Inter’s Finances Explained Part 2: How Do UEFA’s Financial Fair Play Rules Work?
Since the Financial Fair Play (FFP) has enter the mainstream football debates, people are absolutely torn about its usefulness or indeed how fair it is. This is mainly due to poor understanding of the rules. As it’s common when it comes to company finances – which is essentially what football clubs are nowadays – there are a lot of articles regulating operational functions, many grey areas, countless adjustable rules and exceptions.
Yesterday a brief introduction into what a bank bond is was published here on SempreInter.com so starting today this will be the first of a three-part series in an attempt to explain how the FFP generally applies in a way that is as simple as possible, how it applies specifically to Inter and what can the club do to be fully compliant with it. This will not be a debate on whether the FFP is actually beneficial or not for everyone, this will be simply an explanation of what the FFP does. It will be as simple as possible and these pieces will try to avoid complex technicalities because they only apply under very particular circumstances.
The FFP’s aim can be generally summed up in to a simple sentence: To improve the financial health of European club football by preventing them from spending money they haven’t earned and, indeed, do not have. For many, many years, clubs around Europe have been spending huge amounts of “free” money injected in their coffers by their owners or by third parties. What was seen as a normal at the time was actually hurting the clubs because they didn’t take care of their actual finances. Why bother trying and reducing your balance deficit when a sugar-daddy is going to pump in hundreds of millions for free every year? This tactic brought European football in the brink of a financial meltdown. Of the 655 professional clubs in Europe half of them incurred a loss in the year prior to the implementation of the FFP (2009) and 20% of them were close to bankruptcy. Studies at the time showed that the Premier League clubs were in debt to the tune of €3.7bn (that’s right, billions), Serie A had a bloated €1.7bn debt while La Liga’s debt was estimated around €2.8bn.
Those numbers were staggering and something had to be done. To combat this immense problem UEFA created the Club Financial Control Board (CFCB) in an attempt to regulate clubs’ financial activities and enforce the FFP regulations. That means the CFCB’s main task was to ensure each club was generating its revenue through legal sources, as opposed to piles and piles of money funnelled to the clubs’ coffers by mega-rich owners.
Since the implementation of the FFP, clubs must balance football-related expenditure with their actual income. It simple and complex at the same time, because you can basically break down a club’s finances in two big categories (income and expenses) but, in turn, these two have a ton of sub-categories themselves.
Clubs make money in two ways: Operating Income and Investment Income.
The Investment Income is basically money not earned by the club but rather given to it, like TV deals and sponsorships.
Conversely the Operating Income is the profit earned from a club’s normal core business operations, basically transfer income, merchandise, ticket sales and prize money.
Let’s have a look at a very simple example with small numbers:
Supposedly SuperTeam FC earned €65.000.000 last year of which:
€40.000.000 came from Operating Profits
€10.000.000 came from parent club investment
€5.000.000 came from sponsorships
-€10.000.000 were lost in operating costs
Total Operating Revenue
– Operating Costs
= Operating Profits
That’s the Operational Income. Sponsorships and investments are taken into account separately because they’re Investment Income. Adding the Investment Income to the equation and you get the total income of the club for that year i.e. €65.000.000 and that’s the amount within which the club must operate meaning it can’t be spending, for example, €150.000.000 that year.
Similarly, club expenses are easy to comprehend (the Operating Costs from the above example), but clubs generally spend money on a lot of areas. There are many pit falls and failing to properly manage them can lead a club in financial ruin. Player wages, staff wages, bonuses, signing fees, transfers, ground maintenance, taxes, match day expenses… the list goes on and on and everything counts towards the income but not everything counts towards the FFP regulations; Money spent on stadiums, training facilities, youth academies and community projects are exempt.
That means the owner of a club can invest freely from their own pockets to upgrade the youth academy of his club or build a new stadium.
Now, the FFP ensures via break-even rules that a club has to balance its books. That means it’s not mandatory for a club to have have earnings, but it can’t have considerable loses either. The team in the above example is well within the FFP regulations, but they can still spend over their limit. They’re actually allowed to go €5.000.000 over than what they earn per assessment period (every 3 years) and can even exceed that limit with the help of the owner who is allowed to cover up to €30.000.000 over a period of 3 years. In practice that means that clubs can lose up to €30.000.000 during the monitoring period if the owners are stable and willing to put their hands in their pockets. This number may seem big but it really isn’t. It’s basically the price of an average transfer in top-flight clubs.
If the club in the example ends up having -€10.000.000 in turnover over a period of 3 years they are still within the boundaries since the owner can cover that amount. The FFP was implemented for clubs that used to have more than €100.000.000 in loses (Real Madrid had over €300.000.000 in loses just in 2010).
