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Cash converters

Football's new money needs to be managed sensibly to keep the game sustainable, says  Matthew Garrahan

When Alan Sugar spoke of the “prune juice effect” in his address to the Oxford Union in 1997 he was not talking about how his stom­ach felt after seeing Darren Anderton limp off the field for the umpteenth time. Sugar used the term – cogently and correctly – to describe the inability of professional football clubs to manage the huge amounts of money coming into the game.

Three years on, as accountancy firm Del­oitte & Touche’s annual financial review shows, the prune juice effect has achieved even greater laxative qualities. The money at the disposal of Premier League clubs has in­creased exponentially thanks to their television deal with BSkyB, as has their ability to spend it on transfer fees and vastly inflated sal­aries. Wage inflation is occuring across all four professional divisions.

The prob­lem for clubs is keeping wages at a level in tune with the money generated by the club. All four leagues pay average wages of more than 50 per cent of turnover, which is the level recommended by Deloitte & Touche as sustainable. The average in the Third Div­ision is 95 per cent of turnover while the Premier League average is 58 per cent – more manageable, but still rising faster than the clubs can sensibly afford. While this doesn’t mean the immediate future will be bleak – some clubs such as Crewe and York City gen­erated impressive profits in 1998-99 – it does not bode well in the longer term.

Matters for lower league clubs are not helped by current transfer trends. Total transfer payments for 1998-99 rose to £317 million from £228 million in 1997-98.

The rise itself isn’t surprising, bearing in mind the fact that the price of players has risen over the years. What is worrying is that a larger percentage than ever before was spent on play­ers from overseas teams (£142 million com­pared with £70 million the previous year). The increase is a cause of concern because it is money which would once have been spent by top clubs on players from lower leagues. For smaller clubs, selling talented players to big­ger clubs was once an important source of income and represented a good opportunity to stay afloat. That avenue, as the report shows, looks to be closing, leaving them in need of other ways to generate cash.

Clubs in the First, Second and Third Div­isions can take solace from the improved terms of their latest TV deal. In June, Ondigital and ITV agreed a £315 million three-year deal with the League. NTL will also pay £65 million over five years for internet rights, adding more desperately need­ed cash to the pot. The new TV money should help Football League clubs stabilise finances, but it won’t help them compete with their counterparts in the Premier League.

Deloitte & Touche believe Foot­ball League turnover will rise to £500 mil­lion (up from £230 million), but by then the gap bet­ween the Premier League and the rest will have widened even further.

Taking into account new broadcasting con­tracts with BSkyB, NTL and ITV (worth £1.6 billion over three years) Deloitte & Touche predict that all 20 Premiership clubs will gen­erate £1.3 billion a year from the 2001-02 season (up from £630 million in 1998-99), when the contracts start. This does not include the substantial sum the league will earn in internet rights when they are negotiated at the end of the year.

All of which adds up to an apparently un­assailable chasm between the top-flight and the rest. Promotion will mean a windfall of epic proportions, likewise relegation could result in a crippling collapse in finances. If clubs continue to spend heavily in the hope of returning to the top flight quickly, and fail, serious financial trouble could ensue (witness Crystal Palace).

Taking a long hard look at wages and transfer fees and setting them at sustainable levels is the key for all ambitious football clubs. Otherwise, with more money coming into foot­­ball than could possibly be imagined, the damaging properties of the prune juice effect will be felt by chairmen and fans alike.

From WSC 164 October 2000. What was happening this month

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