Please explain FFP in very simple terms

Creaky · Jan 26, 2014

AZ Gull said:
You are absolutely right - and hence why FFP explicitly allows capital expenditure on fixed assets. Albion's combined ticketing and catering income in the first season at the Amex was 9.1million, compared with 2.3million in the last year at Withdean. I am in full agreement with your argument here, and FFP fully supports it. But for a club to be financially self-sustaining, expenditure HAS to be tied to revenue. The formula is simple: invest in capital assets --> increase revenue --> expenditure can rise sustainably. This is exactly the blueprint that Albion are following.

The claim that expenditure has to equate to revenue is simply not a model followed by any entity that is trying to expand, or in the case of football clubs, trying to progress higher up the leagues. Expenditure has to equate to income and that income can come from investors as well as turnover.

AZ Gull said:
FFP is following a structured timetable of implementation; the maximum allowable losses of £5M come into effect in the 5th year of implementation (having been £12M in the first year). Of course a club who is in the process of moving from a small, rented stadium into its own £100M new-build is likely to incur abnormal losses. Even so, it's losses still fell within the FFP timetabled deviations. Your argument here is specious.

The argument is far from specious! - I pointed out that were the FFP regulations in force, (not during a period of initial implementation), in our final few years at the Withdean then we would have been in breach of the regulations during our final year there and our first year at the Amex. This would indeed have been the case.

AZ Gull said:
How can you seriously argue that FFP discourages investment in clubs by wealthy individuals? Have you heard of a club called Brighton and Hove Albion, and their chairman, Tony Bloom?

Indeed I have - but would he have been as willing and able to make that investment if he knew that by doing so the likelihood would be that the club would then face a transfer embargo?

In fact hasn't the imminent implementation of FFP reduced TB's added investment in the club and rather been diverted to other possible avenues such as a hotel complex?

AZ Gull said:
You seem to be arguing that a club in a lower league should be able to spend massively on players wages, in the hope of eventually gaining promotion. If that isn't a recipe for disaster, then I don't know what is. (In fact, if you were to examine every case of clubs getting into financial difficulties over the last 30 years, I would suggest this very reason would lie at the heart of the matter in nearly every single case). It is this attitude that is putting the cart before the horse (ie spending money that the club doesn't have). I think you will find that FFP will actually have a beneficial effect here because it will force clubs to reign in their spending on players wages - in fact David Burke alluded to this in his interview the other month, saying he had seen firm evidence that this was the case.

It's not been the spending on the playing side of clubs that has caused problems but the way in which the money to pay for those players has been raised - ie loans which in turn increase the debt burden of a club. I don't know of any club that has little or no debt that has got into financial problems - indeed why should they?

So yes I am saying that clubs in whatever league should be able to spend whatever they like on the playing side and for whatever the reason so long as doing so does not increase the debt burden of those clubs - Either that or EXACTLY the same rules should apply to ALL leagues.

Remember Leagues 1 and 2 of the Football League have totally different rules and are not enforcing FFP but rather using SCMP, an equally bizarre set of rules. Why are clubs in League 2 limited to spending 55% of turnover on players but clubs in League 2 can spend 60% - makes no sense. On top of that although the limits are there in League 2 for the current season the penalties for breaching them haven't been decided! :ohmy:

AZ Gull said:
The Community Stadium Ltd is a wholly owned subsidiary of Brighton & Hove Albion Holdings Ltd (the entity that, to all intents and purposes, is "the club"). The Amex was built by, and is owned by, "the club".

You have highlighted exactly the point I was making - BHAFC Ltd and The Community Stadium Ltd are separate companies owned by a holding company which in turn is owned by TB - as such the club does NOT own the assets of the Community Stadium Ltd. There is NOTHING to stop TB selling either one or both those companies to whoever he likes should he decide to do so at some time in the future.

AZ Gull · Jan 26, 2014

Creaky said:
The claim that expenditure has to equate to revenue is simply not a model followed by any entity that is trying to expand, or in the case of football clubs, trying to progress higher up the leagues. Expenditure has to equate to income and that income can come from investors as well as turnover.

I don't understand what your argument is here, because I don't understand how you are using various terms. To me, income is one and the same thing as turnover, but you are obviously using those words to mean different things. Can you clarify?

AZ Gull · Jan 26, 2014

Creaky said:
In fact hasn't the imminent implementation of FFP reduced TB's added investment in the club and rather been diverted to other possible avenues such as a hotel complex?

How on earth would either of us know what TB's plans for the club would have been without FFP? And a hotel complex would be built BY THE CLUB (otherwise the revenue it generates would not help under FFP), and so if anything, FFP is having the effect of INCREASING investment in the club by TB (the key point here is that it is encouraging investment in the club's fixed asset base, which will lead to sustainable, long-term income streams, rather than short-term profligate spending on operational expenses such as player wages).

