Cashing In: Arsenal’s Ever-Growing Cash Balances

My recent post on Arsenal’s finances  generated a lot of interest. Following this, John Pickford has delved deeper into Arsenal’s recent balance sheets to look in particular at the amount of cash the club holds.

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Phil Wall (@AngryOfN5)

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There has been a lot of debate on the state of Arsenal’s financials for the past couple of years and more recently on social sites like Twitter so I have sought to answer the crucial question, does the club have the cash or not? Supporters are divided so I aim to explore a little deeper into the intricacies of the financial position of the club.

Let’s start with that oft-bandied term loved by media, board and supporters alike: sustainability. Well of course we are a seemingly well-run club, it’s acknowledged that we are now in a healthy financial position, but just how healthy does a club have to be to be self- sustaining? Times are hard out there, there’s a global economic downturn but at the moment anyway it doesn’t seem to have much effect on the upper echelons of the game. Sure smaller clubs are going broke but we are not a small club. We are fifth on Deloittes so-called Rich List, we charge just about the highest prices in the world at the gate, we have been seeded in the top eight clubs in Europe for over a decade, we have made circa £35million after tax on average per annum for the past five years. That’s right, it’s envisaged that the next full set of accounts will show that our balance sheet will have grown by £170m since the results announced at the AGM in October 2007.

I’ll come back to the 2007 AGM later but in the meantime let’s just say that the majority of clubs in football are self-sustaining. Sure there are clubs that are quite clearly not like Chelsea and Man City; Liverpool are – just – though they have huge internal problems ahead if they want to build a new stadium. But there are others like Tottenham and even Man Utd that though they have huge debts are clearly self-sustaining enterprises. You don’t have to be making extraordinary profits to be self-sustaining, anywhere above breaking even is self-sustaining so let’s dispel that rumour right away.

Let’s now have a look at some numbers. Most of the information is historical data though for completeness and to keep it current I have estimated 2012 figures. Have a good look at the figures.The assumptions for the latest year are detailed, and I believe I’ve been very conservative but in any case it will give you an idea of what our position will be at the end of the year regardless of whether we qualify for the Champions League.

NB: I have had to make assumptions for 2012, and these notes apply to them:

  • they take in all player trading in summer 2011
  • turnover and profit is estimated conservatively (eg reaching last 16 of CL only)
  • I estimate a slight increase in wages, though some high earners were sold
  • net debt is reduced by cash increase and small increase in proceeds of loan-free property

Admittedly it’s fairly involved. I’ve tried to be as user friendly as possible, but to arrive at fundamental ratios you have to go through the various steps in calculating players’ transfer fees both in and out and amortisation (similar to depreciation) costs charged, all of which results in an overall net investment in playing staff over the seven year period since we moved to AG – £16.6m ( a on spreadsheet). Please note this figure is different from the net transfer aggregate over the same period which would have been negative as my figure is now adjusted for amortisation costs. The difference is taken up with the P&L and is part of overall profitability.

Also set out are other key indicators, namely:

  • turnover (football only)
  • profit after tax
  • net assets (accumulated shareholder wealth)
  • net debt
  • cash positions.

These quite clearly show the growth of the balance sheet mentioned previously, £170m in five years. Football turnover has been fairly stagnant in the last four years but all things being equal will be the growth revenue generator over the next five years. What it does show is that net debt has been reduced significantly over this time period, with cash increasing over time, which has offset against the primary bond loan deals (the underlying financing instruments used to finance the stadium). By the way the new stadium has generated incremental revenues of approximately £45m a year as gate money of an extra £65m less interest and capital reduction of principle circa £20m. This in itself defeats all talk that staying at Highbury would have been a preferred option, as had we stayed there we would have been this amount worse off per year.

So basically the question I have now is: should we and indeed could we have spent more of our cash on investment since we moved?

