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Is the Premier League the financial bonanza it is made out to be?

Writer's picture: Andrew ZarbAndrew Zarb

Updated: Jun 28, 2023

It is very often said that being in England's top flight, the Premier League, is the ultimate competition from which to earn prize money, to the extent that owners in the lower leagues of English football, particularly in the second tier (the Championship) risk almost everything to get into the top flight. On one hand, yes, getting into the Premier League is extremely lucrative, as clubs earn significant sums of prize money from the top division - so much so, that, last season, Huddersfield Town earned just over £96m from participating in the Premier League despite finishing bottom, and in total the league distributed just under £2.5bn to the 20 participating clubs, evidently highlighting how lucrative a place in the Premier League can be for clubs - with the below graph demonstrating how much turnover each of the 14 clubs who have published their accounts for the 2018/19 financial year in full.



However, is being in the Premier League all rosy from a financial point of view? There are the downsides of this..

Increased costs Despite clubs being able to earn significantly more revenue in the Premier League compared to the lower divisions, this does come with increased costs, particularly in relation to wages. Furthermore, of the 14 clubs who have so far published their accounts from the 2018/19 season (taking those clubs who were in last season's Premier League), only four reported an operating profit, which looks at profit before interest and tax, whilst excluding any profit on player sales. The four clubs who did so were Manchester United, Liverpool (who more or less broke-even), Wolverhampton Wanderers and Cardiff City. Perhaps it is no coincidence that two of the four clubs were teams who achieved promotion from the Championship in the 2017/18 season, given that the increase in revenue from the Premier League is extremely sharp (between them, Wolves and Cardiff's revenue increased by a combined total of slightly under £256.5m from 2017/18), and usually the increase in revenue tends to be considerably higher than the increase in operating costs in a club's first season in the Premier League, especially if a club would not have been benefiting from some parachute payments whilst in the Championship. On the other hand, the fact that Manchester United made an operating profit of £24.2m highlights the club's impressive ability to generate cash (and thus revenue), despite relatively unsuccessful performances on the pitch in recent seasons - and the club is extremely self-sufficient despite the amount of debt lumped onto it by the Glazers. Liverpool, meanwhile, are another example of an extremely self-sufficient club who have been reducing their debt levels and investing in the squad whilst achieving success on the pitch, as they won the Champions League in 2018/19. However, as mentioned earlier, 10 of the 14 clubs who have so far published their accounts in full for the 2018/19 season made an operating loss. Now, this may not necessarily be a bad thing, and it could imply that the club is adopting a model of selling some players for a decent profit (profit here means the difference between proceeds received and a player's value on the books) in order to balance the books (or at least reduce the losses). In fact, Manchester City were one of the 10 clubs who made an operating loss (theirs was £22m for the 2018/19 financial year), but they then went on to make a profit before interest and tax thanks to a profit on player sales of £39m as they sold players such as Brahim Diaz, Angelino, Pablo Maffeo, Angus Gunn, Jason Denayer and Rabbi Matondo. Meanwhile, both Chelsea and Leicester City (who made considerable losses even before interest and tax) had profit on player sales exceeding £55m, clearly demonstrating how both clubs incorporate the sale of players for considerable profits into their business model. That being said, the fact that 10 of the 14 clubs who have so far published their accounts in full for the 2018/19 financial year clearly highlights that the clubs have operating costs which exceed their revenues. A key reason for this is wages, as the 14 clubs who have so far submitted their 2018/19 accounts recording a total of just under £2.5bn, an average of roughly £175m per club (though this admittedly is skewed by the fact that the five of the 'big six' clubs who so far have published their 2018/19 accounts have wage bills considerably higher than the rest). However, if each club wanted to break-even from operations, the average wage bill must fall by approximately £36m (which is the average operating loss a club in the Premier League makes), highlighting the fact that wages are exorbitantly high in the Premier League. The below image shows how much each club (of those who submitted their 2018/19 accounts) spent on wages during the 2018/19 financial year:

Manchester United clearly could afford to spend more in wages than most, given that they generated the most revenue in the league. The five clubs with the largest wage bill are five of so-called 'big six' clubs (Tottenham Hotspur have not yet published their accounts in full for the 2018/19 financial period). It must be said that both Everton and Leicester City have considerably high wage bills and it is no coincidence, therefore, that their wages to turnover ratio is among the worst in the division - with only Chelsea having a higher operating loss than these two clubs. However, Everton's figure is a bit of an anomaly here, as their 2018/19 financial year ran for 13 months due to an extension to the date of the financial year end from 31st May to 30th June, and June is traditionally a month where clubs tend to receive very little revenue but still incur fixed overheads (hence Everton's operating losses is higher than what they would have likely recorded had their financial year lasted 12 months as usual). The following image below, meanwhile, shows each club's wages to turnover ratio, and illustrates the point made earlier that Leicester City and Everton spend a considerably high amount of wages given their turnover.

