brining in new players and paying high wages in a bid to reach the lucrative Champions League. Critics have asked whether there really is any difference between contributions from wealthy owners and corporate sponsors. This is one of the reasons why the Premier League has reservations with chief executive Richard Scudamore saying that he was opposed to any limits being set on the ability of owners such as Sheikh Mansour to invest money in their clubs.

In any case, UEFA have now announced a sliding scale of sanctions for clubs that breach FFP rules, which works like this: a warning, fine, points deduction, withholding of prize money, preventing clubs from registering players for UEFA competitions and ultimately a ban. This implies that a ban is the last resort, but UEFA has recently banned two Turkish clubs, Bursaspor and Besiktas (suspended), AEK Athens and the Hungarian club Gyori for FFP breaches. These decisions were backed by the Court of Arbitration for Sport (CAS).

"Qu'est-ce que c'est, ce FFP?"

UEFA were also given some comfort by the European Commission’s confirmation that there is consistency between FFP and EU State Aid policy, though this has not been fully tested in the courts. There is still plenty of scope for a powerful club to pursue a competition law case, if it was banned

Some have questioned whether the regulators will have the bite to go with their bark. Expelling teams from the Champions League works fine on paper, but would UEFA really risk damaging their main cash cow? If, for example, they banned Manchester City, Milan, Inter, PSG and Juventus, they would risk killing the goose that lays their golden egg and increase the prospects of a European Super League.

Indeed, key proponents of FFP have expressed doubts over UEFA’s willingness to act, such as John W Henry, “The question remains as to how serious UEFA is regarding this. It appears that there are a couple of large English clubs that are sending a strong message that they aren’t taking them seriously.” Even Arsene Wenger admitted, “UEFA want to create a situation where clubs with deficits cannot play in the Champions League, but I question whether they will be able to force it through.”

"Hulk hears of an incredible deal"

That said, UEFA’s credibility would be severely compromised if a major club that was in breach of the rules was not effectively punished. Listening to public pronouncements, they have consistently said that this will not be the case. Only last week, Platini was unequivocal, “We are never going back on Financial Fair Play. I want the clubs to spend the money they have, not the money they don’t have. We will be enforcing these rules.”

It’s certainly an interesting challenge for UEFA, not least with the arrival on the scene of big-spending Paris Saint-Germain and Zenit St Petersburg (who this week splashed £64 million on the Brazilian striker Hulk and the Belgian midfielder Axel Witsel), but, as we have seen, they have cleverly built a fair bit of leeway into their regulations (and sanctions), so the vast majority of clubs should be just fine with FFP, particularly those in England.