These days, the beautiful game is as much about the bottom line as goals
I T used to be the case that the biggest day in a football fan’s life was a trip to see their side at Wembley in a cup final. For many football fans, though, it’s no longer the dream destination of Wembley that keeps them up at night. Instead, it’s the prospect of a High Court clash with creditors wielding a winding-up order that’s giving them nightmares.
The headline case at the moment is the tale of Premier League strugglers and 2008 FA Cup winners Portsmouth FC. Pompey have been temporarily saved from being wound-up by entering administration days before a court fixture with HMRC.
Portsmouth’s predicament – “living the dream”, followed shortly by the living nightmare of administration and financial woe – is one that is becoming horribly familiar to football fans.
Leeds United (Champions League semi-finalists 2001, now League One via administration) and Southampton (FA Cup finalists 2003, now League One via administration) are perhaps the most notorious examples of riches to rags tales, although there are plenty of clubs to have run into financial difficulties without ever tasting success in the first place.
Crystal Palace, Watford, Accrington Stanley and Notts County have all either been in administration, been within hours of it, or have faced winding-up orders. 2008 FA cup finalists Cardiff City as well as Southend United have a little over a month to pay debts or face winding up. Chester City, a former Second Division (now The Championship) club, were wound up recently.
Sean Hamil, a lecturer at Birkbeck College in London and an expert on sports finances, notes that there have been, “52 incidences of financial administration in the Football League over the 1992-2009 period. Many of those administrations represent clubs who get into difficulties trying to avoid, unsuccessfully, relegation from the Premier League. To this extent the Football League has represented a kind of financial A&E department for the Premier League.”
Not all clubs are in trouble and many are run soundly, but there seems to be a worrying trend of unsustainable finances bearing poison fruit for football clubs.
FINE LINES
Financial management and the audit function have a vital role to play in any business, and football should be no exception. Effective financial oversight – from audit to tax management – is vital to any industry and the economy, providing confidence and trust in financial reporting.
The world of finance and audit is currently in the glaring spotlight, with last year’s Treasury Select Committee Inquiry into the banking crisis concluding that the failure of audit to “highlight developing problems in the banking sector does cause us to question how useful audit currently is”. These were tough words and not political bluster with an eye on the headlines.
One of the central problems with statutory external audit is its basis on assumption; audits are a historical look at a company’s reports but they contain assumptions about the future, especially when prepared on a going concern basis. The most important of these assumptions is a company’s business model, which currently the audit process fails to engage with effectively.
In football, this can be a particular problem. In response to concerns over club debts, the Premier League has introduced rules such as a “going concern” test which requires accountants to confirm a club can fulfil its fixtures for the season. But again, this approach is based on the here and now rather than the long-term sustainability of a club’s business model; a change in ownership during the season can seriously affect a football club’s financial position.
Making assumptions about the future in football can be dangerous as the game can be highly volatile. While the financial future of a “normal” business can at least be considered in the context of a usually stable market – and even then, the financial implications of being slightly worse than a competitor aren’t usually disastrous – the financial future of football clubs is contingent on the ability of one team of 11 to kick a glorified pig’s bladder into a net more times than another team. Success in this regard is wholly dependent on unpredictable factors such as the form and health of the players.
A club’s high-spending ways may be a sustainable business model if they qualify for the Champions/Premier League cash cows. But the business model is clearly unsustainable if the players fail to achieve that incredibly difficult goal on a regular basis.
Leeds United’s loss of fourth spot to Newcastle United in 2001 and the problems caused by the subsequent drop in income is a case in point (although other decisions contributed to Leeds’ downfall too). The same is true for some of the current big four; loss of Champions League TV revenue could cause real problems for Manchester United as they seek to service their mind-boggling debt.
SHAKY FOUNDATIONS
The enormous gap in rewards between finishing places in football leagues – for example fourth and fifth in the Premiership or playoff winner and loser in the Championship – isn’t the only major predictability problem. Besides prize money, with extra TV money being the Champions League prize, TV rights and wealthy owners are two key sources of funds that can lead to unsustainable business models.
Whenever a club bases its business model on a gamble and tries to buy success, it appears that a fall lurks around the corner. Eight years ago, plenty of football league clubs saw the ONDigital money as an excuse to spend big to achieve promotion to the promised land of the Premiership; ONDigital (having become ITVDigital) collapsed and several clubs were left with unrealistic wage structures and funding gaps.
The same applies for some clubs that have relied on wealthy owners to pump money into a club to pay large transfer fees and wages. If this funding is used to paper over an otherwise unsustainable business model, then there are problems when the money tap stops. Both Portsmouth and West Ham have been left staring over the financial precipice after the respective owners either left or lost their source of funding.
To compound matters, problems with the sustainability of business models can often result in clubs using Revenue and Customs (HMRC) and unpaid VAT as a default “bank”. It is this type of behaviour that the taxman has finally tired of leading to an increasingly litigious approach by HMRC.
Commenting on the structural problems in football, Sean Hamil adds: “In a league system where owners prioritise sporting success over financial success, every club owner has an incentive to over-spend on playing talent. In this environment, the virtue of financial discipline does not have its own reward, as to exercise tight financial controls when all around you are spending with reckless abandon is to invite relegation and financial catastrophe.”
BACK TO FINANCE MANAGEMENT
Improving the value of the finance function in football requires more active engagement with the business model. This is not only limited to football clubs either; other businesses would benefit from a review of the sustainability of their business model.
This is not about football being tied up in financial red tape; living the dream can often turn out to be a nightmare. With an improved role for the whole finance function to guard against unsustainable football business models, the biggest footballing clashes can be removed from the High Court and returned to the pitch.
Dr Steve Priddy is Director of Technical Policy and Research at ACCA