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English Premier League financial review – a look at a few of the issues in the League as a whole

By Phil Gregory

First up, a couple of general notes. As most of the teams in the Premier League are privately owned, they are much slower at publishing their accounts than you might expect.  But these articles are based on actual published accounts and not rumour and comment in newspapers.  So my most recent and complete data set is for the 07-08 season. Not the most up-to-date information, but the trends and concerns that I will point out during this article are not the sort of thing to have changed in a couple of years.

The profitable sides

Looking at the entire Premier League, Arsenal, Birmingham, Blackburn and Manchester United were the only sides to make an operating profit in the 07-08 season, a clear minority. As such, it is not surprising that the net operating loss for the League was nearly £20million for the season.

Such figures look worse when you remember that operation profit is calculated as Earnings Before Interest, Tax, Depreciation and Amortisation. Accounting for those, most club’s financial positions worsen: case in point the hefty £42million of operating profit made by Manchester United disappears completely once interest payments are considered. See the article written recently on Manchester United for more on this.

What does this mean? Well, as I said in a previous article, operating profit is your core business. If a club is not turning an operating profit,  the club is in trouble as their income is simply not covering their costs. Why might this be?

Well, naturally a big part of the reason is wages. By my calculations, wages as a percentage of turnover were on average 65% for the 16 teams in my data set. Naturally, you’ll know there are 20 teams in the Premier League, but as I started compiling my data with, I only looked at teams currently in the Premier League. Once you go back a few years there isn’t the data for a few sides who dropped out of the league.  But these are the sort of sides who have the highest wages as a percentage of turnover, so I’d imagine the actual figure would be nearer 70%.

The wages

I’ll have to lapse into economics-talk briefly here to explain the rationale behind footballers’ wages. In economics, wages are assumed to be priced according to a complicated-sounding thing called the “marginal product of labour”, which is basically a measure of how productive a worker is. Applying this to football, a footballer’s wage is based on what he “produces” i.e. what he adds to the team on the pitch (and likely the commercial side think, for example, of Beckham & Madrid).

Naturally, all teams desire the best players (those who “produce” the most) so there is an intense competition for players, but there is only a limited pool of professional footballers. Classic supply and demand plays a role, and usually the footballer goes to whomsoever pays him the most. This means that generally speaking the sides with the biggest wage budgets also have the best squads, which we can assume translates into the most points. The table below compares wage budgets in the 07-08 to points gained and final position.

As you can see, wages roughly correlate to actual performance, but there is scope to waste substantial sums of money in the style of Newcastle United.

There may be an element of having to pay players more to turn down flashy London for the North East, but you could look at Sunderland and argue that such an effect is negligible. I also note that in the table, no team outperforms the position their wage bill ranks them at by more than five positions. As Dylan Mills put it recently, money talks.

The pressure on lower-table sides is further complicated by the fact that most teams cannot financially afford to be relegated (more on that shortly) and so regardless of their resources they think they need to spend an amount that will get them enough to points to survive. Of course, three sides have to go down, so the end result is all sides spend beyond their means to keep up with their peers, but those who go down do so in a more perilous financial state than would otherwise be the case.

So considering the fact that smaller sides can’t sustainable rival the larger, established Premier League sides, they have to offer more wages than is considered safe in order to compete for talent…

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So what we end up is a lot of sides spending more than they can safely do in order to stay in the league. 60% is taken to be a safe limit beyond which wages should not go (remember the Premier League average was above this!)

Given how some clubs manage to perform poorly or above-expectations given their wage budgets, we can analyse further what they get for their money. A good measure of this is a club’s wage bill divided by the number of points gained. I plotted this measure against a club’s total league points below:

(In case the text is not clear, the clubs in order are Birmingham Fulham, Bolton, Sunderland, Wigan, Newcastle, Spurs, WHU, Man City, Blackburn, Aston Villa, Everton, Liverpool, Arsenal, Chelsea, Man U)

Where the left axis is wage spending per point gained.

As I’d expect, there is a weak upward trend, which lends weight to the idea that players’ wages get exponentially more expensive despite them only adding a small amount of extra quality as they get better and better. The trend would be much clearer if Newcastle (them again!) hadn’t performed so poorly while Chelsea’s wage bill should see them winning the League. It’s also interesting to note some of the teams that are below the trend – such as Everton and Blackburn – two teams you would traditionally link with doing a lot with a little.

TV Revenue dominates

Another issue that should be of concern to the Premier League is how for the lower-table clubs, TV contributes a vast percentage of revenue. Clearly this is a big concern, as TV revenue falls dramatically if a side is relegated, a very real threat for many of these teams.

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This compares to 35% for Arsenal in the same period.

I couldn’t include Bolton in my mini-table above as there were no TV money figures in their accounts, but they will be roughly comparable to Blackburn. Straight away you can see the importance of TV money to some of these clubs, Blackburn, Fulham and Wigan would all face massive falls in turnover in the event of relegation. Birmingham and Newcastle aren’t quite so reliant due to larger matchday revenues arising from having good-sized crowds but Newcastle have  a substantially higher wage bill than most to contend with.

Conclusions

Heavy pressure on lower-table sides to spend more than they can afford due to their reliance on Premier League TV revenues. How do you go about dealing with this situation? The financial gulf between the Premier League and the Championship needs to be reduced and with TV money creating the gulf, it stands to reason that TV revenues should be shared  much more between the leagues. The Premier League does a very, very good job of ensuring a relatively equal distribution of revenues within its own twenty clubs, so it baffles me how they don’t think to do more between leagues.

Cutting the gap between the divisions would allow them to do away parachute payments (which to me simply reward overspending, a “don’t worry about the wage bill fellas, we’ve got those handouts to come yet” approach to financial management). More equal TV revenues would mean the hit upon relegation would be lessened so that parachute payments weren’t necessary, while a financially-stronger Championship would mean less clubs having to spend excessively to get a shot at promotion.

However, any attempt to remedy the Premier League-Championship revenue gap would just create another one between Championship and League One. Any passing of revenues must occur in every single level of the Football League in a proportional manner or more problems will just be recreated elsewhere.

Let me know your thoughts: I intend to redraft this in a few weeks with the key points and send it off to Richard Scudamore so any good insights will be taken on-board, properly credited of course! If you need a job doing properly…

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