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SCMP: The daunting financial challenges facing Sunderland this season - what’s the issue & why?

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It’s important that we, the fans, understand the situation Sunderland are in financially. Here, Tom Atkinson explains at length where we’re at, and why the club’s hands are effectively tied as it strives to comply with the EFL’s SCMP regulations - though it’s not all doom and gloom.

Sunderland Pre-Season Training Session Photo by Ian Horrocks/Sunderland AFC via Getty Images

Back in March of 2018, before Donald and Methven acquired SAFC, I penned an article discussing Salary Cost Management Protocol and how that might hamper Sunderland’s exploits in League One this coming season. The big take away worth noting was that:

Any club that has been relegated to League 1 having exceeded the £6m limit will not be subject to a transfer embargo but will be required to comply with the Salary Cost Management Protocol (SCMP) regulations in place in that division. These rules require League 1 clubs to limit their spending on players’ wages to 60% of turnover plus 100% of Football Fortune income (e.g. financial donations, transfer income, revenue from cup matches), with a club relegated from the Championship being able to operate at 75% of turnover for a transitional period of one season.

Simply put, the most important issue is that the playing budget must not amount to more than 60% of our turnover, i.e. we cannot spend 60% or more of the money we make as a club on player wages. This is the issue we currently face.

Last season we were given some leeway due to our relegation, but this season Sunderland will need to tighten their belts in order to avoid a potential transfer embargo or even fines and points deductions - a fate that could well cripple our chances of success in the long run.

Charlton Athletic v Sunderland - Sky Bet League One Play-off Final
A huge part of the reason why Lee Cattermole was allowed to leave the club this summer.
Photo by Mark Fletcher/MI News/NurPhoto via Getty Images

Looking at Sunderland’s finances, the club’s projected turnover for this year, including the final parachute payment, is likely somewhere just south of £30 million - especially if a part of the final parachute payment comes in before the start of the EFL’s measurement period, meaning it would fall into last year’s calculations.

It’s also worth noting that if Sunderland come within 5% of that 60% figure then the club will be asked to explain themselves because the EFL takes the view that turnover can go down as well as up, depending on a mixture of mitigating factors.

Therefore, if you take £30 million as a general figure, then 60% of that is about £18 million. As such, Sunderland have to spend less than that amount of money on player’s wages in order to avoid issues. Take into account the 5% buffer and that would take the club down to less than £17 million. So, if Sunderland spend over £17 million on player wages they will likely be sanctioned, and if they spend around £16.5 million, the club will be asked to explain themselves.

Last year, it is believed that the club spent just over £16 million on player wages. If they had simply maintained that level of spend, then the club would have been pretty much right on the cut off line with no room for manoeuvre in January at all.

Now, many people will be thinking that the exits of Cattermole, James, Love, Matthews, and Ruiter will be enough to steady the ship, so to speak. But unfortunately that won’t be the case.

A tough balancing act.
Sunderland AFC

The issue Sunderland now faces is that not only do the EFL look at the club’s current financial situation, but they also examine the club’s direction of travel in terms of their finances. Basically “where a club is trending” – and this is where Sunderland could have a real problem.

Parachute payments have helped the club steady themselves after two years of intense free-fall. But, because this is the final year of our parachute payments, next year in League One – even if matchday revenues hold up – our revenue will definitely drop below £20 million. Again, simple maths dictates that 60% of roughly £20 million equates to less than a £12 million playing wage cap.

As such, the EFL will be very interested in understanding what the club’s player contract lengths are because if we are signed up to contracts of £15 million for next year, as an example, then even if we are within the rules for this year they can then see that we are going to break the rules next year unless we get promoted.

Basing finances on the risk of the gamble of promotion is simply not an appetising prospect. This is something the EFL are determined to stop as it has cost some clubs their very existence.

Sunderland must be fiscally responsible.
PA Images via Getty Images

This summer is a difficult one for the club. Although many fans want the club to splash the cash required in order to theoretically secure promotion, we would run the risk of falling foul of SCMP, and might find ourselves slapped with a transfer embargo, points deductions, and massive fines should we enter the Championship... not ideal.

So, the club face the difficult challenge of trying to manage their wage budget down to a level which not only enables the side to be compliant this season as we hunt for promotion, but also puts the club in with a chance of getting down to around £10.5 million for next season should we fail to find promotion.

Now, as already mentioned, players leaving the club does certainly have an impact on this situation, and Sunderland need to manage their actions wisely.

If a player leaves for cash or without any compensation, then great, those savings help the club.

However, if you have to pay players off then that still damages your wage bill. So, if a player leaves the club and the club pay 75% of his wages for the remainder of his contract, that only helps the club with a 25% reduction - there it is still a playing cost and that still counts for SCMP.

Lee Cattermole will likely have been in a situation not entirely different from the one outlined above. Although his wages are now gone, the club will have paid him a large percentage of the money he would have earned over the remainder of his contract - his exit does not suddenly free up bundles of money, but it does make a positive difference.

Another one who’ll likely be heading for the door. But will Sunderland be paying for his exit?
Sunderland AFC via Getty images.

This doesn’t end with League One and SCMP, though. If Sunderland are promoted to the Championship, they then have to navigate FFP. There, the rule is that you can only ‘lose’ £5 million per year, or £15 million over three years. Or you can lose a maximum of £13 million a year, but the additional £8 million – over and above the £5 million - a year has to be gifted to the club by the owner with no debt... that’s a lot of money to invest year after year.

Without a parachute payment, Sunderland’s Championship turnover would be somewhere around £30 million. If you add the £5 million loss investment to that, then the club would have a turnover of around £35 million.

