The Chairman's Notepad

Season	Acceptable Loss Deviation Permitted (£m)	Shareholder Equity Permitted (£m)	Total Permitted Allowances (£m)
2011/12	4	8	12
2012/13	4	6	10
2013/14	3	5	8
2014/15	3	3	6
2015/16 +	2	3	5

Deviation from FFP	Fair Play Tax
£1 - £100,000	1%
£100,001 - £500,000	20%
£500,001 - £1,000,000	40%
£1,000,001 - £5,000,000	60%
£5,000,001 - £10,000,000	80%
£10,000,001 +	100%

Apologies for the slight delay getting this post online - I've recently changed jobs so had a little less time to get this complete. If you haven't read Part 1 then I advise you do so before going any further.

But as promised, here is Part 2 of my review of the Championship Finances focussing on club expenditure.


West Ham were the league's highest spenders splashing out just shy of £55m in total. Barnsley, who just avoided relegation, were the only club to spend less than £10m in total, an impressive feat if you consider they were playing against teams who were willing to spend far more on their playing squad.

Total league expenditure rose above half a billion for the first time, but only £4m was paid by clubs in direct taxation. In fact, Middlesbrough received a tidy £3m tax rebate for readjusting their previous financial disclosures.

As you all know, a high proportion of a club's costs are incurred through player salaries and as teams chase that golden promotion to the EPL (and the financial windfall that comes with it) they have been happy to break the bank to bring in better players.


9 clubs in the Championship were happy to pay more in player salaries than the amount the club actually generates, a worrying figure to say the least. Bristol City, who have a limited ability to generate revenue because of the size of their Ashton Gate ground (avg home attendance 13,836), spent £18.7m in player salaries but only generated a total turnover of £11.9m.

Unsurprisingly, the league's biggest spenders were West Ham at £41.6m, with second place going to Southampton who paid out £28.7m.

Reading spent 135% of their revenue (£19.9m) on players (£26.8m) but this gamble obviously paid off as they stormed to the Championship title and got their golden EPL pay day.

The league average was 93% which is far too high to be sustainable.


I included this graph in a separate post the other day as I think it throws up an interesting concept: effective player cost per league point achieved.

In essence what it tells you is this: how much (£,000s) the club paid in player salaries to achieve one Championship point. For example, eventual winners Reading accumulated 89 points by spending £26.8m in player salaries, an effective cost of £301,000 per point.

Peterborough Utd, who were promoted the season before and eventually finished 18th, had the lowest effective cost at £114,000. They paid out just £5.7m in player salaries and finished one spot ahead of Nottm Forest who had spent £17.4m in salaries.

Again, West Ham led the way on this measure, partly because they retained their core Premier League squad in the hope of returning to the EPL at the first attempt (they did through the play-offs). With a total wage bill of £41.6m, they effectively paid £484,000 per point.

Although they failed to return to the EPL, I think Blackpool were the stand out performers when you consider this measure. With an effective cost of £165,000, they were the only team to make the play-offs with a sub-£200k figure.

Total net debt across the league rose to £830m, with Brighton leading the way with net debts totalling £110m partly due to their recent investment in building the new Amex Stadium. The majority of this debt is owed to Brighton owner, Tony Bloom, who has bankrolled the club's recent rise through the league.

Although the graph does show that the majority of clubs in the league owe a substantial amount of money, these figures are likely to fall drastically in the upcoming years with the introduction of Financial Fair Play regulations. I am going to look at FFP in Part 3 when I look at the Profit and Loss Accounts for each club, but the majority of the debts owed across the league are directorship loans which will (probably) be converted into equity in order to bring clubs in line with the new regulations.


The above table shows the net debt to revenue ratio for each club in the league. For those who don't know, a number above 1 says that the club has net debts greater than their annual turnover. For example, Ipswich Town are holding net debts totalling £72.5m but the club only generated £15m in turnover that year, hence their net debt to revenue ratio of 4.8.

Only 8 clubs in the league have a ratio less than 1 (so they owe less than the amount they generate each year) with Leeds leading the way with a ratio value of 0.05 because they only hold a negligible amount of debt.

That pretty much concludes Part 2 of my review of expenditure. I've had a few people ask why I've split my review into three separate articles, so I think it's important to say why here.

In my writing I always try to explain figures and ratios using the simplest explanation or the most suitable graph. In doing so, I feel like I am able to target a greater number of football fans and therefore those who don't have a financial background are still able to understand their club's position. As a result I decided to split the core business of a football club into three simple functions - 1) Revenue 2) Expenditure 3) Operating Profits.

Hope you stick around for Part 3 as this is where the nitty and gritty analysis will be done when I look at Operating Profits (well, pretty much Operating Losses) across the league.