Creaky said:
It's not been the spending on the playing side of clubs that has caused problems but the way in which the money to pay for those players has been raised - ie loans which in turn increase the debt burden of a club. I don't know of any club that has little or no debt that has got into financial problems - indeed why should they?

I'm afraid it is YOU who is putting the cart before the horse here. It is exactly BECAUSE clubs spend more money than their turnover, that creates the need for loans in the first place. If a club makes a profit, there is no need for any new debt financing.

Creaky said:
You have highlighted exactly the point I was making - BHAFC Ltd and The Community Stadium Ltd are separate companies owned by a holding company which in turn is owned by TB - as such the club does NOT own the assets of the Community Stadium Ltd. There is NOTHING to stop TB selling either one or both those companies to whoever he likes should he decide to do so at some time in the future.

As you say, BHAFC Ltd and The Community Stadium Ltd are separate, subsidiary companies 100% owned by Brighton and Hove Albion Holdings Limited. It is this holding company that is "the club". It is this holding company that submits its accounts to the Football League for FFP purposes. It is this holding company that owns the Amex.

symyjym · Jan 26, 2014

I think FFP makes it interesting, clubs will be fined, maybe in the millions, which will be handed down to clubs who stick to the rules. If these clubs have money on tap make them pay for it and spread their money out to clubs who need it.

Transfer embargos will happen, so any club which is promoted and flouting FFP will be exluded from purchasing players for a set period.

That's their risk, and FFP just adds another dimension.

Even if we tried to outbid these other clubs for players they would still raise their offers further so we have nothing to lose and everything to gain by sticking with it.

Creaky · Jan 27, 2014

AZ Gull said:
I don't understand what your argument is here, because I don't understand how you are using various terms. To me, income is one and the same thing as turnover, but you are obviously using those words to mean different things. Can you clarify?

Income is just that - all monies received by the company. Turnover is that part of income generated by the company's normal activities - it does not normally include the buying and selling of capital assets nor equity receipts.

The idea you, and indeed other proponents of FFP, appear to have is that it's fine to build stadia, training grounds etc but not employ the playing staff to actually carry out the normal activities of the club, i.e. play football. Akin to saying it's fine to build a new widget factory but you must wait for turnover to increase before you can actually employ any workers to actually make the widgets - that's what I meant about putting the cart before the horse.

Creaky · Jan 27, 2014

AZ Gull said:
How on earth would either of us know what TB's plans for the club would have been without FFP? And a hotel complex would be built BY THE CLUB (otherwise the revenue it generates would not help under FFP), and so if anything, FFP is having the effect of INCREASING investment in the club by TB (the key point here is that it is encouraging investment in the club's fixed asset base, which will lead to sustainable, long-term income streams, rather than short-term profligate spending on operational expenses such as player wages).

I don't know anymore than you do what TB's plans for the club would have been prior to FFP but it is a fact that the level of investment has fallen since its introduction. What I do know though is that the majority of turnover is not generated by the various subsidiary activities but by the main activity of the club, playing football. FFP is restricting this activity whilst encouraging others - total madness, I don't pay for a season ticket in order to buy a really good pie, nor for the beer but to watch the best level of football the club can provide.

AZ Gull said:
I'm afraid it is YOU who is putting the cart before the horse here. It is exactly BECAUSE clubs spend more money than their turnover, that creates the need for loans in the first place. If a club makes a profit, there is no need for any new debt financing.

That statement ignores the main tenet of my argument - if the additional spending is financed by either equity purchase or indeed by sponsorship deals then there won't be any increase in debt. That is why I suggest that FFP should be addressing the level of debt rather than the level of spending.

AZ Gull said:
As you say, BHAFC Ltd and The Community Stadium Ltd are separate, subsidiary companies 100% owned by Brighton and Hove Albion Holdings Limited. It is this holding company that is "the club". It is this holding company that submits its accounts to the Football League for FFP purposes. It is this holding company that owns the Amex.

Actually it's neither, FFP accounts are a completely separate set of figures - extracted from the club's and the holding company accounts.

Creaky · Jan 27, 2014

symyjym said:
I think FFP makes it interesting, clubs will be fined, maybe in the millions, which will be handed down to clubs who stick to the rules. If these clubs have money on tap make them pay for it and spread their money out to clubs who need it.

Transfer embargos will happen, so any club which is promoted and flouting FFP will be exluded from purchasing players for a set period.

That's their risk, and FFP just adds another dimension.

Even if we tried to outbid these other clubs for players they would still raise their offers further so we have nothing to lose and everything to gain by sticking with it.

If any of that were correct then possibly, just possibly, FFP could achieve its major aim of driving down player's wages, not something I necessarily agree with.

