Thread by @SwissRamble

While it is obvious that football clubs have suffered over the last two years due to the impact of COVID, I thought it might be interesting to look at how their finances have been impacted, both in terms of the profit and loss account, but also the important cash flow statement.

For the purpose of illustrating the effect of the pandemic, I have looked at the Big Six Premier League clubs, comparing the numbers for the last two sets of published accounts (2019/20 and 2020/21) with those reported for the preceding two seasons (2017/18 and 2018/19).

Most fans will understandably focus on a club’s profit and loss account, particularly revenue and wages, but the cash flow statement will also incorporate the money spent on players and infrastructure, thus providing a more complete picture.

The main reason that a football club fails is a problem with cash flow. 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 indeed the taxman, then you will find yourself in trouble.

Therefore, this analysis starts with the familiar profit and loss account before reconciling this to the cash flow statement. It does get fairly technical, but will focus on the different business models employed by the Big Six, namely #AFC #CFC #LFC #MCFC #MUFC and #THFC.

The Big Six generated 5.3 bln revenue in last 2 years, but still made £1.0 bln operating loss, due to £3.4 bln wages (wages to turnover 65%), £1.7 bln player amortisation/depreciation & £1.1 bln other costs. Pre-tax loss £665m after £477m player sales profit less £160m interest.

In contrast, in the preceding 2 years the Big Six posted £471m pre-tax profit, thanks to higher revenue (£5.8 bln vs £5.3 bln) and more profit from player sales (£681m vs £477m). Despite these falling in the last 2 years, wages still increased from £3.1 bln to £3.4 bln.

The reduction in revenue was largely driven by match day, down £587m, as almost all games were played behind closed doors in 2020/21, though broadcasting also fell £108m, mainly due to rebates. This was partially offset by £212m commercial growth.

All the Big Six lost money in the last 2 years with four clubs posting losses over £100m: #AFC £181m, #THFC £148m, #CFC £120m & #MCFC £120m. This was very different from the preceding 2 years when 5 clubs were profitable. The deterioration was quite significant, e.g. #LFC £218m.

There were also large decreases in revenue in the last 2 years for most of the Big Six, especially #MUFC £214m, #AFC £112m and #THFC £89m. However, #LFC managed to lose only £11m revenue, while #MCFC actually increased revenue by £13m.

The main driver of lower revenue was match day, as games were played without fans. Clubs with the highest income pre-pandemic saw the largest losses, i.e. #MUFC £124m and #AFC £113m. The opening of the new #THFC stadium in 2019 somewhat mitigated their reduction.

Broadcasting revenue was adversely impacted by rebates to broadcasters for disruption in 2019/20 schedule, though the main differentiator here is progress in Europe or whether a club qualified for the lucrative Champions League or the Europa League, e.g. #THFC down £102m.

Despite less potential for retail sales and pre-season tours, four of the Big Six grew commercial income in the last 2 years, mainly thanks to new sponsorships, with big increases at #LFC £93m, #THFC £69m, #AFC £61m and #MCFC £59m. However, Ed Woodward’s #MUFC had a £40m loss.

COVID depressed the transfer market, so most of the Big Six made smaller profits from player sales, especially #LFC, #AFC and #THFC, who fell £103m, £60m and £50m respectively. #MCFC achieved a £31m increase, while #CFC made the most money with £171m.

Even though revenue and player sales reduced in the last 2 years, four of the Big Six still significantly increased their wages, led by #MCFC £131m, then #CFC £87m, #LFC £66m and #THFC £60m. The growth at #AFC was only £8m, while #MUFC actually dropped £22m.

Similarly, there were large increases in player amortisation, reflecting transfer spend. #AFC £51m was the highest growth, but their £227m in last 2 years was still a fair way behind #MCFC £292m, #CFC £289m and #MUFC £243m. #LFC £214m was fifth highest, only above #THFC £149m.