Quick post again but this is well worth it.

In preparation for 'Part 2 - Club Expenditure" of my Championship Review I have decided to show you one of the graphs that I have created that I find a little interesting.

As an economist, I tend to focus on the small details and we use a lot of measures such as 'marginal cost' to analyse a company or something. This frame of mind got me thinking about the following -

"How much does a club effectively pay to accumulate one league point?"

I'm also quite a fan of the NFL and one of the things that I have took away from American Football is their constant focus on player performance and all of the measures they have created in order to analyse how successful a player, or a team, is during a season.

So what I've done is created a measure, "effective player cost per league point" which indicates the club's player wage bill as a ratio to the points they managed to accumulate that season. For example, my measure shows it cost Derby County £203,000 a year in player wages to get one point in the Championship 11/12.

So here's the graph, and I'll add the league table with the raw data just below.

In April 2012, Championship clubs voted to introduce Financial Fair Play regulations that will regulate all clubs from the 2014/15 season. The purpose of the new regulations is to curb total spending and prevent owners from funding football clubs through directorship loans.

Brighton & Hove Albion, now competing in the Championship and who finished 4th last season narrowly missing out on promotion on the Premier League, are one of the few Championship clubs who will struggle to fall in line with the new FFP regulations.

The FFP regulations stipulate a number of restrictions on clubs but mainly target the bottom-line figure. Starting this season, clubs losing more than £8 million will be subject to sanctions. This figure will reduce to £5 million next year, effectively giving clubs an 'adjustment' period in which they must consolidate their spending.


Upon inspection of their accounts, over the last 4 years, Brighton have accrued staggering losses of £24,934,031 - a huge figure no matter the size of the club. Despite their Chief Executive Paul Barber's ambition to "build and build", the management will need to clamp down, and quick.

In recent years, Brighton have heavily relied upon their owner, Tony Bloom, to fund their activities. According to their latest accounts the club owe him £120m, with £40m already converted in to share capital raising his ownership to 91%. It is crystal clear that Bloom continues to support the club's losses, exactly what the FFP regulations are trying to stop.

The majority of Bloom's investment has been used to fund the development of the club's new stadium, the Amex. Ticket revenues have soared from £2.3m to £7.9m after the club sold 22,000 season tickets and retail & media has jumped to £2.6m (mainly thanks to selling the naming rights to American Express). In 2011-12, Brighton had the 5th highest match day revenue at £7.3m - only West Ham, Soton, Leeds and Birmingham beat them.

In the 2012 statements, it is noted by the auditors that the club rely on his "ability to generate further funding" and highlight the club's liabilities are currently exceeding its assets by £13.3m.

Despite their worrying losses, the general consensus around the club is positive. It appears that fans are happy to ignore the financial state of the club and only focus on team's league performance. Admittedly I am a little shocked by the Official Supporters Club's opinion on the whole issue. Stefan Swift, editor of the fanzine 'The Seagul Review", was quoted as saying "the stadium is so good and the fans have never had it this good"

Going forward, the success of the team will be relient upon the board's control of costs. Assuming they want to attract players which will allow them to challenge for the EPL (meaning their wage bill will remain at the current level ~ £13.2m) then they will need to employ some major cost cutting measures.

It is only fair to highlight that, being the year they finally moved into their Amex Stadium, the club have incured exceptional costs of £9.4m (£7.5m in 2011 to £16.9m) credited to the cost of furnishing their new digs. If I were to set this to one side then the club would have been in the black, just.

The benefactor model (where a club is substantially financed through a director) is being stamped out by league. Brighton are going to be hit hard and will need to seek & generate new sources of revenues, and cut costs substantially.

It seems like a lifetime ago that West Brom were considered a new team in the Premier League. Last season, their third consecutive in the EPL, saw them register their highest ever points total (49) and finish 8th in the league. Under Roberto Di Matteo, Roy Hodgson and current Manager Steve Clarke, they appear to have progressed from being the 'yo-yo' club of English football and developed a sustainable model that is allowing the team to compete (or survive) at the highest level in English football.

Don't get me wrong, the Baggies are a team with a rich history. A founder member of the Football League in 1888, they have won the FA Cup on five occasions and many of you will remember the glittering 70s team led by Ron Atkinson. Since 2002, they have spent 7 seasons in the EPL but have been relegated 3 times. Their current run in the Premier League is their best for many years and is largely down to the prudent actions of their board.

For the 2012 financial year the club recorded a pre-tax profit of £1.5m. Although a modest figure, a team of the Baggies' size and resources registering a profit whilst surviving in the EPL is very impressive. In fact, according to the Deloitte 2012 Annual Review of Football Finance, only half of the twenty EPL clubs were in the black.