Unfortunately any fines will only be imposed on clubs gaining promotion and it won't be distributed amongst other clubs - promoted teams won't face a transfer embargo either. If the fines are indeed in the millions then that makes it entirely likely that there will be legal challenges tying up the case for years.

As for transfer embargoes imposed on teams remaining in the Championship - sounds good on the surface but essentially punishes players that would otherwise be employed by the embargoed teams and reduces the pool of players available to non-embargoed teams.

Essentially not only does FFP widen the gap between the leagues but its penalties in terms of fines increases the financial instability of punished clubs and at the same time is detrimental to the end product of football clubs by restricting player movement.

AZ Gull · Jan 27, 2014

Creaky said:
The idea you, and indeed other proponents of FFP, appear to have is that it's fine to build stadia, training grounds etc but not employ the playing staff to actually carry out the normal activities of the club, i.e. play football. Akin to saying it's fine to build a new widget factory but you must wait for turnover to increase before you can actually employ any workers to actually make the widgets - that's what I meant about putting the cart before the horse.

And the point that you seem to be missing is that the only way to move towards long-term, financially sustainable clubs is by allowing investment in infrastructure and limiting the allowable size of a clubs annual losses. The reason you are able to watch players of the calibre of Kuszczak, Ulloa, Orlandi et al every other week at the Amex (and will be able to do so for many seasons to come) is because TB invested millions in a brand new stadium (and is investing millions more in a training facility/academy). That investment will ensure massively increased turnover (compared to the Withdean years) for decades. Just imagine for a moment that instead of doing that, we remained at Withdean and instead all that money went to players wages; sure, for a few years you might get to see some talented, massively over-paid superstars, but eventually the money would run out (or the owner would get bored, or sent to jail, or die) and the club is left as a financial basketcase, because the money was spunked away on operational costs (player wages) and nothing was invested in the infrastructure of the club.

And to expand your analogy of the widget factory: if a business built such a factory, but then employed workers on a wage that guaranteed you lost money on every widget you sold, it would be financial lunacy. And yet this is what you seem to be advocating. It is economic madness.

AZ Gull · Jan 27, 2014

Creaky said:
I don't know anymore than you do what TB's plans for the club would have been prior to FFP but it is a fact that the level of investment has fallen since its introduction. What I do know though is that the majority of turnover is not generated by the various subsidiary activities but by the main activity of the club, playing football. FFP is restricting this activity whilst encouraging others - total madness, I don't pay for a season ticket in order to buy a really good pie, nor for the beer but to watch the best level of football the club can provide.

I have no idea what you mean here. TB spent £103M on the new stadium initial build, £15M on the additional capacity, and is spending an estimated £22M on the training ground/academy. The player budget has also increased in each of the last 3 seasons. Are you suggesting you expected TB to invest £100M every season?

Creaky said:
That statement ignores the main tenet of my argument - if the additional spending is financed by either equity purchase or indeed by sponsorship deals then there won't be any increase in debt. That is why I suggest that FFP should be addressing the level of debt rather than the level of spending.

I agree that there is absolutely nothing wrong with a legitimate, market-rate sponsorship deal that increases revenue (and therefore allows expenditure to be increased, if the club so desires). But there is EVERYTHING wrong when that deal is a blatant attempt by the owner to distort turnover, and artificially increase spending on player wages. And equity purchase is a neutral act - what is important is what is done with that capital injection. If it is used simply to increase operational expenditure (ie player transfer fees/wages), it is detrimental to the club because it isn't sustainable. It increases the club's cost base without increasing revenue. In practical terms, I'm sure we will see FFP have a welcome and beneficial effect in reducing the rate at which debt is built up by clubs; but it will be as a byproduct of clubs posting significantly lower annual losses.

Surf's Up · Jan 27, 2014

I'm a complete layman as far as FFP and financial accounting is concerned but it seems to me that a massive infrastructure investment is only going to result in sustainably increased turnover if it is matched, long term, by success on the pitch. Which means both buying in players and developing players who can deliver that. Under FFP, because our operating costs have skyrocketed as a result of the infrastructure investment, we're stuffed in terms of investing competitively on players. Feels as though we're caught in a trap.

nwgull · Jan 27, 2014

gibseagull said:
I'm a complete layman as far as FFP and financial accounting is concerned but it seems to me that a massive infrastructure investment is only going to result in sustainably increased turnover if it is matched, long term, by success on the pitch. Which means both buying in players and developing players who can deliver that. Under FFP, because our operating costs have skyrocketed as a result of the infrastructure investment, we're stuffed in terms of investing competitively on players. Feels as though we're caught in a trap.

Infrastructure investment is exempt from FFP - this includes stadium and training facility costs.

If it wasn't then no new stadiums or renovations would ever be built again.

Surf's Up · Jan 27, 2014

nwgull said:
Infrastructure investment is exempt from FFP - this includes stadium and training facility costs.

