Interesting.
Despite the large sums of money coming into sport, many professional clubs seem reluctant or unable to make a profit. This represents a culture problem that those running clubs are finding hard to tackle
Attempts to run sports clubs along the lines of traditional businesses have traditionally failed because of a complex set of issues. Despite the huge flow of revenue into popular sports, the demands on even the most successful clubs limit their ability to deliver regular profits.
Take football, England’s national sport: despite the unprecedented commercial success of the Barclays Premier League, with the exception of Manchester United and Arsenal there are few clubs in English football that can boast regular operating profits.
Man Utd reported a profit of £23m from revenues of £320m in 2012, while Arsenal’s operating profit came in at £32m in the year to May 2012 from a turnover of £243m.
Other top-flight clubs have been bankrolled by owners who have little expectation of seeing a profit.
Fulham, Aston Villa and Wigan are the ongoing beneficiaries of loans directly from their owners – or the companies they own.
This type of financing looks safe and cheap, as it generally comes with very low interest rates (often zero) and no urgency on repayment.
The owners of Chelsea and Manchester City have even written off their soft loans of £701m and £305m respectively recently, in effect making these two big-spending clubs free from debt.
The resultant challenge for those running football clubs’ finances is to work in an environment where balancing the books is often an alien concept.
While certain levels of debt are acceptable, clubs such as Leeds United, Rangers and Portsmouth are notable examples of what can happen when expenditure gets out of hand.
Between 2000 and 2010, 53 clubs in England entered administration, many owing substantial amounts to HM Revenue & Customs (HMRC).
Mike Cheston, former FD at Everton, explains: “The overriding key performance indicators of a football club are its performances on the pitch, its status in the league and its achievement of expectations. These factors far exceed the financial situation. No football club FD can attend a board meeting and boast about the profitability or financial performance of their club, especially if the team is relegated or has underperformed. The FD is not going to get a lot of thanks for that.”
He adds: “You do have FDs with the right intentions, but fans and the media complain when clubs don’t spend. Leeds and Portsmouth threw money at their teams and both ended up in administration. While fans complained when the overspend backfired, they didn’t when big money was being spent on transfer fees and players’ wages. The fact they were breaching every financial safeguard rule simply didn’t matter at the time.”
Many football clubs rely on TV revenues as their main source of income: six Premier League clubs derived more than 70 per cent of their turnover from TV rights in 2011-12 – and, for now at least, there is no sign that the bubble is going to burst.
The latest round of Premier League TV rights amounts to £3.02bn for the period 2013-16, thanks to Sky and BT – an increase of more than £1.2bn on the amount paid by Sky and ESPN for the previous three years.
When overseas TV rights are included, the latest figure is worth more like £5.5bn.
Up and under
Rugby league is another sport where it’s rare to see teams making a buck.
The 14 clubs in the Anglo-French Super League have combined debts of approximately £69m, although there are huge financial disparities among them.
While several clubs are performing well, others either make losses annually or just about wash their faces financially, while two clubs have significant levels of debt.
This is where sports need governing bodies with strict checks and balances. In a year that sees England host its first Rugby League World Cup since 2000, the Rugby Football League (RFL) is working with Super League clubs to help them improve their finances.
A spokesman for the RFL says: “There are clubs in the league structure that make a profit and it is those business models that others should seek to utilise. A salary cap has been introduced. This has brought stability and allows many clubs to operate profitably. It is also helping to attract new investors into Super League. But the ultimate responsibility for the performance of any club rests with the individual club and its directors.”
The RFL signed a deal with Sky in August 2011 that guarantees the sport an income of more than £90m over five years, but that hasn’t prevented clubs such as the Bradford Bulls and Salford Reds from experiencing financial problems.
Gary Hetherington, chief executive of Leeds Rhinos, says financial management needs to improve at club level.
“The crowds are very strong, the TV audiences are very strong and the game itself is as good as it’s ever been. We don’t want that overshadowed by incompetence at club level – and that’s what we’ve seen in recent years. We need to rid ourselves of poor management practices. All clubs have a real responsibility, a real role to play. The majority of clubs are working hard. It’s some of the others that have let the sport down, quite frankly.”
So, while the money continues to flow into major sports, the problems appear to lie with the willingness of some club owners to spend big on transfer fees and wages, regardless of whether the funds exist to pay them.
“Even previously successful businessmen who come into football rarely achieve sound business structures at clubs,” Cheston says.
“It is difficult to be profitable on a regular basis, as it’s antagonistic to fans. The fans spend money with their clubs and they expect that money to be invested in players.”
English football’s best-run club, Arsenal, boasts a cash reserve of £153m – an amount previously unheard of in football. But because of these savings the club is repeatedly placed under intense scrutiny by fans and the media for not spending more on players and for not having won a major trophy since 2005.
The general culture of the game is to criticise, rather than praise, financial achievement.
Horn of plenty
Leeds Rhinos have made a profit in eight of the past nine years, but Hetherington says that the club’s continued success on the field means that this hasn’t upset the fans.
He adds: “We reinvest any surplus into the business to improve the stadium and so on. The benefits to fans are there for all to see. Our focus is on making a profit and this will fund ambitious plans we have for our people.”
Perhaps, more than in any other industry, the role of the FD in sport is to provide accurate information and identify trends and potential problems before they transpire, and to ensure that the board and chief executive are armed with the information.
This is because there are hundreds of variables in sport that make it a challenging industry from a financial planning point of view – for example, the volatility of external factors such as transfer markets and fan bases.
The value of a player can fluctuate in a second from a market point of view, depending on form and fitness. As a result, the value of a club’s main assets – its players – is completely subjective. They are simply worth what another club is willing to pay for them.
Most clubs don’t know which league they will be playing in from one season to the next or, in the case of top-flight football, whether they will be playing in a European competition or not.
The general economy, the performance of rivals and the banks’ willingness to lend to clubs are all significant unknowns.
“Dealing with these unknowns is difficult,” Cheston says.
“The key is being able to adjust quickly to situations. Ideally, expenses such as staff contracts should have relegation clauses inserted, but that is easier said than done. Players and staff will more likely go to clubs offering straight five-year contracts without these clauses, rather than to a club that is offering a contract with terms that could lead to a reduction in pay. But cash flow is more important than asset volatility. The ability to pay key creditors when their bills fall due is an important indicator of business performance. Paying staff and player wages, ground rent and HMRC on time are indicative of the real health of a club. That’s a tough challenge in this economic climate, as banks are becoming increasingly reluctant to lend to football clubs.”
There is a popular view that agents are draining money out of clubs and sports, but Dave Williams, a rugby union agent and the publisher of
www.runningrugby.com, disagrees.
“While it is true that agents are not value creators, they are a reflection of the clubs and players,” he argues.
“They don’t create new markets, but they do understand market values and manage the expectations of clients while trying to get them the best deal. There are similarities between agents and auditors: both do a job that is guided by strict regulation and they are both rewarded for it.”
Williams continues: “You could argue that sports business is not business at all – even HMRC deals with sports clubs differently from ordinary businesses. Nobody, it seems, has yet figured out the magic formula for reducing costs and still winning in sport. In effect, no one has transferred the essence of capitalism into sport.”