At the time of the AGM in October 2007 Arsenal were riding high in the EPL. The financial results were roundly applauded. Peter Hill-Wood joked that Danny Fiszman had asked Arsène Wenger what he would do if he gave him £100m. Seemingly Wenger said he would give it back and that he asked for patience and faith. I say this not to highlight that with hindsight this was a fairly foolish promise but just to show that by 2007 our immediate cash problems had diminished. It was widely reported that we were in a healthy position and that cash was available for the team.

As I say, since this time £170m of profits has been added after taxation, and cash will have grown by about £126m. We can also see that during the same time near £16m (net) was invested in playing staff after adjustments for amortisation but even so each year since 2007 we have made an average of £35m a year and we have added cash to our coffers of about £25m a year.

Let’s now talk about timing differences. It’s often commented on that there are timing issues with our cash flows and this is no doubt true but no one is exactly sure what they are as we are not privy to management type accounting information which would be invaluable in deciphering the complete state of the business.

But I’m going to do some comparison. Back at the beginning of 2007, when the club said we were on a very healthy financial footing we had £36m in the bank and had wages of £90m. So this £36m was apparently sufficient to cash flow a £90m wage expense – I’m ignoring other expenses at this stage as wages are by far the greatest expense in the club, but even so you’d assume other expenses would have been covered by this £36m. The corresponding amounts now at year end are estimated to be a £130m wage bill vs cash at bank estimated at £200m.

So £36m was sufficient to cover wages of £90m back in 2007 while we now have £200m vs  £130m wage bill. Have a good look at those differentials. I’m only pointing out these figures to give you an overview of the cash mountain we now have at our disposal that supposedly is meant to cover timing differences like wages.

There’s something obviously not adding up here. Swiss Ramble, a respected financial blogger, estimated Arsenal’s transfer kitty to be at least £53m after the summer activity and I believe he was being conservative. By year end this will have been added to and could quite easily be circa £75m at least. Look at that table and make your own mind up. Yes there’s cash blocked by the loan, yes there are timing differences but let’s not be under any illusions here. There is money available and always has been since 2007 and we have failed to adequately invest it.

Let’s now look at the Wages vs Turnover ratio and the Football Investment vs Turnover ratio. Wages vs Turnover has slightly increased over the five year period, as wages have risen whilst revenues stagnated. As stated, I’ve been conservative in my 2012 estimates but the ratio will be about 57%, which is fairly comfortable.

Football Investment ratio includes not only the wages but also the player trading function. This ratio is in fact a little lower but let’s say it’s about 57% also. I haven’t gone into comparing our club against our competitors, but I can confidently predict that not only would our Wages vs Turnover ratio be lower than everyone other than Man United, but that our Footballing Investment vs Turnover would absolutely blow everyone else away including Man Utd. It is unbelievable that we are investing so much less than our competitors and whilst I would agree that spending for spending’s sake is folly, surely there’s some kind of correlation between investment and success?

Next I’d like to look at player investment as a ratio of business assets or shareholder wealth. You can see here a reduction from close to 50% in 2007 to 25% now and quite clearly here you see the problem. A decline in player investment has mirrored a decline in on-field performance. It’s not as if we are an Everton and can’t afford to invest more. I’m sick of fans suggesting that we are in a temporary dip in form and that the seven year wait for success is but a mere drop in the ocean to previous droughts. Fans ought to realise that Arsenal Football Club have moved on, we only have to see that magnificent stadium to see that we are no longer even the club of five or six years ago. The past is the past. When are Burnley, Wolves, Ipswich, Blackburn, even Villa, Everton and Leeds ever going to win the league again?

I’m getting to the end now so please bear with me a little longer. I’ve argued there is cash available but it doesn’t end there. Until now I and every other commentator have talked about Arsenal’s investment (transfer) kitty as a set figure war chest. @JohnCrossMirror recently mentioned a figure of £35m and I asked him how he arrived at this; no answer. Swiss Ramble gave us his reasons why he believed it was approximately £53m and I’m suggesting it could be as high as £75m or more by 31 May.