If it wasn't then no new stadiums or renovations would ever be built again.

I know - my point was that as a result of this investment our operating costs have soared which has in turn restricted our ability to invest in footballers.

Creaky · Jan 27, 2014

AZ Gull said:
And the point that you seem to be missing is that the only way to move towards long-term, financially sustainable clubs is by allowing investment in infrastructure and limiting the allowable size of a clubs annual losses. The reason you are able to watch players of the calibre of Kuszczak, Ulloa, Orlandi et al every other week at the Amex (and will be able to do so for many seasons to come) is because TB invested millions in a brand new stadium (and is investing millions more in a training facility/academy). That investment will ensure massively increased turnover (compared to the Withdean years) for decades. Just imagine for a moment that instead of doing that, we remained at Withdean and instead all that money went to players wages; sure, for a few years you might get to see some talented, massively over-paid superstars, but eventually the money would run out (or the owner would get bored, or sent to jail, or die) and the club is left as a financial basketcase, because the money was spunked away on operational costs (player wages) and nothing was invested in the infrastructure of the club.

And to expand your analogy of the widget factory: if a business built such a factory, but then employed workers on a wage that guaranteed you lost money on every widget you sold, it would be financial lunacy. And yet this is what you seem to be advocating. It is economic madness.

I love the way you distort the argument being put forward - at no stage did I suggest there shouldn't be investment in infrastructure nor that such investment shouldn't be encouraged! What I have said though is that it is equally important that money is spent on the players to match the potential of those facilities - something which TB thankfully appears to have recognised.

I agree that without the money TB spent on building the Amex it would be unlikely that we would be watching a team of the calibre that we have - without a competitive team though it is unlikely that we would have had the attendances at the Amex of the size we have enjoyed over the last 2+ years.

As pointed out previously though had FFP been in full force when we moved into the Amex then we wouldn't have had such a team - either because we didn't offer the wages to attract the players in the first place or were being faced with a transfer embargo.

Back to the analogy of the widget factory it is not that unusual nor is it economic madness for products to be initially produced at a loss when pushing for growth. To use TB's phrase, in order to be "Premier League ready" a company will often invest in the best facilities, staffed by the best workers, in order to produce goods that may not initially provide a profit but have future potential. Without such risk taking the economy would simply stagnate.

Rugrat · Jan 27, 2014

gibseagull said:
I know - my point was that as a result of this investment our operating costs have soared which has in turn restricted our ability to invest in footballers.

But our revenues have grown at a higher rate

Surf's Up · Jan 27, 2014

Rugrat said:
But our revenues have grown at a higher rate

Then how come we've got a negative balance of £8m pa?

Rugrat · Jan 27, 2014

Creaky said:
Back to the analogy of the widget factory it is not that unusual nor is it economic madness for products to be initially produced at a loss when pushing for growth. To use TB's phrase, in order to be "Premier League ready" a company will often invest in the best facilities, staffed by the best workers, in order to produce goods that may not initially provide a profit but have future potential. Without such risk taking the economy would simply stagnate.

Another good point that I was about to make.

Back to football .. if Sheikh whatever at Forest funds a push for the next 2/3 years and he gets there then all is fine. If they can't and he decides to walk away then fine also if he hasn't saddled the club with debt or burdened them with financial commitments that they can't manage

This is where I see FFP as being a totally blunt instrument. The FA should be focussed on the quality of the investments and the safeguard of clubs not on imposing restrictive rules that would not be tolerated anywhere else in the business world

Rugrat · Jan 27, 2014

gibseagull said:
Then how come we've got a negative balance of £8m pa?

I imagine it would have been a lot more than £8M if we had stayed at Withdean, we lost £7M in our last season there. The costs of our transfer dealings and the wages of those brought in and others with new contracts will be significantly higher than they were in L1

Creaky · Jan 27, 2014

Rugrat said:
Another good point that I was about to make.

Back to football .. if Sheikh whatever at Forest funds a push for the next 2/3 years and he gets there then all is fine. If they can't and he decides to walk away then fine also if he hasn't saddled the club with debt or burdened them with financial commitments that they can't manage

This is where I see FFP as being a totally blunt instrument. The FA should be focussed on the quality of the investments and the safeguard of clubs not on imposing restrictive rules that would not be tolerated anywhere else in the business world

Spot on - there has never been, to my knowledge, a case where 'wage restraint' over a prolonged period has been a success.

nwgull · Jan 27, 2014

gibseagull said:
Then how come we've got a negative balance of £8m pa?

Because of the players' wages.

El Presidente · Jan 27, 2014

gibseagull said:
Then how come we've got a negative balance of £8m pa?

Because of poor cost control by the pre-Barber regime, along with a doubling of the wage bill.

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