Michael Dell set up the Dell Computer Corporation the day after Everton featured in a 4th round FA Cup replay at Prestfield Stadium, drawing 0-0 on a bitterly cold night in the winter of 1984. I mention him because he gave one of the best descriptions of the importance of cash flow I’ve ever come across.
When discussing how his board ran his company he said the following “We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.”
That’s precisely how UEFA, the Premier League and the English Football League regulate football. Financial Fair Play and profit & sustainability rules regulate club’s finances by measuring the P&L statement (the speedometer).
The assumption was if you regulate the P&L then there’s always enough gas in the tank (cash in the bank) – the name of the rule profit & sustainability more than indicates this. Why did they make this assumption? Because they assumed that the sources of income would never dry up. This, despite the crisis that beset the Football League and its members with the collapse of ITV Digital in 2002. The collapse of the deal created an almighty cash flow crisis – clubs were committed to spending more cash than they were about to receive.
A quick lesson in cash flow statements
Cash flow is calculated by looking at 3 principal areas, operating cash flow, from investing activities and finally from financing activities
So in football, cash from operations takes net income (Match day, Commercial and broadcasting) minus operating expenses (wages, other operating costs), tax and net interest paid. If we wanted to create a cash flow statement we would add back in the amortisation and depreciation charges as they reflect cash already spent (at the time of the purchase of the asset).
Cash from investing activities in football arises from the trading of players and occasionally the selling or buying of fixed assets such as land and stadia. As I have spoken about before, player trading has been a critical part of club’s financial activities for many years. The purchase and sale of players (and the underlying payment/receivable terms) are hugely important to club’s cash flow management.
Finally there is the impact of financing activities. Raising capital through a share issue or arranging finance through bonds or debt obviously benefits the cash flow statement. (As can the aforementioned payment terms on player transfers which in theory is another form of debt). There is a couple of issues in football however. The regulations link expenditure to income. One of the impacts of that is that in a sustained loss making situation as a result of falling revenues it can be difficult to fund these losses from capital contributions or increased debt. Something which will cause several clubs (including Everton) problems unless regulations are relaxed.
Raising debt can be difficult because of the football creditors rule (more later).
The information, series of charts and ultimate conclusion are going to look at the change in cash flow, not cash flow itself. They will show the degree by which financial circumstances may change due to Covid-19
Impact of Covid on cash flow arising from operating activities.
Match day revenues have been impacted this season and will be considerably impacted next season. I will continue with the assumption that no matches are played in season 20/21 in front of paying spectators: Earlier in the series I estimated revenue losses as:
Lost match day revenues
|£ millions||Lost matchday t/o (2019/20)||Whole season 20/21||Total|
|West Ham United||6.2||27.1||33.3|
|Brighton & Hove Albion||4.2||18.5||22.7|
|3 promoted teams||6.5||25.9||32.4|
For ease I will look at the 17 clubs in the Premier League 2018/19 and 2019/20, on the assumption they each remain in the Premier League.
The penalties applied to Premier League clubs are highly dependent upon the outcome of Project re-start.
There appears (as reported by the Athletic) to be two possible outcomes although the terms are yet to be finalised. The outcomes depend upon this Premier League season successfully re-starting on June 12th and finishing by July 26th. Failure brings in a second much more punitive penalty:
|Broadcasting revenue losses||Season completes 12 June -26 July||When payable?||Payable per club before end July 2020||Payable per club season 2021/22|
|Payment to domestic broadcasters||223,000||Season 2021/22||11,150|
|Payment to international broadcasters||107,000||End of July 2020||5,035*|
*The above chart assumes equal payments by each club and the agreement of BT to defer domestic rebates in the same manner as Sky.
Failure to re-start on June 12th or finish by July 26th
|Season does not complete||Payable per club||When payable?|
|762,200||38,110*||end of July 2020|
*assumes equal payments per club,
In addition to the above, it is not perhaps unreasonable to see a reduction in broadcasting revenues next season given the changed nature of the product on offer, and as said previously, the chances of all broadcasters remaining in business.
Lost commercial and sponsorship revenues
With over 300 individual deals across Premier league clubs it is impossible to put a firm figure on potential reductions in the immediate term. However, all clubs will be suffering from a loss of merchandising, match day entertaining, food and beverage and pitchside sponsorship. Over the summer many of the larger clubs will miss out on lucrative post and pre-season tours to Asia and the US.
I will assume 20% reductions in all commercial revenues for the last three months of the season which equates to 5% of annual revenues. For season 2020/21, on the basis of no paying spectators I will assume 20% of annual revenues. Using 2018/19 as a base this would produce the following reductions in revenues:
|Reduction in commercial/sponsorship revenues|
|Manchester United||– 13,750||– 55,000|
|Tottenham Hotspur||– 6,750||– 27,000|
|Arsenal||– 5,550||– 22,200|
|Liverpool||– 9,400||– 37,600|
|Manchester City||– 11,350||– 45,400|
|Chelsea||– 9,000||– 36,000|
|West Ham United||– 1,800||– 7,200|
|Newcastle United||– 1,420||– 5,680|
|Brighton Hove Albion||– 550||– 2,200|
|Southampton||– 1,000||– 4,000|
|Everton||– 2,050||– 8,200|
|Leicester City||– 1,800||– 7,200|
|Crystal Palace||– 800||– 3,200|
|Wolverhampton Wanderers||– 1,400||– 5,600|
|Watford||– 700||– 2,800|
|Burnley||– 800||– 3,200|
|Bournemouth||– 500||– 2,000|
|Total||– 67,750||– 271,000|
Impact of Covid on cash arising from investing activities
I have often talked about player trading profits being an important part of football finances. However, trading profits are not to be confused with the movement of cash arising from player purchases and sales as shown in most clubs’ cash flow statements.
