Thread by @SwissRamble

Following my recent analyses of where Premier League and Championship clubs source their money and what they spend it on, I received many questions on how a cash flow statement works, so I will explain the mechanics (using Premier League season 2016/17) in the following thread.

Traditionally, supporters have focused on a club’s profit and loss account, which is not surprising, because: (a) that is what the media tend to report; (b) it is intuitively easy to understand, being basically revenue less expenses (mainly player wages).

Nevertheless, the reported figure is an accounting profit, which is not necessarily a “real” cash profit, as it is based on the accountant’s accruals concept and this can be very different from actual cash movements.

This is important, as the main reason that football clubs 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 will find yourself in trouble.

This analysis will start with the familiar profit and loss account and then reconcile this to the cash flow statement to highlight the differences. It’s fairly technical, but will reveal the different business models that are employed and explain why certain clubs act as they do.

Premier League total revenue 2016/17 was £4.6 bln (TV £2.8 bln, commercial £1.2 bln, match day £0.6 bln), but this only produced £119m operating profit, mainly due to £2.5 bln wages (wages to turnover 55%) plus £896m other expenses and £1.0 bln player amortisation & depreciation.

13 Premier League clubs made operating profits in 2016/17. #MUFC led the way with £70m, followed by #LCFC £56m (enhanced by Champions League), #AFC £52m & #THFC £30m. At the other end of the spectrum, #CFC had a large operating loss of £54m, followed by #SAFC £39m & #MCFC £30m.

The £119m operating profit was boosted by £547m profit on player sales, though there was also £93m net interest payable (most notably #MUFC £24m, #AFC £15m & #THFC £12m), leading to £572m profit before tax. After considering £72m tax, this comes to a round £500m profit after tax.

Profit on player sales has become increasingly important to some clubs’ business model, e.g. #CFC moved from £54m operating loss to £16m profit before tax thanks to £69m profit from this activity. Next highest profits #EFC £52m and #SaintsFC £42m, but #AFC made only £7m here.

Operating profit of £119m is reconciled to £1.3 bln cash flow from operating activities by making two adjustments: (a) adding back non-cash items such as player amortisation, depreciation and impairment £1.0 bln; (b) movements in working capital £97m.

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 shows cash sales & purchases.

Given the rise in transfer fees, player amortisation has become a major expense in the profit and loss account, e.g. adding back #MCFC £135m amortisation & depreciation moves them from £30m operating loss to £105m cash generated from operations (before working capital movements).

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).

Usually, working capital movements are not that significant, but there were some large numbers in 2016/17: #THFC £114m (payments in advance), #MUFC £52m & #MCFC £40m. In contrast, some clubs’ cash flow was adversely impacted by negative movements, e.g. #AFCB £(35)m & #AFC £(35)m.

After adjusting for non-cash items and working capital movements, the picture looks much healthier with £1.3 bln total operating cash flow (only #SAFC was negative). Indeed, some clubs generated significant sums from operations: #MUFC £252m, #THFC £226m & #MCFC £145m.

This £1.3 bln operating cash flow is what is available to the club 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.

£788m was spent on net player purchases, led by #MCFC £147m, #MUFC £142m & #AFC £103m. In contrast, #THFC had £6m net sales. Cash payments for player purchases less sales are often very different from net spend reported in the media, largely due to stage payments of transfers.

The cash number for transfers is the only authentic figure publicly available, but it can also be a bit misleading, as it may not cover the entire fee due to payments made in instalments. Paying transfer fees in stages is increasingly used by some clubs as a source of financing.

On a cash basis, the highest player sales in the 2016/17 Premier League came from #CFC £101m, followed by #SaintsFC £75m, #THFC £68m and #LFC £58m. Worth noting that #AFC only generated £9m cash from this activity, around the same as #Boro and #BurnleyFC.

Unsurprisingly, the highest player purchases were at #MCFC £199m and #MUFC £194m, followed by #CFC £135m, #AFC £111m (a significant increase on previous years) and #LFC £97m. The other member of the “Big Six” #THFC only spent £62m.

So, on a cash basis, #CFC had £135m player purchases and £101m player sales, giving net player purchases of £34m, which is completely different from the £69m profit on player sales reported in the profit and loss account.

