Big loss, big deal?

No doubt over the coming days many Blues will get texts, emails, tweets and messages regarding City posting a record loss of £194.9m over the 2010-11 financial year. No doubt many of those will include references to the financial fair play rules that stipulate that a club can't make more than a £38m loss over the next 3 years and that we'll be banned from European football etc etc. I'll probably get a few myself, but am I really bothered? No, not really.

Now I'm no expert on finances but it's quite clear to me that this figure isn't anything to be overly concerned about. Why not? I'll explain why this record loss is not going to be a trend for City.  

First of all, this is not a surprise to the hierarchy at City, they were well aware that the 2010-11 financial year was going to be the largest hit the club would take. Speaking to mcfc.co.uk at the end of the 2010-11 season, Chairman Khaldoon Al Mubarak described that we would not see spending in 2011 on the scale we saw in the summer of 2010.

"It wont be like last summer, or the summer before. What you will see this year is strengthening the squad in areas that we feel require more depth."

And that's exactly what happened. City purchased Pantilimon (loan), Hargreaves (free), Savic (£6m), Clichy (£7m), Nasri (£24m), and Aguero (£38m) for a combined fee of £75m.

Compare that to the season before when City signed Boateng (£10.5m), Kolarov (£19m), Balotelli (£24m), Toure (£24m), Silva (£26m), Milner (£26m), and Dzeko (£27m) for combined fees totalling £156.5m. So City have spent less than half the amount this year, just as Khaldoon said we would.

Graham Wallace, Manchester City chief operations officer, also stated after the announcement that "Our losses, which we predicted as part of our accelerated investment strategy, will not be repeated on this scale in the future." Once again we see that those in charge at City were fully aware and prepared for these losses before the spending was ever authorised.

So we've looked at recent spending City have done as far as transfers go, but what about income? With regards to outgoing transfers, it's no secret that City struggled (and still are in some cases) to offload several players (on a permanent basis) that were purchased under Mark Hughes' tenure and before. Adebayor, Santa Cruz, Bridge, Bellamy and Jo are the main players in the list that Mancini has been trying to sell on since taking over, partly due to their wages eating away at the coffers while they're not part of his plans.

Emmanuel Adebayor spent 6 months on loan at Real Madrid last season and is on loan again, this time at Spurs for the whole 2011-12 season. Miraculously the loan fee is covering the percentage of wages Spurs aren't copping for. This means we don't have to worry about him until the summer when we can hopefully get a transfer fee for him.

Roque Santa Cruz was also on loan last season (Blackburn) and is once again on loan this season (Real Betis). As with Adebayor, we will hopefully get a transfer fee for him next June-July.

Wayne Bridge (a.k.a the new Danny Mills) spent January onwards with West Ham and turned down a move to Celtic in the summer transfer window so he is still with us, unfortunately. I suspect that despite him clearly not getting enough game time enabling him to walk away from his contract here and find another club, he's more likely to swan about with his missus doing clothes shopping until his contract runs out.  

Craig Bellamy spent last season with with Cardiff at City's expense as the bluebirds could only afford a fraction of his wages. Liverpool took him off our hands in the recent transfer window for, albeit on a free transfer, such was the demand for his services.  

Jo Alves de Assis Silva, or just Jo, featured a few times last season, mainly in the Europa league and Cup games. There are many ways to describe his time at City; crap sums it up nicely. He was offloaded to Internacional for a whopping fee of absolutely nothing.

The 'sale' of the likes of Jo and Bellamy among others are actually included in the financial report in the sum described as "additional exceptional charges". In other words, because the club let these players go for nothing they have added the players' valuations onto the loss the club has made. This total comes to £34.4m. Quite astute accounting really as for the purposes of proving to UEFA that City are working towards FFP they have actually increased their losses to make any future improvements factually greater than they would be otherwise.

There are other players that have been sold or loaned, and I'm not talking about for development reasons, but the point is City aren't just buying and buying, they're also selling the players they don't want. I've lost count of the times I've heard someone say "City have got x number of strikers and there's not enough room in the squad blah blah."

Yes there are now what you would class as 6 'main' strikers registered to City, but only 3 of them are even wanted. City were willing and trying to get rid of the rest throughout the summer but were unable to get what they deemed were reasonable transfer fees for them. 2 of them are now on loan with their wages covered. I'm not mentioning the other one. Obviously the transfer fees for any player will be knocked off any losses incurred in the future.

Clearly trying to make a sustainable business model dependent on the sale of limited resources isn't going to work, so what are City doing to increase their income from other areas?

The fans are, and will always be the main factor in the viability of any club. The more fans there are, the more tickets are sold and the more demand there is for the club to be shown on TV and since Sheikh Mansour took over, whether some fans like it or not, City's global appeal has shot through the roof for various reasons.

It's just a fact of football, the more successful a team is the more fans it gets. The longer it stays successful the more fans will stick around if the club hits a sticky patch. There are always going to be fair weather fans who change teams depending on trophies won, just as there are fans who only support a team because of a certain player.  

City has greatly benefited from its recent exposure resulting in more league games selling out quicker than in previous seasons (every Premier League game has sold out home and away so far this season, often several days or even a weeks in advance), as well as increased average attendance for Cup games. The increase in fans also means greater income from merchandise sales.

TV revenue is set to be at club records due to increased numbers of matches being shown live on various channels. It's not only the league games, but now City are in the Champions League the revenue from TV deals is far far greater than without it.

Along with ticket sales and TV revenue from league games we can also add earnings from the various competitions City are now competing in, again most notably, the Champions League. If City reach the quarter finals of the competition, the earnings before their share of domestic TV deals and gate receipts would be in the region of £15m, and would obviously increase even further if they got any further in the competition.

All of these basic increases are likely to continue throughout the season and beyond as City now have a team that can compete for top honours in the long term.

Of course on top of the increased ticket sales, increased TV revenue, increased merchandise sales, we also have sponsorship deals.

I don't think I need to go into much detail regarding the Etihad deal do I? Around £40m a year for the next 10 years is being paid into the clubs coffers with this deal alone. City have also recently struck multi-million pound deals with EA sports and Mansion who now stand alongside a number of other companies such as Jaguar, Heineken/Amstel, Thomas Cook and more, as partners and sponsors. None of these new deals are represented in the 2010-11 financial year.

The media will no doubt focus solely on the loss made by the club, which despite being record levels for any English club, isn't any more of a trend than me going out and decorating the main rooms in the house and then cutting back spending while a add the finishing touches.

City can take great positives away from the 2010-11 financial report. The overall turnover increased by more than 20% pushing above the £150m mark for the first time. Ticket sales increased by 8% to £19.7, TV revenue by 27.4% to £68.8m, and commercial revenue by 49.7% to £48.5m.

I'll say it once again, ALL of these figures are set to dramatically increase in the 2011-12 season. The commercial revenue alone is set to almost double with the new sponsorship deals in place. I'm not saying we'll be in the black, or even break even by the end of the current financial year. What I am saying is that the financial viability of Manchester City as a business is in very capable hands and any losses reported this time in 12 months will be vastly reduced. All City need to do is show a definite trend towards conforming to the financial fair play rules, and this is exactly what they shall be doing.

So don't believe the hype when you hear things like "City will be worrying as to how they can comply with UEFA's financial fair play rules" as by the time the those rules actually come fully into play in the 2014-15 season, City shouldn't have any trouble at all.

You can see a basic overview of the financial report on mcfc.co.uk. You will also find a link on there for the full report.





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