What Is Financial Fair Play And Why Should We Care?

Maffff takes us through a quick breakdown of Financial Fair Play (FFP), what this has meant for us in the past and a potential look into the future.

What is ‘Financial Fair Play’?

FFP is the set of ‘profit and sustainability’ rules that operate in the Championship. From 2016/17 the rules were changed to bring the league into alignment with the Premier League - assessing clubs over three-season periods rather than a single year.

This alignment is key as harmonisation should remove the historical FFP stand-offs that arose with QPR and Leicester, given that the Premier League had previously refused to collect the ‘fair play tax’ fines for clubs that overspent but won promotion, which significantly undermined the Football League’s case and impacts on the effectiveness of punishments.

The UEFA fair play rules are over 90 pages, but the key points to be aware of are:

1. The maximum loss limit is now £13m per Championship season (or £5m a season if the owner does not inject equity to cover losses).
2. Losses are assessed over three seasons (rather than just over the single previous season).
3. The assessment of each club’s finances is a combination of a historic assessment (looking at figures for the two previous completed season) and an assessment of the current season.

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Where do Reading stand?

Reading has always complied with FFP, which we can see from the club’s financial results since relegation in 2013.

2013/14: £7,291,469 loss

2014/15: £2,588,554 profit

2015/16: £15,034,948 loss [three-year rolling: -£19,737,863]

2016/17: £4,661,150 profit [three-year rolling: -£7,785,244]

2017/18: £20,952,868 loss [three-year rolling: -£31,326,666]

[source: Companies House]

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What’s the current problem?

Parachute payments have helped us in previous seasons but, with the playoff final season being our last year of receiving parachute payments, 2017/18 saw our turnover drop from £36.7m to £18.8m.

Additionally, salary costs increased after the playoff final from £27.9m to a staggering £35.3m - that’s 197% of turnover; a huge ratio which only two clubs came close to: high-spending Birmingham City on 202% (themselves deducted points) and promoted Wolverhampton Wanderers on 192%.

Photo by Catherine Ivill/Getty Images

For the season that has just passed - 2018/19 - accounts will not be visible until next March, but we do know that we remain with a bloated squad, high earners and a severely diminished turnover. This creates a hangover for 2018/19 and presumably a real pinch for the coming season, 2019/20.

With a £20,952,868 loss on the account for 2017/18, it meant in theory last season we could lose £22,047,132 and still comply with FFP - but this would give us absolutely no money available the season we’re about to head into.

I fully expect we will have complied with three-year rolling FFP when we see the 2018/19 accounts in March 2020.

The bigger issue is this season. The £20m loss from 2017/18 is on the accounts, but the £4.6m profit from 2016/17 disappears as we are now entering a different three-year period from this season onwards: 2017/18, 2018/19 and 2019/20.

In 2017/18 we lost £20,952,868, meaning that over 2018/19 and 2019/20 combined we can only lose a total of £18,047,132 - just over £9m per year. Over half the ‘wiggle-room’ FFP gives in the period is already gone in year one. All the while we’re running on a severely diminished income. Ouch.

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So, what are we doing about it?

We’re lucky to have owners that aren’t cash-poor. However, due to the FFP, they’re held back from being able to invest as much as they’d like. It means we have to ensure that one of two things happens (well, a balance of both really):

1. We increase our turnover
2. We reduce our expenses

How do we do that? Examples of how to increase turnover include:

• Perform on the pitch. The better you do, the more fans come watch, the more likely you’ll be picked up for games on TV and the higher up the pitch you finish, the more money you receive for finishing higher up the league. That’s tough, given the inability to invest.
• Seek alternative commercial revenue. The obvious one here would be the stadium naming rights, plus getting better shirt and stadium sponsors.
• Get creative. Sell the stadium - which has now transferred to the owners with Reading paying a low annual rental fee. It’s a one-time thing, but brought roughly £40m into the club to balance against debt.
• Consolidate the debt. Our owners have done this; our interest payments fell from over £2.17m to under £200k this year just gone. That means we’re paying £2m less a season simply to repay past monies.

Photo by Harry Trump/Getty Images

But what about reducing expenses?

• Sell players. Yep, the obvious one, but the unpopular one. Better players tend to cost more in wages and are the ones that can generate transfer fees. If you can get them out the club you’re spending less. The risk here is that you diminish the quality of the playing team and can face further ramifications - such as relegation.
• Get creative with loaning players in. We had loans from Chelsea and Arsenal last season, bringing us quality players - some of whom Gomes said we paid nothing for in either wages or fees. Every penny is needed - if you can get value for money to get quality players in cheaply, it’s a no-brainer.
• Get creative with players out. Sone Aluko to sister club Beijing Renhe (owned by Dai Yongge) - there’ll no doubt have been a decent fee here which has offset some losses for the season, plus wages off the books. We’re lucky to have the option of using the sister clubs as it provides a creative solution. Even getting David Meyler, Marc McNulty, Vito Mannone etc out will bring some money in and get some wages off the books.
• Don’t renew contracts. If keeping a player doesn’t offer resale or value for money on the pitch, cut the fat. Paul McShane, John O’Shea, Callum Harriott and others - it might be a shame to see you go, but it’s needed. Sorry.

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What does this mean going forward?

Simply put, it’s a tough season or two and the owners seriously need to be on it financially. Ron Gourlay’s departure is encouraging as there never seemed to be any emergence of the commercial income he shouted about and fiscal prudence didn’t seem to exist in his vocabulary, given some of the contracts during the season after the playoffs.

But it isn’t all doom and gloom. We know the owners want to invest; we hear it every few days or every week. So, my own personal expectations for the coming season and seasons after are as follows:

1. This season we work hard to remove players off the books that aren’t giving us value for money.
2. If we do not manage to reduce this as much as we want, we will potentially consider bloated offers for our better players or a young star that is breaking through. We would only need to sell one or two and the ball is in our court – it isn’t totally desperate and there are other ways to balance the finances.
3. We will sell Sone Aluko to Beijing Renhe for an excessive fee.
4. We will continue using KSV Roeselare for loans, and possibly see more use of Renhe.
5. We will continue looking at options to increase our income, such as stadium naming rights.
6. We will sign a smaller number of players, expecting them to be young and needing to prove themselves - focusing on resale value.
7. If we do sign experience it’ll only be a couple - and in small numbers.
8. We will continue to focus on blooding youth.
9. Next season is about setting the foundations and lower mid-table is a likely realistic target, aiming for use as a foundation for 2020/21.

The £20m loss is a huge chain around our necks. Once that’s out the way we’ll be much more comfortable.