While the talk remains focused on new owners and the ‘imminent’ (or not) takeover, Financial Fair Play means Nottingham Forest will need to become self-sustainable in the near future. Steve Wright looks how the club can make ends meet.
The first point to be made about moving to a sustainable future is that it’s not the end of the world. Nottingham Forest generated £15.2m of income in 2010/11 — that’s not an insignificant amount — and there should be a path to a future that can be both enjoyable and free from the need for continuous massive external investment.
To put the financial power of the club into context, Swansea City had a turnover in the Championship of £10.1m in 2010; the year before they secured promotion to the Premier League and they made a £0.6m profit on that turnover. Southampton in a normal Championship season without parachute payments generate similar income to Forest, Leicester City managed a little more at £16.2m in 2010, Norwich do a little better again with £18.2m when in the Championship in 2009, which maybe highlights Forest’s limited commercial potential given the outdated facilities at the City Ground. Blackpool managed promotion on a turnover of £9.4m, although they made substantial losses on that once promotion bonuses were paid out.
Meanwhile, big rivals Derby had a turnover massively boosted by parachute payments in 2009 and 2010 but in 2007, the year they were promoted to the Premier League, their turnover was £13.9m. That year they gambled on promotion with Billy Davies and won, losing £12.5m in the process. This is where they differed from Forest who gambled on a similar loss with the same manager but didn’t make it over the line to promotion.
Financial Fair Play (FFP) should have all clubs moving to something more sustainable over the next few years which will of course make it easier for Forest, as they will be solidly placed around the middle of the turnover league in the Championship — although the size and duration of parachute payments will make it difficult for clubs rooted in the Championship to compete with those relegated each year from the Premier League. To be fair though, this is a problem with the structure of the game and Forest should not behave dysfunctionally just because the game does.
The Football League is taking a lead with regard to getting a better control of finances in the game and trying to prevent the string of administrations we have seen in recent years. The right path is for Championship clubs to follow that lead rather than try to jump over it and into the profligate and debt-ridden top flight.
Summary of Accounts for 2010/11
|Matchday hospitality, catering and events|
|TV, radio and internet|
|Sponsorship, royalties and advertising|
|Signing on fees|
|Loss on operatng activities|
|Returns on investment and servicing of finance|
|Investment in capital assets|
|Cash paid for purchases|
|Cash received on sales|
|Net transfer spend|
|Cash loss before financing|
In the 2010/11 season revenue was £15.2m and the club made a cash loss of £10.1m. The main reason for this is clearly staff costs which exceed total income at £16.3m, Capital investment was also relatively high during the year at £1.7m and the club invested £2m net in transfer fees.
In order to remove the losses the club needs to raise revenues and reduce costs, with the latter probably being the easiest to achieve in the short term but the former still a key factor that must not be forgotten.
Football income has grown in recent years and the club has a good level of support for the league it is competing in with crowds consistently over 20,000. In 2011/12, despite an awful season on and off the pitch, Forest were placed 7th in the average attendance league with 21,969. This should be a reassuring statistic when it comes to competing in the future although the club will need to work hard to retain that number.
Where the club perhaps loses out is on the commercial side of the business. The facilities at the City Ground are now outdated and the ancient Main Stand provides comical facilities for the club’s main and match sponsors. The table below shows the differences in 2009/10 between Forest’s revenues and those of Derby County. TV income is distorted by Derby’s parachute payments but Derby’s hospitality and sponsorship income is more than double that of Forest’s.
|Matchday hospitality, catering and events|
|TV, radio and internet|
|Sponsorship, royalties and advertising|
Of course updating the facilities at the City Ground is not easy and would require a substantial capital expenditure. Although this would not be a problem from the perspective of FFP, as capital investment can be excluded from returns, it would either require personal funding from the owner or a reliance on external debt – which would then mean annual interest charges which would be included in FFP returns and reduce the club’s ability to spend in other areas.
This is one reason why the club were keen to secure a new stadium as part of England’s World Cup bid which would have secured funding without the associated costs, but with that bid failing the prospect of renewing the club’s facilities and commercial offer has receded.
From 2010/11 Forest’s merchandising income has reduced but this is because of a change in business model with the club receiving an outsourcing payment from Kitbag which amounts to a share of profit with no associated cost of sales. This reduction in income should therefore be offset by a reduction in costs and one would hope a net increase in the bottom line.
Commercial incomes are clearly an area of weakness for the club but there are mitigating factors which require substantial investment to remedy. This will be something that any future owners will need to weigh up as the cost of financing capital improvement may negate any improved income, although longer term the ground will certainly need renewing in some form if it isn’t to fall into terminal decline.
Another, albeit probably much smaller, area of income that might be worth looking into is around sponsorship and support from the local community, be that local businesses, wealthy benefactors or the general fanbase – or preferably all three. This could be particularly relevant to the club’s youth Academy, especially if that Academy is clearly and effectively placed at the heart of the club’s football strategy.
