Thread by @SwissRamble

One question often asked by football fans is “Where has all the money gone?” The answer is partly found in a club’s profit and loss account, but the cash flow statement is also relevant here. Of course, cash is particularly important now with the challenges presented by COVID-19.

A club’s profit and loss account is easy to understand, i.e. basically revenue less expenses (mainly player wages), but this is a technical profit based on the accountants’ accruals concept, which 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 indeed 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 a fairly dry subject, but will focus on the different business models that are employed by the Big Six Premier League clubs.

In 2018/19 revenue for the Big Six was £3.0 bln (TV £1.4 bln, commercial £1.1 bln, match day £0.5 bln), but this still produced £97m operating losses, mainly due to £1.7 bln wages (wages to turnover 55%) plus £0.8 bln player amortisation/depreciation and £0.6 bln other expenses.

#MUFC had the highest revenue with £627m, almost £100m more than #MCFC £535m and #LFC £533m. Thanks to their Champions League exploits, #THFC £461m now have the largest revenue in London, followed by #CFC £447m and #AFC £395m.

5 clubs are most reliant on broadcasting revenue (45-53%), though commercial £275m (44%) is the most important revenue stream at #MUFC. United also have highest match day £111m, followed by #AFC £96m (24%). Winning the Champions League means #LFC £261m have the highest TV money.

Obviously wages are the highest cost, but they only account for around half of a club’s total expenses. Taking #MUFC as an example, their £622m expenses comprise wages £332m, player amortisation £126m, depreciation £13m, other expenses £109m, exceptionals £20m and interest £23m.

As a result, only 3 of the Big Six clubs made an operating profit – and #LFC only just broke-even with £1m. #THFC led the way with £96m, mainly due to low wage bill, followed by #MUFC £24m. #CFC reported a huge £163m operating loss with #AFC £33m and #MCFC £22m also losing money.

The £97m operating loss was offset by £193m profit on player sales, though there was also £70m net interest payable (notably #THFC £25m & #MUFC £23m), resulting in £33m profit before tax. Deducting £26m tax (#THFC £19m) gives just £7m profit after tax, a very narrow profit margin

Profit on player sales has become increasingly important to many clubs. As an example, #MCFC turned a £22m operating loss to £10m profit before tax, largely due to £39m profit from this activity. The highest profit here was #CFC £60m, while #LFC benefited from £45m.

Four of the Big Six then posted profits before tax, led by #THFC £87m, followed by #LFC £42m, #MUFC £27m and #MCFC £10m. Lack of Champions League qualification has driven large losses at #CFC £102m and #AFC £32m.

There’s not much difference after tax, though #THFC profit was reduced to £69m, #LFC to £33m and #MUFC to £19m. On the other hand, tax credits reduced losses at #CFC and #AFC to £97m and £27m respectively.

The operating loss of £97m is reconciled to £840m cash flow from operating activities via two adjustments: (a) adding back non-cash items such as player amortisation, depreciation and impairment £763m; (b) movements in working capital £174m.

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 expense in the profit and loss account – over £100m at 4 clubs led by £168m at #CFC. Adding £11m depreciation moves #CFC £163m operating loss to £16m 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).

Some clubs had large working capital movements, e.g. #THFC cash flow benefited from a £109m positive movement (increase in creditors), but #CFC cash flow was adversely impacted by a £71m negative movement (increase in debtors).

After adjusting for non-cash items and working capital movements, the picture looks much better with £840m total operating cash flow and only #CFC still negative £(55)m. However, others generated a lot of cash, especially #THFC £278m and #MUFC £264m, though #AFC were only £30m.

This £840m operating cash flow is what is available to the 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.

Around half a billion was spent on net player purchases, led by #CFC £162m and #MUFC £135m. #THFC net spend was strikingly low at just £3m. Cash payments for player trading are often very different from net spend reported in the media, largely due to stage payments of transfers.

The cash figure 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 of the Big Six were made by #CFC £120m and #LFC £115m, both of whom have used this as a key part of their business model. In contrast, #MUFC, #THFC and #AFC all generated less than £60m from this activity.

The highest player purchases by far were at #CFC £282m, in advance of a FIFA transfer ban linked to a breach of regulations from registration of Academy players. This was around £100m more than #MUFC £178m, #LFC £174m, #MCFC £164m and #AFC £118m. #THFC only spent £49m.

To illustrate the difference between cash movements and profit and loss account, on a cash basis #CFC had £282m player purchases and £120m player sales, giving net player purchases of £160m, which is completely different from the £60m profit on player sales reported in the P&L.

The Big Six invested £505m in infrastructure, mainly for development of the stadium and training ground. The vast majority was #THFC spending £413m on the new White Hart Lane stadium, then a huge gap to #MUFC £26m and #LFC £23m.

£56m interest was paid with the largest payments made by #THFC £26m (new stadium loans), #MUFC £16m (Glazers’ debt) and #AFC £10m (Emirates stadium loan). #MCFC, #LFC and #CFC only paid £4m combined. Note: interest paid is not always equal to (accrued) interest payable in P&L.

Only £15m corporation tax was paid, the highest being #THFC £8m (£34m last 2 years), 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.

After this expenditure we have £235m cash losses before financing, perhaps the purest reflection of how a club runs its business. Only 3 clubs were profitable (#MCFC £95m, #MUFC £83m and #LFC £47m). Big negatives at #CFC £233m (transfer spend) and #THFC £172m (new stadium).

Fortunately for those clubs, the £235m cash loss was more than covered by £384m financing to give a net cash inflow of £149m. This comprises £224m from the owners plus £183m external loans less £23m dividends.

The highest owner financing provided by some distance was a £238m loan from Roman Abramovich at #CFC, taking the Russian’s debt up to £1.4 bln. In fact, none of the other owners at the Big Six put money into their clubs in 2018/19 with #LFC actually repaying £14m of the FSG loan.

The largest external loan was unsurprisingly an additional £195m at #THFC to help fund the new stadium development, taking Spurs’ debt up to £658m, the highest in the Premier League. Relatively low repayments at #AFC £9m, #LFC £6m and #MUFC £4m.

The only club in the Premier League to pay dividends to its owners in 2018/19 was #MUFC, who shelled out £23m to its shareholders (namely the Glazer family), which makes a hefty £89m exiting the club in this way in the last four years.

After this financing, we have net cash movements with only #AFC having an outflow (£64m), partly due to delay in season ticket renewals as a result of Europa League final timing. The two Manchester clubs led the way (#MCFC £102m and #MUFC £56m), while #CFC effectively broke-even.

Despite being the only Big Six Premier League club with a net cash outflow in 2018/19, #AFC still had the second highest cash balance of £167m, thanks to their historical prudent approach. #MUFC remain the highest with £308m. Smallest balances at #CFC £37m and #LFC £38m.

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.

Amongst other things, this analysis has shown that even some of the Big Six make operating losses, largely offset by profits from player sales. Significant financing was still required at two clubs to cover investments: player purchases at #CFC and the new stadium at #THFC.

As the old saying goes, “Revenue is vanity, profit is sanity, but cash is king.” This is especially the case when football has shut down. As cash is really important in these difficult days, we will take a closer look into the cash flow statements of the Big Six clubs tomorrow.