What's the problem?
Despite higher levels of income coming into their coffers, the finances of many football clubs are far from healthy. In February, Rangers, for so long one of the most dominant clubs in Scottish football, became one of the sport's highest-profile casualties. It went into administration after it could not pay its tax bill, and the outlook for the club remains unclear. Other recent casualties include English football league clubs Portsmouth and Port Vale, while the list of teams currently struggling to make ends meet is long and could get longer.
Why is this happening?
Rangers' woes may have drawn attention back to this issue, but financial distress among British football clubs is hardly a recent phenomenon. Prominent clubs such as Leeds United, Derby County and Crystal Palace have all been placed into administration at some point during the last decade, and a long list of teams from the lower leagues have suffered the same fate.
Most of football's financial wounds have been self-inflicted. As with many of the difficulties facing the financial world today, there are two fundamental problems: more money has been going out than is coming in; and clubs have taken on too much debt.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
What's driving the over-spending?
The rapid growth and importance of income from broadcasting rights has fuelled an arms race between football clubs. Competition for the best footballing talent has seen players' wages and transfer fees soar. In turn, debt has rocketed. During the 2009/2010 season, English Premier League clubs had cumulative revenues of £2.1bn, but suffered pre-tax losses of £418m. Debts stood at more than £2.5bn. Of the top clubs, only Arsenal made a respectable profit of £56m. At the other end of the scale, Manchester City announced a loss of £195m but is being bankrolled by its wealthy Arab owner.
Will more clubs run into trouble?
Yes if player wages as a percentage of turnover doesn't start coming down. But some teams are more vulnerable than others. Those in England's second tier, the Championship, seem to be most at risk. According to Deloitte, Championship clubs are spending £4 for every £3 they take in. The average wages to turnover ratio is 88%, with a third of Championship clubs having an annual wage bill that is actually higher than their turnover.
The income outlook for these clubs is deteriorating too. The value of broadcasting rights from the 2012/2013 season is 25% lower than the current rights. Hence clubs that pay high wages to hold on to better players in the hope of getting into the Premier League may face tough times if they aren't promoted quickly.
Once in the Premier League, the outlook in terms of income gets more promising. The next batch of TV rights includes more live games, so could fetch more than the current £3.6bn price tag as more firms are expected to bid for them. But if current trends are maintained, much of that extra income could end up going to players, with no improvements in company finances.
Can governing bodies do anything?
Football's governing bodies and even the British government realise that the game's finances are on an unsustainable path. The aggressive use of debt or bankrolling by wealthy owners has even been described by some as "financial doping" that creates an unlevel playing field. Clubs in the English first and second divisions have already agreed on a salary cap.
UEFA, which runs European football, is introducing financial fair play' rules for the 2014/2015 season. This is meant to put an end to stratospheric wages, silly transfer fees and big cash injections from rich owners. While there will be a transition period, clubs won't be able to spend more than their revenues, including income from TV rights, gate receipts, prize money and sponsorship.
Any clubs that break the rules won't be allowed to enter European competitions. This will put pressure on clubs like Manchester City and Chelsea to balance their books. Some are sceptical as to whether the new rules will work, claiming clubs will find loopholes.
So why do people want to own football clubs?
Good question. There has been a huge influx of foreign ownership of the top English clubs over the last decade, yet having spent millions on players and stadiums, these buyers have little to show for it. The ability to turn the English Premier League into a global sporting brand with huge income flows has been seen as the main reason for buying a club.
Other reasons such as prestige and even money laundering have been cited. But with financial fair play rules, it'll be harder for rich owners to throw money at players to build the best teams. So either they increase the amount of money coming in (meaning it would cost us a lot more money to watch football) or players get far lower wages. Few spectators or owners would be unhappy about that.
Is there a better way to run the sport?
Clearly there is no perfect way to run football, but some point to the relative financial stability of Germany's top league the Bundesliga. This may seem like the antithesis of English football, but it seems to work. Clubs have to stick to rigid rules on debt and the wages they can pay players. They also have to be majority-owned by fans. Despite cheaper ticket prices, the Bundesliga is profitable and has higher attendances. Although some clubs have got into financial difficulties, the levels of distress are much lower than among their British peers.
