So where did all the money come from?

The surprising answer to this question is that we (Everton) are likely to have financed the summer by using our existing resources.  Financially, at least, whilst there are large challenges ahead, it looks like we are in extremely capable hands, working our resources and credit facilities to maximum advantage.

The coming year (18/19) is a different story, and as I’ve stated on several occasions a capital injection, be it a rights issue or further quasi-capital (debt with no repayment date) from Farhad Moshiri is required.

 I’ll touch on it later in the article but financial year 2018/19 will show significant losses in the absence of increases in commercial/sponsorship monies, or a further trimming of the squad including player sales.

The caveat to all below is that without seeing the books it is impossible to be totally accurate, but using fairly solid assumptions (assuming that transfers in and out are paid over equal terms and no major change to other creditor/debtor relationships), it’s possible to see how the transfer activity and continued high wage bills have been paid (to date, at least) and their future impact.

Let’s start with what debt facilities Everton have:

ICBC – Industrial and Commercial Bank of China. Everton entered a rolling three year, £60 million credit facility in July 2017.

Santander –  Everton have used Santander to advance (receive early) future transfer payments. Initially we had an advance on a payment due for John Stones from Manchester City for £13.75 million and a further advance of £18.75 million for an instalment on the Lukaku monies owed by Manchester United.

Although the charges relating to those advances still show as outstanding on the Companies House website, they were settled by payments from City and United on 8^th August and 14^th July 2018 respectively.

Everton have entered a further arrangement with Santander taking an advance on 1^st June 2018 for the two outstanding instalments due from Manchester United, each of £18.75 million (payable by United in July 2019, and July 2020).

Therefore, we have received £37.5 million from Santander to be repaid by the funds due from Manchester United in 2019 and 2020.

How much have we spent?

Whilst not a fan of net spend, when looking at cash flows in and out of a business it’s obviously useful. In season 2017/18 we committed to transfers in valuing £182 million, selling £113 million, creating a transfer deficit of £69 million.

This window to date, we have committed to £82.7 million of transfer payments receiving £21.4 million, an additional transfer deficit of £61.3 million.

The final element of calculating how much cash we have used comes from looking at the Profit & Loss accounts and looking at the operating performance of the club. From that we can get an idea of whether the business is generating cash or spending it.

The bad news is that we are currently spending well in excess of what we are earning. If you recall at the beginning of the transfer window there was much talk about having to reduce the squad size and reduce the wage bill. Whilst we’ve reduced numbers, the most recent activity will have increased the wage bill for 18/19. That may change with further outgoings in the remaining weeks of this month. Also turnover falls in 18/19 due to the absence of European football.

I’ve summarised income and expenditure for 2016/17, 2017/18 (based on Robert Elstone data) and 2018/19 (projected).

*estimated

The above calculation shows whether the business is generating cash or spending more it generates. From the above you can see that the club was profitable in season 16/17, but based on Elstone’s projections for 17/18 and my own for 18/19 we spend more than we generate.

Just a note, some of the other operating costs are costs associated with the new stadium which will be capitalised once planning permission is granted allowing future adjustments, however in cash terms, this is money being spent now.

So how much cash do we have or not have?

As of 31^st May 2017 (the last accounts) we had £9.6 million in cash. We also know from the accounts that between the beginning of the financial year and the publication of the accounts in December 2017 Moshiri contributed an additional £45 million. We have also received the advance of £37.5 million from Santander (which drops into the 2018/19 financial year).

If we assume transfer payments in and out are paid and received over three years, we can estimate that by taking into account the previous three years transfer activities, we would have made net payments of £31 million in 17/18, and will make net payments of £63 million in 18/19 (current financial year) based on the above assumption.

The contribution from the business to cash flow (operating profit/(loss)) using Elstone’s and my own forecasts, is negative for 17/18 and 18/19 as above, to the tune of -£14 million and -£34 million respectively.

Taking all that into account, the club should have had a cash balance at the end of May 2018 similar to the previous year of around £9 million. This will become apparent in the next published accounts.

Projecting forwards in to this financial year, taking into account the increase in transfer payments to be made and the operating loss, we will not only use all our credit facilities (Santander & ICBC) but require a significant capital injection, particularly when we have not considered additional stadium costs prior to funding in these calculations. By my estimates, in cash terms we will see a cash outflow approaching £97 million in 2018/19. By design or co-incidence, that is the extent of our existing credit facilities.

Should we be concerned?

I think the short answer is no. We are in good financial hands under Moshiri and Ryazantsev who are operating at levels very different from seen previously at the club. However, it is clear we cannot operate as we are currently without that much talked about further injection of capital in this financial year.

Not only is it required for the stadium, but in the absence of much higher commercial revenues is needed to fund continued losses and meet on-going commitments in the transfer market.

In summary, we have got through this window despite the earlier calls for reducing the squad further, using our own resources. We have not had to call upon Moshiri to fund further than his existing £150 million to date.

However the situation beyond this financial year is an entirely different matter and will require significant investment, a reduction in unnecessary costs and increases in commercial income as well as the use of our existing credit facilities and a much-needed further capital injection.