Clubs invested £390m in infrastructure in 2016/17, mainly for development of the stadium and training ground. This was dominated by #THFC £226m (investment in the new White Hart Lane stadium), followed by #LFC £52m (main stand expansion), #MCFC £29m and #AFC £25m.

£77m interest was paid with the largest payments made by #MUFC £19m (Glazers’ debt), #EFC £12m (including £7m penalty fee for early repayment of external loan), #AFC £12m (Emirates loan) & #SAFC £8m. Note: interest paid is not always equal to (accrued) interest payable in P&L.

Even though 19 Premier League clubs reported profits before tax in 2016/17, only 7 actually paid any tax, mainly #THFC £14m, #AFC £8m, #MUFC £5m & #WBA £2m. This is a very complex subject, but, essentially, use of prior year losses and other allowances helps prevent tax payments.

After all this expenditure, we have £8m cash flow before financing. This metric is perhaps the purest reflection of how a club has run its business. In 16/17 9 clubs were positive, led by #MUFC £77m and #SaintsFC £43m. However, big negatives at #AFC £38m, #MCFC £35m & #EFC £35m.

We then add £84m of financing to give our final £92m cash flow after financing, comprising £117m of owner funds less £10m external loan repayments and £23m dividends (all paid by #MUFC).

By far the largest owner loan provided in 2016/17 came from Farhad Moshiri at #EFC £104m, followed by #WatfordFC £25m, #SAFC £25m and #SCFC £16m. The largest payments to owners were at #MUFC £23m (dividend) and #THFC £20m (preference shares buy-back).

Largest external loans were #THFC £56m, #LFC £18m & #Swans £9m. #THFC drew down £158m from the £400m bank loan facility agreed in May 2017, but paid back £102m taken out of the former £200m facility agreed in December 2015. #EFC used Moshiri’s loan to repay £58m external loan.

After this financing, we can see the overall movements in cash. #MUFC lead the way with an impressive £53m, followed by #THFC £27m. Fans of #WBA £25m & #hcafc £20m will be disappointed more was not spent to avoid relegation. #AFC cash outflow £46m, but balance was still £180m.

Let’s now look at how the cash flow has impacted the actions of the seven leading clubs in the Premier League.

Although #AFC had £109m operating cash flow, they “went for it” in 2016/17 after years of relative austerity, splashing £103m (net) on players and £25m capex (mainly training grounds). Also paid £20m for Emirates loan (£12m interest & £8m debt) and £8m tax. Net outflow £46m.

Massive #MUFC operating cash flow of £252m funded £142m player purchases (net) and (relatively low) £9m capex. Held back by £43m paid out due to Glazers’ financing: £23m dividend and £19m interest. However, after £5m tax payment, cash still rose by £53m to a jaw-dropping £290m.

#MCFC £145m operating cash flow was entirely used (and more) to fund £147m player purchases (net), while they invested £29m in capex and made £3m lease payments on the stadium. As a result, cash fell by £35m to £19m. City did not have any owner financing (unlike previous years).

#CFC £54m operating loss became £63m operating cash flow thanks to non-cash adjustments. Only spent (net) £34m on players (high purchases offset by sales) and £5m capex, while £18m loan reduction due to conversion to equity. Net cash inflow of £6m increased cash balance to £33m.

#LFC £74m operating cash flow mainly spent on capex £52m (stand expansion) and players £39m – £97m purchases less £58m sales. Shortfall largely funded by £18m increase in bank loan, leading to £4m decrease in cash. Liverpool spend all they earn, so have a low £4m cash balance.

#THFC high £226m operating cash flow, boosted by £114m working capital movements, but spent almost all on new stadium £221m. Only major club with net player sales £6m. Paid £6m interest & £14m tax. £56m additional loans; bought back £20m preference shares. Cash up £27m to £200m.

#EFC £23m operating cash flow helped by £47m net financing (£104m from Moshiri less £58m external loan repayment). Spent £40m on players – £71m purchases less £31m sales. Also £6m capex & £12m interest (incl penalty fee). Cash up £12m, but balance only £10m as overdraft cleared.

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.