But here’s the thing: since when has any club spent this amount in cash? No other club (other than the billionaire clubs and then it’s usually through a loan) have this amount of ‘free’ cash available for transfers except maybe Man Utd, who have got massive loans offsetting their cash position. We could quite easily ‘gross’ our transfer position twofold by using credit terms. In the past (and now if we really needed to) we could have used our not unsubstantial overdraft facilities to cash flow our operations also. More expense of course but with the profits we’ve made we could have easily afforded this more risky strategy and who knows what positive consequences that would have afforded? Not only success-wise but quite possibly we’d have hung on to players we have lost, attracted others and not been in the position we find ourselves now with potential loss of Champions League qualification.

It’s also worth noting that tax efficiency is the cornerstone of financial planning. Arsenal have probably paid more tax than all other EPL clubs put together since 2006. Investment is expensed over the course of the asset’s life and written off to P&L. In turn a basic rebate of approximately 25/30% (not quite sure of current UK companies tax at present; it was 28% in 2010 but changes often) is saved by investment.

I’m pretty sure Arsenal have not been on top of many aspects of their business model going right back to 2007. There have been distractions in the boardroom of course, but now a lot of the mistakes made are coming home to roost.

I do not believe for one minute that this can be turned around by the end of the transfer window and this piece hasn’t really been written to highlight mistakes made but mainly to show that cash availability has not been the problem that a lot of Arsenal fans have believed. I do not know where to begin on the ramifications of not qualifying for the Champions League – I honestly believe we would be set back between three and five years.

Lets hope we can pull it around and qualify otherwise I can only see more pain.

John Pickford

Follow me on twitter: @theN5er


6 thoughts on “Cashing In: Arsenal’s Ever-Growing Cash Balances

  1. Very interesting piece. However, only qualifying once in 15 years for the CL does not seemed to have hampered Spurs at this point in time.

  2. Hi Gladwina, I really don’t think we want to go down the line of comparing ourselves to our neighbours on many levels, suffice to say our manager thinks missing out on the CL will be a footballing disaster and our directors have intimated similar on a business level, though just the one year out has been built into the financial model seemingly.

    Lets leave other ramifications of not competing in the CL to one side for a moment (losing current & potentail players) and note that on the plus side we will at least have the resources to cash flow this eventuality, but I really don’t believe it should have come to this.

    Thanks for your comment.

  3. Is it possible to look at the figures so that they show that the club is being fattened up in readiness for it being sold?

    The only reason I ask is that Usmanov is still buying shares, a few here, 16 there. He should have enough by 19th April to break the 30% barrier and be obliged to put in an offer for the other shareholders’ shares.

    He is currently paying £15,000 per share. That would make a big profit for the shares that Kroenke bought from Fiszman and Bracewell-Smith last year and a huge profit on the shares he bought before that. Would he resist the temptation?

    • It is possible Kroenke could sell for a profit sooner or later, but Usmanov reaching 30% is a red herring. He wants 30% because he hopes the PL will agree with his view that under their rules that entitles him to full access to Arsenal’s books. Stan will probably resist that, and even if he doesn’t or can’t it won’t make any material difference to an owner who is rarely in the country.
      Usmanov will NOT be obliged to make an offer if and when he reaches 30%. That only applies when there is no majority shareholder. If he wants to make an offer to Kroenke he can make one now, when he reaches 30%, any other time or never. The 30% is irrelevant for this.

  4. Excellent piece, John. I think it highlights the question of why that money hasn’t been spent and why the Arsenal Board has not since 2007 placed any sort of pressure on the manager to spend that money, and whether for all the claims about money being available to spend if THEY actually made it available to spend or wanted it spent. at any point the past five years. I think we need to pose the question and DEMAND an answer for the good of the Club both short- and long-term.

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