Having adjusted for non-cash transactions, the Big Six operating cash flow was a decent £623m in the last 2 years, though the cash flow before financing was a negative £719m after considering expenditure on players, infrastructure, interest and tax.

In the preceding 2 years, operating cash flow was almost a billion higher at £1.5 bln, though cash flow before financing was not much better with negative £631m. However, worth noting this would have been much better without £1.1 bln capital expenditure (largely #THFC stadium).

After financing, cash flow was half a billion lower in the last 2 years (minus £437m vs £67m), though if we excluded the £798m reduction in capital expenditure, the difference in the COVID era would have been £1.3 bln, which is a lot for six clubs to bear.

This shortfall was largely driven by the £880m increase in operating loss from £104m to just under a billion. All of the Big Six endured major reductions here, ranging from “only” £85m at #CFC to a massive £274m at #THFC.

The operating loss of £984m is reconciled to positive £623m cash flow from operating activities via two adjustments: (a) adding back non-cash items such as player amortisation, depreciation and impairment £1.7 bln; (b) less negative movements in working capital £140m.

At this stage we need to understand how football clubs account for player trading, both for purchases and sales, as the accounting treatment in the profit and loss account is very different to the actual cash movements.

Football clubs do not fully expense transfer fees in the year a player is purchased, but instead write-off the cost evenly over the length of the player’s contract via player amortisation, while any profit made from selling players is immediately booked to the accounts.

So if a player is purchased for £30m on a 5-year contract, the annual amortisation in the accounts is £6m, i.e. £30m divided by 5 years. This means that the player’s book value reduces by £6m a year, so after 3 years his value in the accounts would be £12m, i.e. £30m less £18m.

If the player were to be sold at this point for £35m, profit on player sales from an accounting perspective would be £23m, i.e. sales proceeds of £35m less remaining book value of £12m.

Player amortisation is a non-cash expense, so is added back for the cash flow calculation. In the same way, profit on player sales is purely an accounting profit, which is booked in total, regardless of when the club is paid. Instead, cash flow includes cash sales & purchases.

Given the rise in transfer fees, player amortisation is a major cost in the profit and loss account, while depreciation has shot up at #THFC due to the new stadium investment. In the last 2 years, these non-cash expenses accounted for more than £300m at three clubs.

Working capital measures short-term liquidity, defined as current assets less current liabilities. Changes in working capital can cause operating cash flow to differ from net profit, as clubs book revenue and expenses when they occur instead of when cash actually changes hands.

If current liabilities increase, a club is paying its suppliers more slowly, so is holding on to cash (positive for cash flow). On the other hand, if a club’s debtors increase, this means it collected less money from customers than it recorded as revenue (negative for cash flow).

Most clubs saw a negative swing in working capital movements in the last 2 years, e.g. #THFC cash flow was adversely impacted by £117m negative movement (decrease in creditors), compared to £86m positive movement in preceding 2 years (increase in creditors).

After adjusting for non-cash items & working capital movements, the picture looks much better with £623m total operating cash flow. That said, most clubs had big falls in last 2 years. #MUFC generated the most cash with £155m, despite dropping £228m compared to preceding 2 years.

This £623m operating cash flow is what was available to clubs to spend on buying players, investing in infrastructure (stadium or training ground) or paying interest on loans and (occasionally) tax, though additional financing may be required to cover any shortfall.

Despite less available cash, the Big Six still spent slightly more on net player purchases in the last 2 years: £964m vs. £927m. #MUFC were easily the highest with £284m, followed by #AFC £159m, whose net spend was somewhat surprisingly more than #MCFC £147m and #LFC £145m.

The cash outlay is very different from figures reported in the media. Although authentic, it can be a bit misleading, as it may not cover the entire transfer fee due to payments made in instalments. This is increasingly used by most clubs as a source of financing.

On a cash basis, the highest player purchases in the last 2 years were at #MCFC £386m, followed by #MUFC £359m and #CFC £315m. Total gross spend fell £211m from £1.9 bln to £1.7 bln compared to preceding 2 years with largest falls at #CFC £159m and #LFC £116m.

