Feeling the pinch: Clubs braced for cuts as FFP arrives with teeth

We are part of The Trust Project What is it?

It’s the Football League’s lean, mean, debt-reducing, killing machine – and coming to a club near you. FourFourTwo's Joe Brewin runs the rule over the financial regulations that will impact the 72 next season.

OK, so it won’t hurt quite like George Foreman in his prime but after over two years of discussions, Financial Fair Play finally arrives packing a punch.

Though sanctions don’t arrive until the 2014/15 campaign, clubs in the second tier and below have been warned. Failure to adhere to the League’s strict framework can result in consequences ranging from transfer embargoes to heavy financial penalties.

It is not a test to trick clubs, nor is it designed to catch them out. Simply, the Football League doesn’t want another Portsmouth on its hands.

And can you blame them? The latest accounts (2011/12) were released sporadically by clubs from the end of last year, and showed only five second-tier outfits posting a net profit. 

All but three of the Championship’s 24 teams voted in favour of the model in April 2012. With aggregate losses of £158m – an average of almost £6.6m per club – it was an issue too big to ignore.  

While the Premier League is also braced for spending cuts after clubs ratified the implementation of FFP in April, the regulations are likely to hit Football League clubs hardest. After all, the top flight’s bumper new television deal softens the blow for the English league's top 20 clubs.

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“But how the flippin' ‘eck does it actually work?” we hear you cry. Well folks, here’s FFT’s bullet-point guide to the boring stuff.

• Next season, Championship clubs are allowed losses of up to £8m. Of that, £3m allowed is operating losses and £5m in equity (effectively shares bought through the owners – ‘gifts’, not loans).
• Those figures decrease to £6m in 2014/15 and £5m in 2015/16.
• Clubs must submit their annual accounts from the previous season/financial year by December 1 each year.
• The first reporting period was actually the 2011/12 season – the Football League’s trial run, if you will.

Hey presto! From that, the League’s boffins calculate a ‘Fair Play Result’ that will ultimately decide each club’s fate. Those clubs who don’t meet the criteria from accounts posted by 1 December 2014, will be subject to a transfer embargo until they can prove their ship has been steadied.  

Sides in League One and Two have chosen to implement the Salary Cost Management Protocol (SCMP) instead. Despite the technical-sounding name, the concept is simple. Broadly, the SCMP limits a club’s spending on player wages to a percentage of its turnover. League One sides will be restricted to a 60 per cent threshold from next season, while League Two teams (who have used the system since 2004/05) have reduced their limit to 55 per cent. Transfer embargoes, unlike in the Championship, are applicable as of now. 

There are exemptions to a club’s FFP result, however, which include investment in youth development, community schemes, promotion-related bonuses and the profit element of “the purchase, sale and depreciation of fixed assets excluding players (e.g. a club's stadium)”.

But if you’re a cavalier club hoping to blitz your way to the big time, think again. Spending beyond your means to reach the so-called Promised Land won’t wash – and clubs who try and do it that way will be forced to pay a ‘Fair Play Tax’.

The tax is applied on a sliding scale. Excesses of between £1 and £100,000 are met with a charge of one per cent of the excess; any excess over £10m draws a 100 per cent charge. The exact figures can be found here.

To put that into context, a club gaining promotion next season with £10m losses would pay a tax of £1.2m (60 per cent of a £2m excess). Any proceeds are split between clubs who have complied with FFP regulations that season.

So rather than a gold star or pat on the head, well-behaved sides are actually rewarded properly. Neat, eh?

Naturally, the sceptics among us are already wondering how clubs will bend the rules. Inflated sponsorships appear an easy way out but to combat this the Football League have a plan up their sleeve.

“If a club was to receive inflated commercial revenues from an owner or any other related party, as part of the audit review of the Fair Play calculation these would be adjusted for the market,” a League spokesman told FFT.

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If you’re still with us at this point, congratulations. But whether interesting or otherwise, FFP is a significant step forward for football and will almost certainly have huge implications on next season’s title tilt.

Financial number-crunchers Deloitte unearthed alarming figures in their recent football finance review, revealing the average wages-revenue ratio for Championship clubs to be a staggering 89 per cent (having hovered around that level for five seasons). Nine clubs exceeded a 100 per cent ratio - meaning they spent more money on wages than they brought in.

Some clubs have more work to do than others. Though QPR are not subject to FFP rules as a newly relegated club (they would pay ‘tax’ should they bounce straight back up while failing to comply, however), the west Londoners’ 2012/13 accounts are expected to paint a frightening picture. 

They aren’t alone either, with Blackburn anticipating losses of at least £40m over the same period after dropping out of the top flight. Leicester (-£29.7m), Bolton (-£22.1m), Ipswich (-£15.96m) and Nottingham Forest (-£12.2m) also have work to do after posting heavy losses in their last sets of accounts.

The latter clubs are expected to shape up better next time around but, almost certainly, there will be those who don’t meet demands even with a predictably frugal summer.

With everyone now hampered by the restrictions, offloading overpaid excess becomes all the more difficult. Teams are faced with a choice: bite the bullet and get rid on the cheap or hang on in the hope that such a player still has a part to play.

We won’t know how the land really lies until last season’s accounts are published towards the end of this year, but one thing is for sure, FFP is very real and its sanctions significant.

The gulf in class between English football’s top two tiers hardly needs bridging further but, inevitably, the Championship can’t sustain this careless spending forever.

These regulations should point towards a new emphasis on youth development within the Football League - but EPPP has put paid to that. That’s another argument entirely, however, and one made no better than this.

Sadly clubs had better get used to it though - it’s all uphill from here.