Go figure: Manchester City's accounts explained

By Prestwich_Blue, Sat 19 November 2011 10:10

Go figure: Manchester City's accounts explained

City have just released their accounts for the year to 31st May 2011 amid the now regulation howling about record losses, FFP, financial doping and the rest of the lazy clichés. So let's ignore all that and take a look at what the figures really say and what they mean for our future.

The first thing to say is that they mean absolutely nothing with regard to FFP. The first accounts that count towards those will be the ones for the current financial year and they won't be anywhere near as bad as these for various reasons. Plus UEFA rules will allow us to exclude a significant chuck of our expenses from those accounts, making them look even better. Having said that, we can use them to try to understand what those next accounts might look like. £194m is a lot of money to lose and our revenue doesn't even cover the wage bill so how will we make ends meet?

One key thing to note is that we’ve written off nearly £35m as a one-off or exceptional item. This relates to players contracts in the balance sheet that we expect to make a loss on. I’m not going into detail on this but we’re effectively saying that these players are on our books but they’re not worth what we paid for them or what we could expect to get in transfer fees from other clubs. This works in our favour as it gets this loss out of the way in one hit, before FFP bites. This means that our underlying loss is actually £160m. That’s still a lot but is better and we can close the gap.

Let's look at income first. We pulled in revenue of £153m in the year, which is a significant increase on the previous year's figure of £125m. This mainly came from increased media income (due to success on the field) and higher commercial revenue. What it doesn't include is the revenue from the new Etihad deal, which is worth probably an extra £30m a year to us. Nor does it include the revenue from our first ever participation in the Champions League. It's difficult to put a figure on this at the moment as it depends on how far we actually get but the way the prize money is structured means that we will earn a significant amount (at least £25m) merely by being in the group stages.

Then add the ticket revenue & increased commercial income and we could be looking at another £10m when it's all totted up. So these two sources alone should give our bottom line a boost of at least £65-70m. Add that figure to the £153m, factor in better ticket sales and other commercial income and our revenue in the next accounts should be somewhere around £230m or upwards, which is slightly more than Arsenal’s income from football this year. That’s obviously a huge step towards profitability.

The other side of the Profit & Loss account is of course our expenses. In any set of accounts, there are two sorts of expenses; expenses we actually pay out and those we don't. The first category will include things like wages, which we pay out every week or month. The second category includes things like player amortisation, which are just accounting entries and don't involve a cash outflow. That's important because cash-flow is the life-blood of any business so huge losses may not be that important in the overall scheme of things as long as we get more cash in than we have to pay out.

Of our cash operating costs of £230m, wages made up £174m and these alone were £20m more than our total income. That’s obviously not good but I believe that’s not as bad as it looks. The main reason for saying that is that it includes the wages of a number of players that we know are surplus to requirements. These would cover any player still on our books during the financial year to May 2010, including Santa Cruz, Tevez, Adebayor, Vieira, Sylvinho, Jo, SWP, Robinho, Onuoha, Bridge, Bellamy & Given. I don’t know what each of those was on but I suspect that a figure for the year of £50m is not unreasonable. Since then, we’ve brought in players like Aguero, Nasri & Clichy but I imagine their wages would be significantly less than that figure. I’d be looking at a stabilised wage bill of around £145m when everything settles down. That’s about 65% of projected turnover (and possibly less) which is perfectly reasonable.

The other major operating expense is a non-cash one, namely player amortisation, which accounted for £84m of our total operating expenses. To explain what this is, when we buy a player we don’t put his full fee through the P&L account in one year but apportion it over the length of his initial contract. Therefore buying a player for £25m on a 5 year contract leads to a charge of £5m a year for 5 years. Now we’ve bought an awful lot of expensive players in the last few seasons so amortisation is high but that won’t last for ever. I’ve done a projection that this figure will, for the current crop of players, be slightly higher next year but then start coming down, to somewhere around £20m in four years. Undoubtedly we’ll buy more players but even if we spend £20m a season net, that will only go up to about £30m. That will be another £50m or more off the bottom line. We won’t get rid of it completely for players who stay with us for a while, as we re-apportion any remaining amount when we re-negotiate a contract, but if a player leaves then we don’t have to provide any further amortisation

So even only using current figures, we’ve added up to £70m in revenue (and we’ve still got a long way to make up in ticket income to even match Liverpool, who have a comparable stadium) and eliminated around £80m in expenses. That makes the bottom line £160m loss look significantly better and I’m sure there’s more to come. That, and the exclusions allowed, means we will easily break even under FFPR.

But that’s not all, as I mentioned cash-flow before and how important that is. Our cash flow statement shows that our net cash outflow was £179m last year, which is pretty horrendous. However £155m of that was on player purchases so taking that out gives us a net outflow from operations of £24m. Now add the projected increase in revenue of £70m and that gives us a net cash inflow of £46m. Reducing the current wage bill by £30m would increase that to £76m, which is very healthy indeed. That’s not profit but it is money we can afford to spend on players. More importantly, it demonstrates to UEFA that we’re living within our means and spending less than we earn. And that, of course, is the whole point of Financial Fair Play isn’t it?