Sunderland Financial Results: Are Cats As Short As They Seem?

It is that time of the year again when Sunderland, amongst other clubs, announce their annual financial results, and that means just one thing: it is that time of the year again for the press to blanket report, pretty much ignorantly, the total financial oblivion into which the club is staring.

I don't necessarily blame the press for that. Well, I do a bit. After all, it is their job to investigate various goings on and get themselves in a position to accurately relay that, is it not? Anyway, the point is that the financial side of pretty much everything can be confusing, and that is even more so with football finances due to the fairly unique manner in which they are recorded.

Still, every year, despite the club putting out the pertinent information for all to see, we hear the same old things. Specifically the numbers being taken literally and reported, and the context and insight entirely excluded.

Fans are no different of course. In fact we are guilty of mostly the same thing. We openly admit to not being experts, and then we see a set of numbers and blindly accept them despite knowing that the financial health of the business is being looked after by infinitely better qualified people than us.

And yet, since Sunderland released their results we have been treated to a steady stream of sweeping and statements usually starting by quoting ‘the huge £26.9m loss', steaming through the ‘over-reliance on Ellis Short' rhetoric, and ending up somewhere around a chilling warning for the future about how ‘that doesn't even include the £30m the club have spent this season, either'.

But that is just a sensationalist and fairly lazy way of reporting it, which doesn't sit entirely well with me. The club are generally elusive with this sort of thing - understandably - but there is enough information out there to be able to piece together a much better idea than we have seen.

So I have attempted to do just that.

‘The huge £26.9m loss'

This is the most understandable misconception since Sunderland themselves said ‘resulting in a net operating loss of £26.9 million' in their announcement via the club website with the figure itself bolded for added effect.

The full statement, though, considered properly, reveals a much better insight.

The figures show a turnover for the 12-month period ending July 31st 2012 of £78.0 million. The club's operating loss for this period, which highlights all costs, excluding player amortisation and trading, was £4.2 million.

Operating expenses, including areas such as staff/player wages, match costs and utilities, fell to £104.9 million, compared to £110.7 million for the previous year, resulting in a net operating loss of £26.9 million - a reduction of £4.3 million on last year's results.

These operating expenses feature player amortisation costs for the period of £22.8 million. One permanent signing and three loan players arrived during this period and five players who did not figure in the manager's future plans were moved on.

They key statement is probably the second one that we have bolded because it accounts for the bulk of this loss we keep hearing about. The problem is that no one reporting it seems to be bothered to examine or explain exactly what ‘player amortisation' is and how it is relevant here.

The brilliant Swiss Ramble, a blog which expertly deals with football finances, explains what exactly this means below whilst referring to Borussia Dortmund.

[F]ootball clubs do not expense transfer fees completely in the year of purchase, but treat players as assets. So the cost of buying players (in accounting terms) is spread over a number of years by writing-off the transfer fee evenly over the length of the players' contract via amortisation. As an example, Marco Reus was bought for €17 million on a five-year deal, meaning the annual amortisation is €3.4 million.

All very well and good, and obviously Sunderland have spent a lot on players in recent years so a high amortisation cost has to be expected.

But the obvious problem is that we are talking about just, in essence, an accounting procedure here rather than the actual movement of funds out of the club. The period includes, for example, ‘amortisation costs' for the likes of Craig Gordon, George McCartney, Lee Cattermole, and Michael Turner, who were bought with an investment from Short that was made and then capitalized a while ago - as former Chief Executive Steve Walton revealed three years ago.

[W]ith the help of Ellis Short, we capitalised £48million last July. We just did it and didn't make a song and dance about it. That made us much stronger.

We spent more than we earned last year and we did that because we wanted to take the club to another level.

We could only do that because our owner allowed us to.

I can't believe that many clubs will show a stronger balance sheet and reduced debt. Not only did we cover off the investments, Ellis Short gave us money to reduce our external bank debts as well.

