Tuesday, February 27, 2007

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"

14 Comments:

At 10:23 pm, Anonymous Anonymous said...

Briliant Article, it really does endorse my feeling that the money we used to finance the move to the COMS was not available. Maybe City under a new backer could and should re negotiate the lease. Lets hope 1/ we stay up 2/ get a backer who dosn't mind losing money.

 
At 10:24 pm, Anonymous Anonymous said...

Just read your article with great interest. I am not an accountant of any sort, I posted a similar message on citymancs web a few weeks ago questioning our chief exec, Ali Mac, again basing my facts on 'what I see', City just about break even on the money we get from season ticket sales, corporate sales and shirt/kit sponsorship plus sky money. We have a ceiling of 36,000 season tickets to sell, so we can only generate a certain amount from ST's , (even if we managed to sell them all) we know how much money we get from Sky, so this cannot be increased, corporate sales could be increased (but not in such a way to provide a transfer kitty), so the only way I can see City ever getting enough money to allow us to have a transfer kitty (take over & selling players apart) is by actually getting a shirt sponsorship deal & a kit deal that is worthy of 'any' premiership team. Currently Thomas Cook "pay" us £1.5 M a year, and it seems as though we were grateful for that, and Reeboks' input was less than £5M over what, 3/4 years? Tottenham have recently signed a 4 year deal with Mansion for £40M + and I believe puma paid around £10m for their kit deal, and i have heard that Villa have been negotiating a new £25m Deal.I don't quote any of the 'top 5' here because I am realistic, but
there is an awful strong rumour going round that City are renegotiating with Le Coq for the kit, ..........in a £3M deal. Jesus, We must have the or one of the lowest incomes of any premiership team from this, and with the new deals due very soon, it will show if we are to have at least another 3 seasons with Dietmar Macmanamans and truly awful Dabos of the Bosman world, here to pick up a pension.

 
At 11:07 pm, Anonymous Anonymous said...

Another very apparent problem is the reducing attendances. It's clear to everyone who attends that our abscentees are getting towards 5k per game at very least.
Where are monies for SWP sale?
The confident messages included within the season ticket renewal correspondence is fine but will one of the players we have to sell be Barton. That will be a disaster - we need to supplement his talent with some creativity in midfield. We are also delluding ourselves if we believe Nedum etc will be an adequate replacement for Distin in the next 2-3 years.I admire Wardles hesitancy in selling his shares to a dodgy dealer but please can we have some more info!!!

 
At 11:45 pm, Anonymous Anonymous said...

I've just read the chairmans statement! who is he trying to kid!?
First Rant
£1.5m fall in gate reipts largely due to 1 less match! We all know the truth Mr Wardle. A quick calculation of 1 match gate receipts would be say 17,000 season tickets at £350 = £18.42 a match and 17,000 £500 = £26.31 (These are my own very basic estimates of season tickets and are probably over estimated as they don't include Child,OAPS) Total for one match) and 10,000 tickets at £30 (another estimate)equals £1,060,410 So thats over £400k unexplained! We all know why due to the fall in attendances and we all know why that is!
Second Rant
It is the Board’s strategy to run a higher wage bill in this very important year for the Club
I'm off to bed before I explode on this one!
Good Luck on Sunday Lads Hopefully it will be the beginning of something...........

 
At 1:49 am, Anonymous Anonymous said...

This is a worrying article. Unprofitablity used predominantly. I heard one of your blokes on 5 Live the other night and he was really good. More pertinently was the Sun journalist at the end asking "Where has the money gone?" Disappointed the board cannot explain; even more disappointed the Sun or any other newspaper has not investigated this further or sooner. I reckon the goings on at the club mirror an incredibly badly written soap opera. Get this trust formed NOW. Without it we will be left in the brown stuff by this current board.

 
At 7:40 am, Anonymous Anonymous said...

One home game you are kidding Wardle.The season ticket sales are included anyway so you can discount that theory.Match day sales now are running at approx 8000 at say £30 so only £240000 plus down for one home game.
You dont believe what you have written you clown so why should we.

 
At 10:00 am, Anonymous Anonymous said...

Another reason turnover is down is that corporate sales are down, look at all the empty boxes and I know we paid £4k less for our box this season than last, and its only on a 1 year deal not 3 years like they were able to tie us to before. Turnover down, costs up = losses & no money to spend!

 
At 10:17 am, Anonymous Anonymous said...

I still don't quite understand where the money is going? Our squad is relatively small by premiership standards. Wages can't be that high, particularly after the departure of Fowler, Anelka et al. Our crowds, although declining are still above the premiership average. Without the extra TV money, it looks like we'd have to get rid of 3-4 big earners (ie our best payers), just to break even, and we all know what that would lead to. Something fishy going on?

 
At 12:19 pm, Anonymous John E said...