There was also a big reduction in player sales, partly due to COVID depressing the transfer market, from £952m to £704m, though two clubs made good money from this activity, namely #MCFC £239m and #CFC £200m. Significant £153m fall at #LFC from £220m to £67m (Coutinho deal).

To illustrate the difference between cash movements and profit and loss account, on a cash basis #CFC had £315m player purchases and £200m player sales, giving net player purchases of £115m, which is completely different from the £171m profit on player sales reported in the P&L.

The Big Six invested £265m in infrastructure in the last 2 years, mainly on stadiums and training grounds. Highest was £110m at #THFC, though their spend was £784m lower than the preceding 2 years, driven by expenditure on the new Tottenham Hotspur Stadium.

£119m interest was paid in last 2 years with the largest payments made by #AFC £44m (including once-off £32m refinancing fee), #MUFC £40m (Glazers’ LBO) and #THFC £32m (stadium loans). Note: interest paid is not always equal to (accrued) interest payable in P&L.

Hardly any corporation tax was paid in last 2 years, the highest being #MUFC £6m, though football does pay a lot of tax via PAYE on salaries and VAT on (domestic) transfers. This is a complex subject, but use of prior year losses and other allowances helps lower tax payments.

Having accounted for this expenditure, we have a £719m cash loss before financing, perhaps the purest reflection of how a club runs its business. None of the Big Six were positive in last 2 years, due to COVID. Largest negatives at #MUFC £203m, #THFC £172m and #AFC £146m.

This £719m cash loss was partially offset by £282m financing , though this still ended up in a net cash outflow of £437m in last 2 years. The financing was made up of £214m from the owners (loans £163m and share capital £52m) plus £102m external loans less £34m dividends.

The largest external loan was unsurprisingly an additional £191m at #THFC to help fund the new stadium development, taking Spurs’ gross financial debt up to £854m. #AFC £214m decrease is due to redemption of the bonds, which were then replaced by a loan from owner Stan Kroenke.

The replacement of the bonds with the Kroenke loan explains why #AFC received £211m owner financing in the last 2 years. Interestingly, despite the ravages of COVID, this was the only additional loan by Big Six owners in this period. Abramovich provided £275m in previous 2 years.

That said, the owners at #CFC and #MCFC did inject new share capital into their clubs in the last 2 years with £50m and £23m respectively. In contrast, #MUFC spent £21m on a share buy-back. City’s owners had previously put in £58m capital in preceding 2 years.

The only club in the Premier League that pays dividends to its owners is #MUFC, who shelled out £34m in last 2 years (mainly to the Glazer family), which gives a hefty £79m in last 4 years. The second half 2020/21 payment (£11m) was made in July 2021, i.e. after accounts closed.

After this financing, we finally have the net cash movement with only #THFC having an inflow of £24m. The rest of the Big Six had outflows, though #LFC and #CFC restricted this to just £6m and £20m respectively. Highest shortfalls were #MUFC £202m, #AFC £148m and #MCFC £85m.

These clubs covered their cash deficit in the last 2 years via a reduction in their cash balance, down from £802m in 2019 to £370m in 2021 for the Big Six. For example, #MUFC cash dropped from £308m to £111m, #AFC fell from £167m to £19m and #MCFC decreased from £130m to £45m.

In other words, the large cash balances built up in the good times at #MUFC, AFC and #MCFC have covered the COVID losses made in last 2 years. Some additional financing was required, especially at #THFC and #LFC, but not as much as people might expect.

This has been quite technical, but those wishing to understand a football club’s finances and the impact these have on its strategy should, as always, follow the money. That means not just focusing on the P&L, but also looking into the mysterious world of the cash flow statement.

As the old saying goes, “Revenue is vanity, profit is sanity, but cash is king.” This has never been more true than the past two years, when football was severely impacted by the COVID pandemic. Those clubs that saved cash for a rainy day benefited from their prudence.