Football finances under the spotlight

The troubled finances of football clubs comes under the spotlight again this weekend - this time in an article in the Observer…

Its a useful article, though it repeats many of the issues that have been thoroughly examined by the media over recent years as clubs like Leeds United, Luton United and others have fallen into financial oblivion.

A good point made by the article is that too many football clubs have over-geared. That means that their borrowings (bank loans, overdrafts, directors’ loans) are too high to be serviced by the incomes generated by the club. Even though interest rates are at an all-time low, that doesn’t mean that interest on borrowings has come down substantially.

Indeed the interest rates on bank overdrafts are typically thirty times higher than the official policy rate set by the Bank of England!

Many of the loans were taken out at fixed rates in order to finance ground expansion - an increase in stadium capacity which now seems a risky move in the context of stalling match attendances and declining revenues from corporate hospitality and shirt sponsorship.

There was a time some years ago when the banks were highly reluctant to call time on insolvent football clubs. They judged that the potential loss of goodwill from allowing a major club to go under was more than the cost of allowed a club to default on the loan or overdraft. But no longer - the banks have much bigger concerns to handle. So expect to see a raft of football club administrations and insolvencies arise in the next 3-6 months - spreading from the top echelons of the game right down to semi-professional level.

At the heart of the problem, though, is the proportion of revenue that is paid out in player wages. The common rule of thumb for a professional club to reach break-even is that player wages should not exceed 50% of turnover. The article points out that, at the top level of the game, this ratio is more like 70%. A sure-fire recipe for financial disaster. At the top of the game, the players (and their agents) retain all the bargaining power over their employers - a situation that is bound to remain so long as the game relies on the significant income from broadcasting and other media rights.

In the Hot Seat!

These issues will be all too familiar for students and teachers who use fantastic business simulation which allows students to take over the management of an ailing Premier League club. Managing cash flow, operating costs and capacity are all key features of the game.