Mark Jenkins, the club's Chief Executive and former Finance Director, has plenty to be pleased about. “We know where to make our resources go the furthest," said Jenkins. "We're a club with rather limited resources, and we have to think cleverer than some of our competitors who have got more unlimited resources.”

In fact, in the last 3 years the club have banked £11.3m profit whilst reducing their net debt from £2m to just shy of £500,000.

For any club in English football, striking a balance between player investment and financial stability is extremely tough. Over the years, West Brom have had to carefully manage their expenditures due to their fluctuating revenues and have made a particular point of highlighting this in their Financial Statements.

“The board is aware of the risks which affect the company. It has analysed its previous seasons in the Barclays Premier League and has tried to implement lessons learned from this and as a consequence it believes that the squad will be stronger and more experienced. This is part of the long term policy of the club which is to improve the playing squad and infrastructure year on year”

The board and chairman have not been averse to making tough, often unpopular,decisions. In February 2011, after a run of defeats and poor performances, Roberto Di Matteo was dismissed as Manager “to give the club the best chance of remaining in the Premier League”. The decision paid off immediately and under the guidance of future England Manager Roy Hodgson, the team finished 11th that year.

Going forward the club and management will need to carefully track their expenditures. Last year, for the first time, the club's total wage budget exceed £50m - representing 74% of their total revenues. The club will clearly benefit from the record TV rights that the EPL are generating - this year they will generate atleast £73m from TV rights.

Yesterday evening, Radamel Falcao, the 27 year old Colombian superstar who was predicted to make a move to one of the European giants this summer, scored on his competitive debut for AS Monaco in a 2-0 win over Bordeaux. The French Ligue 1 team, whose average attendance last year was just over 6,000 and are now owned by Russian billionaire Dmitry Rybolovlev, were making their return to the top flight after a summer of big-name, extremely-expensive signings.

Back in 2009, Falcao left River Plate for Portuguese side Porto, and in doing so, became 55% owned by a private fund called Doyen Sports. The company, founded by super agent Jorge Mendez who also represents Cristiano Ronaldo and Jose Mourinho, "provide support and funding, in a very visible way" to clubs across Europe. In essence, they assist clubs to make signings by introducing private finance in return for a proportion of the players registration.

After two blistering seasons at Porto which included scoring 41 goals in just 51 matches, Radamel moved to Atletico Madrid. The Spanish club have had their own financial problems and disclosed they had liabilities of just over €500m at the end of 2011, were aided by Doyen's third party ownership of Falcao. In order to sign the striker they were able to agree a fixed fee with Porto for the 45% of his registration and a private arrangement with Doyen to allow them to register him with the league.

In this deal Doyen did not relinquish their control of Falcao - they held onto their 55% ownership with Madrid effectively paying "yearly royalties" to Doyen (who also take a healthy cut of Falcao's salary).

Falcao's ability has never been questioned. Over the last 5 years he has boasted one of the most impressive goalscoring ratios across all competitions (0.79 goals per appearance in fact) but his latest move has raised questions about the level of influence that these third-party companies can have on a player's choice of club.

Doyen's vested interest in Falcao comes in two forms; firstly they take a fixed percentage of his (after tax) wages and secondly, they still hold 55% of his registration.

In moving to AS Monaco Falcao is expected to earn £12 million pa tax free thanks to Monaco's principality status - a bigger slice for Doyen to pocket. In comparison, if Falcao signed for an English club he would be required to pay income tax of around £4 million pa.

Ultimately, Falcao's ability to negotiate with clubs has been severely diminished. Doyen are a private equity company whose purpose is to maximise return for it's shareholders. They have and will have the last say on any transfer relating to Falcao. Never has one player had so little control over his own future.

Earlier this year, UEFA General Secretary Gianni Infantino slammed the practice of third-party ownership in football claiming it damages the "sporting philosophy of financial fair play". In addition, the often outspoken and controversial Michel Platini, whose main concern is that TPO agreements result in capital flowing out of football, has started to lobby FIFA and promised to issue a European ban even if FIFA fail to make a ruling.

TPO is a contractual agreement between a player and an agent in which, for agreed sum of money, the player sells his league registration rights and/or a percentage of his future economic rights (wages, sponshorship, endorsements). TPO agreements are especially popular in South American football (where the majority of clubs are cash poor) and typically the agent will attempt to sell the player to a European club to make themselves a tidy profit.

After the Tevez & Mascherano saga back in 2006 the FA became the first regulatory body to outlaw the practice and strictly stated that no player registered in England is allowed to hold a third party interest. If an English club wants to buy a player who is (partly or fully) owned by a third party they must first buy out the third-party and obtain 100% of the player's registration.