The above is allowed because manageable debt geared towards the long-term development of the club is efficient for financial planning and is a standard practice in most industries. On the long term that debt is decreased until it reaches zero since it helps boosting the income. But debt taken on board, including the monetisation of future income, to fund day-to-day operating activity such as wages and transfer fees or to fund short-term cash flow shortfalls, can create problems and must be managed effectively. The role of the FFP is to ensure that.
The above are a simple breakdown on how clubs make money, where do they spend money and how the FFP works when applied to their finances. Now that we got the hang of it, it’s time for the million dollar question: How can some clubs still spend so much on a single player, a.k.a. what in the name are PSG and City doing?
Let’s use the transfer of Neymar as an example.
The answer is simple in its complexity: Player amortization and offsetting the expenses in the future; remember, the FFP works in 3-year-long assessment periods. The amortization of a player, in layman’s terms, is the spread of a player’s transfer fee over the length of his contract. Let’s say a club bought a player for €75m and offered a 5-year contract. By amortizing his transfer fee over the period of his contract, his transfer fee accounts only to €15m per season. This seems like a significant loophole but it’s extremely risky because the wages still count as a whole and can’t exceed 70% of a club’s income. This is were the future balancing comes in: Having Neymar in their books PSG still had over €100m rise in expenses (€60m in wages and €44m in amortization of the transfer fee). What they hoped to do was to offset this by a massive boost through marketing (the did sign Neymar after all), attendance and prize money. Will it work though? As it stands it’s not clear and this is why the CFCB is investigating PSG’s finances as we speak. There’s also the fact that Qatar Sports Investments, owned by the state, pretty much independently financed Neymar’s move. Τhey paid Neymar the exact sum that was his clause, something that allowed the player to directly buy it out and force his move to PSG. This has already drawn the ire of UEFA, considering PSG has been heavily sanctioned already for shady deals with Qatar’s tourist body. The CFCB and their army of lawyers are by all accounts ready to pull the trigger.
Amortizing a transfer can also help a club boost its earnings through the re-sale of a player. Let’s say a club signed and amortized a player for €50m and offered a 5-year contract worth of €5m which accounts to €10m per season. If the club decided to sell the player after two years his cumulative amortization will be €20m, leaving a a value of €30m in the books. Now, let’s say the buying club offered €30m to acquire the player. Buying a player for €50m and selling him for €30m sure looks like a very poor piece of business to the fans, but in reality, through amortization, the original club not only paid essentially just €20m plus the €5m in wages of the proposed €50m for the transfer, but actually recorded a profit improvement of €5m by selling the player.
To make it clearer
Buying Fee on paper: -€50m
Actual Fee Through Amortization plus Wages: -€25m
Selling Fee: +€30m
Total Profit: €5m
All the above seem like a nice and easy way to go on about business without the fuss of the FFP, but again it’s extremely risky, as the cases of PSG and Manchester City prove, because financial planning can easily go awry. A club can record huge loses in income due to a myriad of reasons and if that happens, the CFCB will be relentless.
Failure to comply with the rules can have extremely dire consequences. The system of punishment for clubs is gradually more and more severe for serial rule-breakers.
* A warning
* A fine
* A deduction of points
* Withholding of funds generated by European competitions
* Ban on new players playing in European competitions
* A restriction on the number of players that clubs can register to participate in UEFA competitions, including a restriction on the number of registered players
* Disqualification or future disqualification
* Withdrawal of titles or prizes.
At its basis, complying with the FFP is easy but at the same time it’s incredibly complex because of the nature of it. When it comes to finances nothing is stable or stays the same for long and every club but the most stable and profitable can see immense fluctuations in their books in any given year.
To the annoyance of fans around the world that were used at seeing their teams splash-out millions upon millions in transfers, the FFP actually had some measure of success. Three years after the implementation the total club debt across Europe was reduced by €700.000.000 and even managed a 25% reduction in expenses associated with transfer activity, while combined club operating profits were increased at €1.5bn. The wage growth was at its lowest in recent history at just 3%. Overdue payments (essentially debts that weren’t paid in time) were reduced by a staggering %91.
In addition, because of the exemption of youth development and club facilities more and more teams direct their a bigger percentage of their funding towards their youth academies every year.
All in all, the FFP is far from perfect. There’s still a ton of work to be done, but the reality is that clubs are slowly but steadily becoming healthier and healthier each year.
Next up: How does it affect Inter?
*You can read the full 96-page-long UEFA Club Licensing and Financial Fair Play regulations here.