It is widely expected that trading volumes will fall and that as a result of that and a reduction in player values (arising out of expected revenue reductions) the overall cash movements will reduce significantly.
It is therefore possible to estimate the impact reduced activity and reduced player prices would have on club’s cash flows.
I’ve assumed (i) a 25% reduction in trading volume, and (ii) a 25% reduction in transfer values. Below is a chart using data from clubs’ cash flow statements to estimate the impact of that on clubs’ cash flows:
|2018/19 net purchases||2020/21 net purchases||Net improve-ment in cash flow|
|West Ham United||49||27.6||21.4|
|Brighton Hove Albion||72||40.5||31.5|
Whilst a reduction in trading volume and prices would impact the profit and loss accounts of each club, in cash flow terms it can be seen as a large positive. The positive impact would be a reduction in cash used to fund transfers. Whilst advantageous in the short term, longer term reduced volume and value would damage the profitability of clubs and produce even greater pressure on future cost reductions. It would be a significant deflationary factor.
I am going to talk about the cash from financing activities after we’ve worked out the range of cash flow shortfalls for each club.
Let’s look at the aggregate picture for this financial year (2019/20) in terms of reduction in cash flow (i) in the event the season completes before July 26th and (ii) it fails to complete:
(i) Season completes by July 26th 2020 – equal penalty applied to all clubs, reduction in cash flow from operating activities
|Reduction in cash flow £000’s||Matchday||Broadcast||Commer-cial||Total|
|West Ham United||6,200||5,035||1,800||13,035|
|Brighton Hove Albion||4,200||5,035||550||9,785|
(ii) Season fails to complete by July 26th 2020 – equal penalty applied to all clubs, reduction in cash flow from operating activities
|Reduction in cash flow £000’s||Matchday||Broadcast||Commercial||Total|
|West Ham United||6,200||38,110||1,800||46,110|
|Brighton Hove Albion||4,200||38,110||550||42,860|
Now we need to look at the impact of Covid-19 on season 2020/21.The assumptions here are no paying spectators, 20% reduction in commercial income and a 10% reduction in broadcasting revenues (either because there’s a renegotiation due to empty stadia or some smaller broadcasters fail to pay). There’s a positive cash flow contribution from the assumed reduction in player trading.
|Match-day||Commer-cial||Broad-cast||Reduced Player trading cashflow||Total|
|West Ham United||27,000||7,200||12,700||21,400.0||25,500|
|Brighton Hove Albion||19,000||2,200||11,300||31,500.0||1,000|
To get a complete picture of the cash flow implications from March 2020 through to June 30th 2021, we must add this season’s potential impact with that projected for next season. Given we do not know for sure whether this season completes or not I will provide for both scenarios (i) completion (ii) non-completion:
PLEASE REMEMBER: these are not predictions of actual cash flow. They are showing the change in cash flow since the time the Premier League was halted. They show the degree by which cash flow could deteriorate with reasonable assumptions about the impact Covid-19 will have on football.
|Cash flow impact March 2020 – June 2021 £’000s||* Completed 2019/20 season||*Incomplete 2019/20 season|
|West Ham United||38,535||71,610|
|Brighton Hove Albion||10,785||43,860|
OK, so how to fund this?
I ask this because the magnitude of deterioration in cash flow is so huge, not even usually cash rich Arsenal, there is not a single club who can ride such a reduction in cash (assuming no further changes to expenditure such as wage reductions or deferrals) without (i) raising equity or (ii) raising debt.
Let me give you two examples – Manchester United informed the NYSE it has a £140 million debt facility to draw upon, and secondly Tottenham Hotspur.
There’s a temptation from some to think the models shown are unrealistic. It will never be as bad as I am portraying.
Tottenham Hotspur, the best run club in financial terms and with the most financially astute board of directors, has arranged a £175 million credit facility with the Bank of England under the Government’s Covid Corporate Financing Facility. Under the terms of the deal Tottenham can draw down up to £175 million at 0.5% interest. The credit line is unsecured.
The reason Tottenham Hotspur have arranged this line of credit is that their own assessment is that their cash flow will be impacted by Covid-19 by upto £200 million (my model calculated before their deal entered the public domain, suggests a range of £177 – 210 million)
Not all clubs will have access to the debt markets in the way Manchester United and Tottenham Hotspur can. Both clubs are highly creditworthy, have profitable businesses in normal times and are professionally run by people credible in the finance markets.
In the final piece, I will offer some thoughts as to the impact of the change in cash flows and how each club and their owners might finance their cash short falls.
To go back to Michael Dell, a number of clubs were running fine with gas in the tank and plenty of refueling opportunities, others were/are not. A hole in the tank is the last thing that they require and for some the needle is already on red with the warning light flickering.
Thanks for reading!