On average, the wages to turnover in the Premier League is equal to roughly 65%, meaning that clubs spend on average £65 for every £100 earned in revenue. This is not a low ratio, though one that is not entirely unsustainable and UEFA's recommended limit (of wages to turnover ratio) is 70%. That said, it is interesting to note that 5 of the 14 clubs have a wages to turnover ratio exceeding that 70% recommended limit. If each club were to break-even from operations, the wage bill would be as follows:


Given that Manchester United and Liverpool both recorded operating profits, it is no surprise to see them in the top two in this graphic (also given that they generate extremely large revenues) - in fact, Manchester United could have afforded almost an extra £25m in wages and would still have managed to break-even. The top five clubs in terms of wage bill would remain the same, however, Manchester City would drop to third behind Liverpool, whilst Chelsea would drop down to fifth behind Arsenal. It is interesting to note that Everton's wage bill would drop sharply to "only" £33m, which would be bottom of the wage table by some distance and lower than the wage bill of at least six clubs (this could well increase) in the Championship who have so far submitted their accounts for the 2018/19 financial period. Also, Leicester City's wage bill would see a sharp drop and would be the lower than the likes of AFC Bournemouth, Watford and Brighton & Hove Albion. This of course is influenced by the fact that Leicester City and Everton (together with Chelsea) recorded large operating losses. Also, as a result of lower wages in order to break-even, the wages to turnover ratio would be lower, with an average of 48% compared to 65%.


Interestingly, AFC Bournemouth would remain with a relatively high wages to turnover ratio, though this would drop from 85% to 62% were the club to break-even from operations. Also, this above table highlights another point, that clubs who would have a higher wages to turnover ratio (and break-even from operations) are incurring less overheads (excluding wages) as a proportion of turnover. It is worth pointing out that, in order to break-even from operations, Everton last season would have needed a wages to turnover ratio of just 17%, clearly highlighting the fact that the club is incurring a considerable amount of overheads (excluding wages) relative to turnover. It is arguably no coincidence, that the clubs who are bottom of this table (Leicester City, Chelsea and Everton) firstly would see considerable drops in their wages to turnover ratio, and secondly that they were the three clubs with the largest operating losses which also highlights the fact that they were the three clubs with the largest amount of overheads as a percentage of turnover.

From the two tables in relation to wages, it is clear, that clubs spend more wages than they should and thus incur considerably large operating losses. In fact, whilst the average wages to turnover ratio is roughly 65%, it is clear from the graphic presented above that clubs should look at achieving a ratio of around 50% (in terms of wages to turnover). However, some clubs in particular use player sales for considerable profits as a means of balancing the books and it is fair to say that this is a part of both Leicester City and Chelsea's business model. Alternatively, clubs should seek to increase their revenue organically, through for example better sponsorship deals and increased gate receipts, though this may prove difficult for some clubs and increasing ticket prices may not prove so popular with supporters. A solution to control wages (which are exorbitantly high in the division, as said earlier) could be the introduction of a wage cap in one of two forms, either by for example imposing a fixed wage cap whereby a club can spend no more than say £100m in wages, or alternatively it may be regulated so that clubs' wages to turnover does not exceed a certain percentage (for example the authorities could say that clubs can spend no more than for example 60% of its revenue on wages). One limitation, however, of this analysis is the fact, that other overheads and revenue are both being kept constant with figures from the clubs' 2018/19 accounts. In reality, it is fair to assume that overheads are affected by a club's wage bill, hence the exact level of wages in order for clubs to break-even is probably not as accurate as the figures shown in the graphs.

Conclusion

In conclusion, it is true that Premier League clubs generate considerable sums of revenue - in total, the 14 clubs who have so far published their accounts in full have combined total of almost £4bn in revenue, an average of roughly £282m per club - admittedly skewed by the amounts earned by the 5 clubs of the 'big six' who have so far published their accounts in full and who also benefit thanks to revenues from participating in European competitions, namely the UEFA Champions League and UEFA Europa League.


However, many clubs last season made an operating loss and are arguably spending too much money which may not be so sustainable in the long run (or else, this would require clubs to sell players to balance the books, particularly given FFP regulations). It is fair to argue that the fact that some clubs spend more than what they earn is motivated by their desire to move on to the next level and potentially qualify for Europe (think Leicester City and Everton), or alternatively that some clubs do not generate enough revenue (possibly due to limited finances) and spend more than they earn in order to keep up with the competition.


Therefore, it is fair to say that despite massive amounts of revenue generated by Premier League clubs, the competition is not some magic tree for clubs to earn money and competing in the Premier League is extremely costly. Arguably, one must note that Wolverhampton Wanderers' performance for a newly-promoted team last season in finishing seventh was very impressive given the fairly low budget the club was operating on compared to other sides in the division.

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