If you look back at the last couple of seasons there has been only one significant additional income that in theory we could have had that we've missed out on, and that's not money from the UEFA Cup but the very large sums that come from the Champions League. I can only think that Wardle allowed Keegan to get his hands on all that money for Anelka and so on because he really did believe that Keegan could get us into the Champions League places at the end of that first season back in the Premiership. How else could that particular bout of heavy spending be explained away in any long term planning for the club?
The loss we're running also makes it hard to believe that we make an attractive choice for a Glazier-style buy-out, or am I missing something? I can't quite see how the club currently could provide the money for it's own purchase, unless it's through the regular production and sale of academy players of the standard of SWP and Richards.

 
At 1:41 pm, Anonymous Anonymous said...

Fantastic post. I have been trying to find out how much interest City are paying each year, does anyone know?

My guess is that this will be a decent % of the loss each year. I was hoping that the current 'no transfer spend' policy was reducing the debt, this is obviously not the casse.

Yes, more tv money next year, but everyone is getting that which means higher transfer cost, higher wages and no profit for city :(

 
At 5:02 pm, Anonymous Anonymous said...

As any company director worth his salt knows (and many aren't), a minimum of three financial statements need to be examined in any company analysis. These are the P & L, operating cash flow and balance sheet. Just looking at a profit and loss account is inadequate. Check out the following, for example: http://www.unquoted.co.uk/companyinfo/ManCity.pdf

This is a pretty sobering analysis from people who purport to advise others on investments, although a little out-of-date. What it does show is that the long-term debt position is improving, as City slowly repays its 25 and 15 year loans. What we are suffering from is a considerable increase in operating expenses and for that the existing Board and particularly the MD/Chief Executive Officer must take responsibility. Put simply, City needs to cut costs and do it now. When you are bleeding to death you apply a tourniquet and worry about the consequences as soon as you have guaranteed survival. We should have welcomed such events as coaches leaving or third string goalkeepers becoming unsettled and simply taken the financial benefits, not filled the gap with another salary, no matter how modest.

I absolutely support the points about raising income. The commercial negotiating prowess of the current regime is pathetic for a company with such a public exposure, occupying hours of prime television time every week (i.e. Sky Football First etc). Instead we get sneaky little deals like holding back FA Cup away tickets from Loyalty Points holding season ticket holders ('sold out!', screamed the website) then releasing them to anyone with £80 available as a 'hospitality offer'. This is not marketing; it's the lazy man's route to extra income and raises little money but causes damage to existing customer relationships. It belongs in the Open All Hours school of salesmanship.

The Club has a brand and is well known and well thought of outside the area. It should exploit this much more strongly and play harder with potential sponsors. It should pay a new marketing team good salaries and a whacking great percentage of any sponsorship deals it can negotiate over £x millions.

Once cannot fault the two loan-holding shareholders for their selfish wish to retain Board control and protect their interests. Would any of us walk away from a loss-making company with strong cash flows but that owed us millions? I think not. What they can be blamed for is allowing costs to become inflated and then failing to reduce them. That is an executive management failure and they should step down as executives to allow professional management to bring control back into the organisation. Their large shareholding would be their guarantee of being able to stop foolish Leeds-like decision making by the new management team. The other Board members have failed to discharge their non-executive responsibilities but with the largest shareholder as an Executive Chairman that’s hardly a surprise. They are simply outgunned and are just ornaments compared to what their role should be under statute. I hope they are doing the job for free since their advice would then be worth what the Club would be paying for it.

Let us hope for a future where the Club is owned by those who do not then insist on running it on a day-to-day basis, whether that is a trust or anyone else.

 
At 5:47 pm, Anonymous Anonymous said...

What a fantastic article, well researched and understandable to financial underclass. Perhaps OB1 should be taking an active role in running the finances at our beloved blues. 911 Blue

 
At 7:30 pm, Anonymous ICTP said...

I cannot believe that City, run by a Financial guy, are still losing money hand over fist. It is highly commendable that our banqueting and conferencing sales are up, what I find incredibly worrying is that they manage to blame the lack of concert dates also for a downturn in income. If the senior management of MCFC are more concerned with running a concert and conference venue, at the expense of a Football Club, we are stuffed. They really ought to be looking for jobs at GMEX and leave the running of MCFC to professionals.

 
At 9:32 pm, Anonymous Anonymous said...

As other have said great article and i am worried. I have been supportive of this current board as a always felt they had the interests of the club first. However is this so how have they not been able to stem the flow of money. Large long term bosman salaries do not make for long term stability. At least a paid up front young signing is often going to be an investment whereas the older bosmans are just money down the drain. The articles published earlier in the month concerning balance of fee's out and in for players, showed us as the lowest in the Prem league under Pearce. If so and i say it again where is the money going? Outgoing s are climbing ahead of income, i am no accontant but if i start spending more than is coming in i reduce spending, or sell a few UNWANTED Dabo or Hamman esc things on ebay.

 

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