City's Finances - An Independent Accountant's View

Some of you may know OB1 from his postings on Manchester Evening News online. Some of you won't know that he is a qualified accountant with many year's experience. Rather than hear us and our concerns about City's finances, please read OB1's article below. OB1 is not part of the MCFC Supporters Trust Working Party and he is not working for us on the periphery, here's his views:-

"I am a season ticket holder and shareholder who happens to hold a recognised accounting qualification and have over twenty years of post qualification experience working as a senior financial manager in various service industries. However, these are my own views based on a review of published financial information and are not to be relied on in anyway as professional advice.

The just released half year financial results for MCFC match recent results on the field: they are bad. The club made a loss of £7.1 million for the six months ended 30 November 2006 thus demonstrating that the club remains persistently unprofitable; yet the accountants Deloitte report in an article published with their latest Football Money League that the majority of Premiership clubs generate annual operating profits.

City once again occupied 17th place in the Football Money League, which is often referred to as the rich list; but rich means that you have an abundance of wealth i.e. more than enough money. Rich hardly sounds like the a suitable adjective for a club that cannot afford to buy new players without first selling - a situation that has prevailed at MCFC in the last few transfer windows. Deloitte use income as an indicator of a club’s financial wealth because it is the most easily available and comparable measure for that purpose. Also, as Deloitte point out, it might not be the ultimate measure of wealth but it is generally better to have more rather than less income and the choice of how to spend it. So why is a club that has been amongst the top 20 earners in European football for the past three seasons so impecunious or as some might say: where’s the money gone?

I trust that it is rather obvious to say that accountants do not tag each individual pound that comes into a business so that they can say precisely what they spent that pound on. Accountants of course aggregate similar sorts of items of income and expenditure together and summarise them in periodic reports such as profit and loss accounts and cash flow statements. Consequently one cannot say for sure whether part of the money received for Shaun Wright Phillips entirely paid for Georgios Samaras or whether part of Big Sam’s fee was covered by gate receipts; we just know that both events occurred in the same financial year and without the former sale, the latter purchase would not have been possible.

A quick peep at City’s published accounts for the past five seasons reveals that despite gross revenue of £261.6m over that period City’s aggregate loss was £51.6m, even after taking the benefit of the £21m profit on the sale of Shaun Wright Phillips; in other words, five year losses might have reached £73m but for Chelsea’s generosity. Therefore, if you exclude profits or losses on the sale of players, City have lost an average of £13.5m a year for the past five years. A figure not dissimilar to the £13.8m they lost in their last season in Division 1.

City’s first season back in the top flight saw turnover increase by £21m (75%). However, despite this substantial boost to income, City’s annual loss increased by £1.5m. Where did it all go wrong? Much of this new income was swallowed by staff costs, which shot up by £11m from £24.4m to £35.4m, and an extra £6m of transfer fees being written off or amortised. Transfer fees are charged against profit over the period of a player’s contract and that process is referred to as amortisation.

Staff costs have averaged £36.3m a year since promotion and amortisation of transfer fees has averaged £11.6m (excluding any losses on disposal of players). So broadly speaking one could argue that the financial benefits of promotion were eaten up by the cost of hiring and paying new players. Could City have spent less in this respect and achieved more? Well, you be the judge.

City’s top line received further significant assistance from the move to the City of Manchester Stadium: turnover last season was £12.8m higher than in the final season at Maine Road and only £0.3m of that increase represented additional television money. Unfortunately, by the same comparison, City’s annual operating expenses (excluding staff costs) have grown by £10.3m. Furthermore, City incurred finance costs of £2.6m in respect of the stadium lease and will have incurred interest on the money spent on refitting the COMS of, I would estimate, at least £1m last season. That little lot represents the best part of £14m. Now just how much of the additional operating costs have arisen as a direct result of heading east I cannot say. However, since the relocation a step change in operating expenses (excluding staff costs) of between £8m - £10m has occurred. Where this additional cost is directly related to the running of the stadium, does it represent expenditure essential to the successful operation of the new stadium or is money being wasted? Based on the club’s published accounts, I cannot definitively say whether or not the new stadium is actually improving or worsening the club’s current profitability but the available information suggests that it is borderline; however, only those running the club know the answers to such questions.

I must point out that I am not suggesting that City should not have relocated but I would love to know if the move is living up to the club’s expectations. I also wonder if with hindsight the club wishes that they had negotiated the lease terms differently?

So although last season’s turnover being £33.8m higher than in City’s last season in a lower division, the bottom line showed only a £2.9m improvement if you strip out the profit made from selling SWP; consequently, the underlying performance of the business remains unprofitable. This continuing unprofitability combined with high debt levels means that City cannot afford to compete in the transfer market. The question has to be asked, how has performance over the last few years stacked up against the club’s long and short range financial plans? Did the club plan to go through several transfer windows with little or no money to spend? Did it set targets for transfer spending on its return to the top flight then break them and spend opportunistically (Anelka) or reactively (David James)? Plans change but where is the evidence of a coherent long range financial and strategic masterplan at Manchester City?

If City retain their Premier League status they will enjoy their third major boost to turnover in the space of five years with the advent of the new TV deals, which should increase turnover by at least £15 million per season. Unless City have deals in place with players that relate specifically to the amount of TV money the club receives, most of this new money should feed straight through to the bottom line. This means that going forward City have it within their own hands to actually make a trading profit without resorting to selling their best homegrown talent. Nevertheless, the need to cover this season’s losses, which I am guessing will be in the region of £10 - 12 million, may require the sacrifice of a player or two.

I hope, I think, I know that if City were taken over by an investor who could afford to pay off their debts, invest a reasonable amount in the team, improve the commercial activities further and generate a bit of success on the field, City could easily generate annual turnover in excess of £80 million and make profits of up to £10 million available for reinvestment in the team. I just hope that there is someone out there with a rather larger bank balance than my own who views things the same way.

Best wishes

OB1"