Watford run a sponsorship scheme for their academy which allows individuals and businesses to associate themselves with its work for a scale of annual subscriptions. Given the educational and community benefits of aspects of the Academy it may be possible to attract support from local businesses and also benefactors who would like to be associated with the club but do not want to take on the enormous levels of investment that Nigel Doughty did.
A further development of this could be a Nottingham Forest Foundation which builds upon the general principles of the membership scheme but reaches out to both the club’s international support and also its former players and staff. There may be a gap at the club which links it to its history and by forming a meaningful association for both fans and alumni possibilities could arise for both fundraising and promotion. This is unlikely to bring in huge sums but the club needs to be creative about how it generates income and also how it interacts with its supporters and networks with its alumni.
The most pressing concern regarding income, however, will be the impact of current uncertainty over ownership on season ticket sales. The longer that the sale of the club goes on the more likely it is that fans will not commit to the new season and this is of course a vital source of income for the club. The short-term need is to keep supporters interested and engaged during a very difficult time.
The cost base is dominated as you would expect by wages. Under Billy Davies wages grew dramatically and, although the relevant accounts are not yet due for release, we understand that they rose again to some extent under Steve McClaren with significant signings from the Premier League. Whilst other clubs have demonstrated that a lower cost base can bring success this tends to be as a result of a long period of development and improvement and Forest face a period of transition as well as they seek to change the wage structure.
Ongoing contractual commitments mean that Forest cannot just transform their wage structure overnight, it will take two years of running down existing contracts whilst trying to keep a good team spirit in a dressing room that will feature significant wage disparity as new players arrive on considerably lower deals than the those already at the club. At the same time there is likely to be a high level of player turnover as out of contract players leave, hoping for bigger deals and wealthier clubs, and the impacts of FFP bed in.
All of this change and uncertainty will make the manager’s job extremely difficult as he tries to maintain morale throughout the club but it is a task that can only be avoided by the introduction of another wealthy owner willing to put significant funds into the club. Even that might only be a delay to the inevitable as big spending in the Championship can only be sustained for so long, is no guarantee of success and is inherently destructive to other key aspects of the club, such as youth development.
In terms of where wages need to go then a minimum target looks to be about £10m a year for the wage bill, which is a reduction of £6.3m or 39% on 2010/11. That is a huge reduction but if other costs remained the same it would essentially bring the club to a break-even position on operating activities. What that means is that there is no scope for investment in either transfer fees or capital expenditure within the club’s existing turnover.
In other words the club would be looking to make a net profit on transfer fees each year, which means signings will need to be competitive, and often free, and at least one important player from the squad is likely to have to be sold each summer. That might not sound ambitious or appetising but it is the reality of life in the Championship at the present time.
For the squad it feels like this means a move back towards the Colin Calderwood approach of a smaller first team squad that does not include cover for each eventuality as Davies seemed to want but where gaps are instead filled by young players from the clubs own youth programme or short term loans from other clubs – such as that for Scott Wootton last season – should injuries strike.
It is a mindset shift for everyone at the club but there are also positives as highly paid players no longer sit frustrated on the sidelines and young players have accelerated opportunities to progress and develop.
Let’s be realistic though. It has taken Nigel Clough three-and-a-half years to get Derby to the point where they believe they have young players ready to come through their academy and make an impression on the first team and results have been decidedly mixed over that period with bottom half finishes until last season when the financial shackles were lifted a little. This is not going to be easy by any stretch of the imagination.
Although a substantial amount of money makes up other costs, £5m in 2011, there is little sight of what these are from the accounts and therefore little comment can be made. Clearly all costs need to be controlled but without knowing what they are it is difficult to comment.
The key things to take away around moving to a sustainable financial position are that it can be done but the transition will be difficult, the club will need to improve the way it operates and, although it is possible to be successful and sustainable, the odds are stacked against you.
Forest have revenues that can support a Championship club if well managed but every penny will count – in a way that it never seemed to under Nigel Doughty who referred to “killing the club with kindness” in the way he supported it financially – and clubs relegated from the Premier League receive parachute payments equivalent to virtually Forest’s entire turnover.
Of course FFP should see some levelling of the playing field amongst established Championship clubs and those relegated although benefitting from higher incomes often also find themselves coping with high debts as a result of desperately trying to cling on to their top flight status.
I have said before that I believe the future for Forest lies in strong football structures that support long-term development as a club and as a result I tend to favour ownership by a local group with a range of skills and a direct association with the club who see building a club as more important than throwing money at promotion.
The current situation at Birmingham City is yet another warning against selling Forest to unknown investors promising the world, if we really needed further warnings in football. I think that Forest can be sustainable and still an attractive proposition for fans, but maybe fans need to break from the cultural norm of demanding the quick thrill of instant success and themselves focus on something deeper.
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