It's a really strong and powerful picture going forward.

So it becomes increasingly difficult to know how much of that cost that makes up the bulk of the huge reported loss represents actual money going out of the club and how much is a strange kind of phantom costs.

The second issue is that - once again openly stated by the club and bolded by us when we quoted it earlier - ‘player trading' is excluded from the figures. The point here is that for ‘player trading' you'd might as well read ‘player sales' because, as we have already seen, signings are accounted for in the amortisation costs.

So now we are also free to wonder how much of the apparently crippling amortisation costs for the likes of Stephane Sessegnon, Connor Wickham, John O'Shea, and Craig Gardner, who were signed following the sales of Darren Bent and Jordan Henderson, cannot be accounted for elsewhere in the books either - specifically the books that the club are not showing us.

In short, whilst it appears that everything is moving in one direction -outwards - that is precisely how it should look because we are looking at a one way street by design.

This season's spend

It is absolutely correct that these figures do not include this season's outlay on Adam Johnson, Steven Fletcher, Danny Graham, and Alfred N'Diaye, and it is reasonable to mention it. The insinuation that you can take the £30m that has reportedly been spent and lump it on top of the £27m ‘lost' last year to confidently prophesise an impending financial apocalypse is very unfair though.

First of all it won't be a lump sum just thrown onto the books anyway but, secondly, surely if you are going to mention it, you also need to mention what else isn't included this year but will affect the club's ability to absorb the cost moving forward.

The new sponsorship deal with Invest In Africa, for example, or the new kit deal with Adidas. Perhaps increased concert revenues or the removal of the Academy EPPP investment from the expenses?

The point is let next season's accounts take care of themselves rather than allow rampant speculation to sensationalize something largely irrelevant to the discussion at hand.

‘Over-reliance on Ellis Short?'

As far as I can tell, if we were going to look exclusively at the information the club have released on their website, it wouldn't be all that easy to ascertain just how reliant on Short the club is. The information that has been omitted makes it tough to really judge.

The reported loss of £4.2m that excludes amortisation and player trading perhaps offers a better guide, but it is still very rough as it can't be assumed the two just directly cancel each other out.

Thankfully, though, we don't need to look in the figures for an answer to that as Margaret Byrne revealed it earlier this month.

[E]very time we buy a player, Ellis is virtually buying that player for the club himself. [...] This new TV rights deal gives us the ability to do all of that yet (keep your best players and fight for Europe) and start making a profit.

There we have it - Sunderland's ability to continue to invest in players without self-funding it through sales is reliant on Ellis Short's continued backing, but if the added income of the new TV deal (should we be fortunate enough to get it!) can enable the club to be profitable, then we are nowhere near as reliant on the owner as we have perhaps been led to believe by the press.

Conclusion

Again, I need to stress that all we've done here is try to piece together a picture from various different clues and a little research because in truth what isn't in the figures released by the club would tell us considerably more than what is.

That isn't a criticism of the club either. They have no obligation to splash every detail of their accounts all over the place and I am personally pleased that they don't. As I said at the start, these matters are being looked after by people far more qualified than us.

Ellis Short's commitment to the club is seemingly still strong, and we can all be very grateful for that because it is clear that it will be needed if ambitions are to be reached.

That said, I would personally disregard the sensationalist figures and doomsday scenarios these results have prompted some in the media to report. How much of that 'loss' represents actual money going out of the club in the last year is very unclear indeed.

More work is needed, but the trends that the media are failing to report - the good ones - could well be the most telling. Turnover is holding steady (slight drop can probably be accounted for by dropping four spots in the Premier League), costs are down (probably accounted for by a reduction in the wage bill), and losses also continue to fall.

Most importantly, however, is perhaps that the club are openly and enthusiastically discussing the possibility of becoming profitable within the next three years.

Overall, I'd suggest that reports of Sunderland's impending financial disaster have been grossly exaggerated.