The club’s non-playing wages and operational expenses amount to somewhere close to £17 million, so that would allow a playing wage budget of £18 million. In theory, that would be a very competitive budget that would be somewhere close to the sixth biggest in the league if you take out parachute payments that are only ever used to fill black holes.

However, that theoretical £18 million would only actually produce a competitive Championship team if the club have not already spent £15 million a year on League One players - some of whom would also get automatic wage increases.

In reality, to enable the signing of five or more Championship-quality players, to enable us to be properly competitive in our first year back, then the club would need their wage budget on leaving League One to be somewhere around £10-11 million.

With promotion wage increases likely to add another £2-3 million, then the club would have somewhere close to £5 million worth of yearly wages to play with in order to attract much-needed reinforcements capable of allowing the club to challenge in the Championship.

Sunderland AFC via Getty Images

As you can see, the shaping of Sunderland’s wage budget is a difficult balancing act that must be carefully analysed. Sunderland need to build a squad that is capable of battling for promotion, but is also financially viable should the unthinkable happen.

As a side note - if the club had gone up at the end of last season, then we would have really struggled to sign players due to FFP. However, if the club shape their budget well this season and get promoted then they will be in a far healthier financial position - swings and roundabouts?

Sunderland, whilst searching for positive reinforcements this season, will also likely have to trim their playing squad, though, which currently stands at 27 players who have started full professional first team league or Cup games (excluding the Checkatrade).

Sunderland’s budget at this present time is suggested to be around £14 million - within this year’s limits but still a fair bit beyond what it would be need ahead of positive recruitment next year.

Some might be asking why the budget is an issue given that several well-paid players have left without any monies owed to them e.g. Matthews, Ruiter, and James as well as saving some cash on Cattermole.

Well, because the club have already signed four players this season in McLaughlin, Burge, Willis, and Sammut, and, just as relevantly, have young professionals moving from their initial contracts to proper first team contracts. As such, Denver Hume and Bali Mumba alongside Elliott Embleton and Benji Kimpioka (hopefully) have all signed proper ‘adult’ contracts in the last year - they are essentially viewed as new signings according to SCMP rules.

South Shields v Sunderland: Pre-Season Friendly
New deals for young players effectively equates to them being new signings according to the books.
Photo by Ian Horrocks/Sunderland AFC via Getty Images

So, Sunderland’s apparent “one in, one out” approach is not a matter of whether the owner has any money or not. It is basically a matter of fiscal professionalism on the part of the club to fit within EFL rules as they try to create a reasonably sized squad capable of finding success.

At present, it could be argued that a squad of 27 first teamers (with around 10 young professionals as back-up) is simply too large a squad for League One in terms of financial prudence.

In theory, Sunderland’s current squad can’t even all fit in a full-sided training game. Subsequently, the club will have first-team players who not only cannot get in the matchday squad, but cannot even get into training games. It’s counter productive in terms of financial management, but also in terms of having a harmonious, productive squad.

As things stand, we could have an injury crisis of eight players being unavailable and there would still be fit first team players not making the bench. It’s quite incredible.

Sunderland AFC via Getty Images

Jack Ross will have to manage and shape his squad in order to get the right mix of attributes, ages and personalities capable of delivering promotion. He will also likely have to allow three or four players to leave in order to have a solid squad that can, if need, be augmented by Sunderland’s younger talents.

That approximately 24 man squad needs to be in accord with this season’s EFL targets, but also trending towards hitting next year’s ideal aim in order to give us the sensible costbase we need in order to add quality to the squad if we are promoted.

Furthermore, that squad will then need to be able to fulfill FFP requirements in order to avoid massive fees like QPR’s incredible £42 million settlement including a £17 million fine and transfer embargo. Or points deductions like Birmingham City, who lost 9 points due to breaching EFL profitability and sustainability rules. Make no doubt about it, there will be others suffering similar punishments, Sunderland cannot afford to be one of those victims.

The most recent figures suggest that that the highest wage bill in League One is generally around £10 million, and the lowest around £2.5 million. So taking our current numbers into account, we are not going to simply be competitive in the league, but we will have the highest available first team budget and, unlike other League One clubs, will have a host of young talent capable of supplementing the squad in the case of an injury crisis.

Being brutally honest, if we cannot get promoted with those resources being made available then that is not the fault of the club’s financial structure and planning, but the management team’s inability to create a winning side from a talented, well-paid player pool.

PA Images via Getty Images

It’s a tough task we’re facing, but good financial management here could well be the foundations required in order to develop a successful, stable future on Wearside. This might seem like an odd statement, but in reality we should acknowledge the fact that the club’s management have been active on this serious issue and are getting themselves out ahead of potential problems - this isn’t something to bemoan.

For example, back in June of last year, the club were projecting £15.5 million of turnover on top of parachute monies. In reality they managed to generate just over £20 million and also cut costs by £10 million more than was expected. The club aren’t looking to take on unstable debts in order to fund a shot at promotion, they’re living within their means and trying to implement good fiscal practices. Sure, we’d love to splurge serious cash on a host of new signings, but would the transfer embargoes, fines, and points deductions be worth the initial expenditure? I’d argue not.

What’s positive about this news is that there is a management team in place who understand the issues at hand, seemingly have a plan to develop the club, and are actively enabling a chance at real, sustainable success.

It’s frustrating that we can’t throw money around in order to guarantee success, but this dose of realism could be our best chance at a successful future. Now it’s over to Jack Ross and his men to deliver the goods on the pitch.