The Championship - The Basket case of Football

By Andrew Godden

Some things just don’t add up – such as the finances of football clubs across the leagues. In a crazy world of fiscal folly the Championship is the biggest basket case of them all. On behalf of ATFV Andrew Godden – now ex Supporters Trust Chairman – lays out the frightening financial facts that all fans need to be aware of…….

Whatever your circumstances, some things are universal. If you have a certain amount of money coming in, then you can only spend that much. If you’re boringly sensible, you try to give yourself a bit of wriggle room for a rainy day. If you want to spend more than you earn, then you either borrow it or hope someone will pick up the tab. Fairy Godmother’s are a bit rare these days though.

That’s how things work in most situations. Businesses often make losses, especially during times of crisis, but that isn’t sustainable in the long term. We’ve seen that first-hand with how Swansea City Centre, a once-thriving urban hub, has been reduced to little more than a collection of discount shops. Even Poundland is leaving …

As ever, we can rely on the football industry, and particularly the Championship, to be the exception that proves the rule.

The Big Expense

If you look at any football club accounts, the big expense is always player wages. UEFA’s recommended upper limit is that wages do not exceed 70% of your income. This makes a lot of sense as player wages are just one thing clubs need to spend money on. Back-office staff, stadia, training facilities, academy setups etc all cost money. I’ve not even mentioned player trading.

This is widely ignored in the Championship. In 2019/20 for example, Reading exceeded 200%, Brentford were at 186%, Preston and Middlesbrough all exceed 150%. 19 clubs exceed 100%.

What does this mean in real terms? Well, say your income is £20m (which is about average for the Championship) and your wages are about 125% of income (again, about average). That means you have a £5m shortfall, before considering any other costs. That’s quite a hole. And remember, that hole needs filling year on year.

These figures are pre-Covid, and it’ll be a few months before we see the 2020/1 accounts. Given income will go down, but costs didn’t (players did not generally take pay cuts), the situation can only have become worse. I’ve written before that Covid could be the straw that breaks the camel’s back, with clubs folding. Fortunately, at professional level at least, that hasn’t really happened yet.

Why? A combination of factors. Fans have continued to financially support, as we’ve seen with the vast majority of Swans season ticket holders not taking a refund. Insurance helped. Some clubs have enjoyed Government assistance, such as the furlough scheme.

It's Not investment, mun

However, most clubs, if not all, have kicked the can down the road by borrowing. These have either come from official schemes (such as Government or the Premier League backed EFL loans), or from other sources.

In our case, we have seen money coming into the club from the majority owners, along with a new man on the scene in Jake Silverstein. This was announced to great fanfare at the start of the year, talking about new investment into our club.

Ah, Investment. A word guaranteed to trigger many Swans fans, and one we heard a lot about in 2016, when our club was sold. Of course, as the Trust stated at the time, that sale didn’t lead to a single penny coming into the club. The only people who saw money coming into their bank accounts were the selling shareholders.

If 2016 wasn’t an investment in the club, was the money coming into the club in early 2021? Well, this time money did reach the club’s coffers. It’s on the public record that this money is in the form of a convertible loan. Assuming normal rules apply this means that, if the holders choose to, it can be converted into shares at some point in the future, at an agreed rate. It also means that, if they don’t want to convert it, it will need to be repaid by the club at some point in the future.

Somehow.

I recently kicked off a lively discussion on Twitter when I commented on a BBC Wales article quoting Swans Chief Exec Julian Winter’s comments that the Americans have invested in the club, and will need to continue to do so in the future. In fairness to Rob Phillips, who took a bit of unfair flak from the Swans fanbase on his questioning, he engaged and pointed out that viewing these loans as investment was a common view in the football industry and is what frequently happens. He’s not wrong about that.

window dressing & wishes

Broadly speaking, there are two ways club owners can put money in. One way is via a capital call, with new shares being issued. This means the club gets the money, without the obligation to pay it back in the future. The other is by lending the club the money. The key difference is that, with loans, the owners can secure those loans against the club’s assets, so gets first dibs if the club is unable to repay the loans or gets into trouble.

In my eyes, one of these is investment, and the other isn’t. If the club has a duty to pay something back in the future, which it does with loans then, no matter how you dress it up, it’s no different to the bank lending the club money.

That window dressing is something that grates with me. If the club says something, fans want to believe it, and many will. The same goes for journalists, and we’ve seen a number of examples where the press have simply reported what the club has said. I don’t think that’s deliberate; we should remember football journalists aren’t financial journalists. It is good that, when the Trust has disputed these statements, these have also been reported. Saying that, when this is all on the public record, it shouldn’t take the Trust saying something for the truth to come into the public domain.

If you look at Companies House, and this is all publicly accessible, you can see charges in place against the club’s assets because of this “investment”. You can bet your bottom dollar that the holders will only convert those loans if it suits them to do so. If the club can’t repay these loans when they fall due, then they’ll be forced to take on new loans to repay them, if they can find a lender to do so. And so it could spiral. Remember that loans usually have interest rates associated with them, so only go up.

Is that a sustainable model?

Obviously not.

Red Flags

It can only become one if another source of income comes along. Player trading would be the obvious one, that we develop and sell players to cover the shortfall, season after season. In many ways this makes sense, and it’s a big reason why I’ll always argue in favour of retaining an academy. It’s been very profitable for us. Frankly, it saved us after relegation.

That is not without risk, and we cannot rely entirely on it. We all remember the fire sale after our relegation from the Premier League, all for pennies in comparison to what we paid out. More concerningly, we don’t know what the market will look like in the future, in the post-Covid world. At the end of the day, a player’s value is only what someone is prepared to pay for them. It is noticeable that we are one of the few clubs paying fees for players this summer. As a fan, that’s exciting.

As someone with an eye on the financial stability of the club, it’s a bit of a red flag.

The boring reality is that the books need to be balanced. If we can’t fill the hole by player trading, then running at a deficit means more money needs to come in. If the owners can’t, or won’t, finance that then you’re in real difficulties. We know better than most clubs what that means. When it comes to the existence of my football club, I’m pretty risk averse.

This isn’t just a Swansea issue. In fact, in 2019/20, we were closer than most clubs to that 70% UEFA recommendation regarding wages to turnover. That was entirely due to the fact the club were in receipt of substantial parachute payments though.

Those ended last season, and we are now on a level financial playing field with most other Championship clubs. It looks like we’ll be acting like them too.