A Nottingham Forest blog with a concern for the wider game
Now that all 3 of the East Midlands Championship clubs have posted financial results for the year 2012-13 I thought I would continue my series of financial articles by reviewing them all together. I have looked at the recent history of each club in isolation in previous pieces but, with that history now filled in, it makes more interesting reading to compare and contrast their ongoing strategies.
The approach remains the same with cash adjusted financial statements used, although I have now added a movement in net debtors and creditors as well. The reason for this is that changes in the way a club pays its creditors can have an influence on the cash results. This is especially clear for Nottingham Forest in 2012-13 where the balance of debtors and creditors rose sharply, saving cash in the period but leaving large amounts of money owing in unpaid bills.
The Financial Statements for 2012-13
Income and Expenditure
Analysis of the Year 2012-13
The things that jump out immediately are that the 3 clubs are taking different approaches to life in the Championship but the end result in this particular year was not hugely different. Although Leicester made the playoff places, finishing 6th, they did not achieve promotion so had the same ultimate result as Forest in 8th and Derby in 10th. All 3 clubs remain in the Championship at the end of the year.
Leicester’s wage bill on the other hand and net transfer expenditure is much larger than the other two clubs’. Forest are not too far behind and their wage bill is increasing as they seek to follow a similar strategy to Leicester by investing heavily courtesy of wealthy foreign owners. They are a little behind Leicester’s curve with new owners only arriving in the summer of 2012, but they are catching up and with a lower turnover their smaller wage bill is actually a higher percentage of turnover (145% v 134%).
Derby are taking a more prudent approach with a wage bill less than half of Leicester’s and just 60% of Forest’s, which is also a much lower percentage of their turnover at 78%. They also finished lower in the league but they are improving their position and as stated earlier the end result for all three clubs was remaining in the Championship.
The combined statements do seem to show that although you can try to be more prudent with finances it is very difficult to run at this level without making some form of loss. Derby worked hard under the management of Nigel Clough to reduce their wage bill but it seems to have bottomed out at £12M and they are making steady losses of about £5M a year for mid-table finishes. They are making progress but they are also reliant on cash injections from their owners, albeit much smaller ones than Forest and Leicester.
They also suggest that spending increasing amounts of money does not necessarily deliver value. It may improve performance to a point but it is not a straightforward linear relationship. Logically spending more money does buy you better players and also a bigger squad for getting through periods of injuries and suspensions, but there is a limit to the quality you can bring to the Championship no matter how much you pay.
This is why high spending owners do not always see the returns they are expecting and could be an argument for a new owner with money to spend putting short term objectives aside and investing smaller amounts over a longer period to build a club up over time and prepare it for promotion. It is also an argument for investing in structures such as player development, scouting, recruitment and coaching rather than simply on transfer fees and wages.
Of course slow builds, such as we seem to be seeing at Derby, can be frustrating and are still not guaranteed to deliver success in the form of promotion so they have limited appeal to rich men used to getting what they want, but it is a gamble to look for a quick win and it can cost an awful lot of money.
In terms of funding the respective losses the clubs have a mix of loans and equity funding from their owners. Forest were taken over during the year which cleared old debts to the previous owner. They now have total debt of £32.4M owing to the new owners, £20M of which originated from the purchase and the remainder from working capital.
Derby’s overall loan position did not change much during the year, with loans of £34M remaining outstanding, but losses in the year were met by an issue of share capital to the value of £6M, so the club’s net debt position hardly changed.
Leicester’s net debt, made up of loans from their owners and finance lease obligations, increased from £85M to £111M during the year, however, the majority of this debt was held within the group following the purchase of the freehold for the club’s stadium and in November 2013 the owners announced that they would convert their entire outstanding debt to equity. The 2013-14 accounts should therefore show a very different (and much improved) net debt position.
Three Year Trends
Revenue trends show that all three clubs are finding it hard to maintain income during these tough economic times. Forest and Derby have similar sized revenues, although Derby’s newer stadium gives them slightly higher opportunities for commercial income. Leicester have a noticeably higher income which is down to increased TV and sponsorships, possibly as a result of their owners accessing funds from their own country. This is something we might expect to see increase at Forest as the owners seek investment and support from Kuwait.
Wage trends suggest that Leicester have perhaps peaked at £28M in 2011-12 falling to just over £26M in 2012-13, Derby have bottomed out at about £12M, whilst Forest are continuing to grow their wage bill increasing from nearly £17.5M in 2011-12 to almost £21M in 2012-13.
Transfer spends have been relatively modest for Derby and Forest, the latter even making a profit on fees in 2011-12, whilst Leicester have invested over the last two years building a squad designed to take them to the Premier League (clearly this is bearing fruit in the current 2013-14 season).
Overall losses have varied considerably. Derby have made an overall loss for 3 years of £15.9M with a fairly even spread over those years. Forest have lost £35.4M with almost half of that in 2012-13 and Leicester have lost £68.4M peaking at £32.2M in a single year for 2011-12. In all cases losses are funded through a combination of loans and equity from the owners.
It is clear that the 3 major East Midlands clubs have different approaches to their finances and we could argue the relative merits of those. Leicester are currently top of the league so will say they are justified in making those big losses, whilst Derby could argue that they are managing the finances better and still competing by being in the top 6. You can win and lose with any approach and the owners at all 3 clubs have so far met all their obligations financially.
The big takeaway for me though is just how reliant we have all become on the financial support of wealthy owners. Whatever the approach, all 3 clubs need constant cash injections from their owners to continue. The main reason for this is the cost of wages. Ultimately the amount of money footballers want in order to play in the Championship is beyond the means of football supporters to pay.
There has been talk ever since the start of professional football that players are becoming more distanced from fans and it is hard to argue that this is not the case now. Players in the second tier are earning relative fortunes compared to fans and far more than fans can afford to fund them for. Rich owners are in many ways both the problem and the solution, but whilst the problem they cause is universal to all clubs their solution is limited to only those they give favour to.
Whilst Forest, Leicester and Derby are all benefitting from having a solution to at least some extent it makes me sympathise with those fans whose clubs have to try to compete in this skewed market on their own resources. We might all be excited about promotion chances funded by huge wage bills we could never hope to pay ourselves, especially in the case of Forest and Leicester, but some of the gloss is lost by the fact that we are basically cheating – or at least we are significantly distorting the playing field in our favour.
I know many fans, mostly those with wealthy benefactors, won’t agree with me on this but the competition and the satisfaction of achievement in it are both being lessened by this selective sponsorship of one club over another. Money has improved the game in many ways but the distribution of that money has also taken away from it. I don’t know what the answer to that problem is but it is important that we do at least acknowledge that the problem exists.