Kia Joorabchian: agent responsible for transfering Tevez and Mascherano to West Ham in 2006

TPO agreements rose to prominence approximately a decade ago when a number clubs in Brazil were struggling financially and were in desperate need of capital. Clubs turned to private finance and put up a player's registration as collateral (security). A player's registration is highly liquid - if the club default on the loan then the agent can sell the registration to a different club and recover their investment.

Over a couple of years the parties and terms involved in a TPO agreement evolved. Companies began to seek young aspiring footballers and agree a deal directly with them. The majority of young players were keen to agree such deals because of the attraction of short-term riches.

Critics of the TPO practice claim that the player is treated as a commodity and could be manipulated or pressured into moving clubs just to allow the agent to make a profit on the sale.

I must say that, to date, I am not aware of any cases of forced transfers but there have been a couple of questionnable transfers, including Radamel Falcao's recent transfer to AS Monaco despite the player drawing strong interest from many elite clubs.

Conversely, there are many experts who, provided that both parties act fairly and responsibly, look favourably upon TPO agreements. They claim that having an agent who has a vested interest in the player's career will mean that they will always act in the best interest of the player. For example, it is claimed they are likely to negotiate harder for better wages, develop and use industry contacts to after lucrative sponsorship deals.

Jean-Louis Dupont, the sports lawyer who was responsible for 1995 Bowman ruling, publically criticised the FA's "over-reaction" and questioned the legality of completely banning TPO agreements. "The main principle under EU law is the freedom of enterprise, where the restriction is the exception."

As seen in the case of Tevez and Mascherano, TPO agreements can result in smaller teams attracting better players. Instead of having to pay 100% of the market value for the player, a club could purchase a 'smaller slice' and allow the agent to retain his stake. In theory, this can only lead to a greater level of competition in the game - a win/win for all fans of the game.

The effects of TPO agreements is a highly polarised topic, but no matter who you agree with, it appears unlikely they will be allowed for much longer. One thing is clear though, if the practice is stamped out, the biggest losers will be South American clubs and players who rely so heavily on exporting their talent into the European leagues

I think Neymar's agent summed true situation up nicely. "They [FIFA] are taking no account of local specificity and how football is financed in each market".

"The issue [TPO] needs to be addressed properly and FIFA need a full understanding of what it actually means".

The cap also includes a club's spending on non-playing staff (eg. Cleaners etc). Therefore, as Wolves inevitably cut back on luxuries, it is likely that many backroom staff will leave - another cost of the team's dismal performance on the pitch.

The importance of the upcoming season cannot be downplayed. Wolves fans will be expecting promotion and the owners cannot afford to stay in League 1 for more than one season. Some of more the more senior players will need to stand tall and help some of the youngsters settle into the pace of League 1.

The 2013/2014 season is rapidly approaching. Teams are rushing around trying to bring in their target players before the transfer window slams shut on September 1st.

Like many football fans, I too believe that the current level of transfer fees are absurdly inflated. However, knowing how teams account for transfer fees in their books, I do understand how Real Madrid, who seem to always make yearly losses in their accounts, are willing to pay up to €100m for Gareth Bale.

If we consider the fundamental structure of a business it becomes obvious that players are assets and we must account for these assets in our financial disclosures.

When we account for fixed assets, we must amortise (depreciate) the asset over a number of years. In football, this is determined by the length of the player's contract. At the end of a player's contract (assuming that he isn't sold prior and a new contract isn't agreed) they are allowed to leave for free - so the asset will be considered worthless.

Now, lets imagine RM pay €100m to Tottenham and Bale signs a 5-year contract, we will amortise this asset by €20m each year (€100m divided by 5 years). So at the end of the first year we will book the asset value at €80m (€100m minus €20m). At the end of the second year, we will change this book value to €60m. And so on. I think you get it now.

If a player is sold whilst under contract, the selling club will have to quantify their profit / loss surrounding the transaction. If we now hypothesise that Bale is sold to Man Utd in 2 years for the price of €45m, Real Madrid will experience a book loss of €15m, not €55m. The €15m figure is simply obtained by €45m (sales revenue from Man Utd) minus €60m (his book value at the end of year 2).

This accounting structure incentivises clubs to secure new signings to longer contract agreements. By doing so, the player's annual amortisation value will fall as it is spread over a longer duration.

Furthermore, teams will be keen to negotiate a contract extension with their players. Not only will this secure players to the club for a longer duration, they can also adjust the annual amortisation figure by adjusting the asset according to the new terms.

For example, if in the 3rd year RM negotiate and agree to a 3 year contract extension (so 6 years total) they will reduce the annual amortisation to €13.3m (year 3 book value of €40m divided by new 3 year contract).