Review of PFC Financial Statements 2019-20
By Simon Colebrook

Portsmouth Football Club has released its annual accounts for the 2019-20 season, and as usual we are casting an eye over them to give fans a guide on what they say, how the club has done and what they mean for the club.

It goes without saying that the last 12 months have been some of the most challenging for football clubs in living memory. These accounts cover the season leading into the pandemic that was cut short as the country went into lockdown in the spring of 2020. As a result, they show the initial impact of the loss of gate receipts but not the full picture that will be shown by the accounts for the season we are currently in. I will go into that at the end of this review as I have asked the club for some details of the impact of playing without crowds and how the club has supported its operations without ticket income.

For now, though, let’s focus on the previous season and see how the finances of the club looked over that year. There's a lot to unpick in this year's accounts so this is a long read.

As always, I’d like to thank Tony Brown (the PFC Finance Director) and the club for providing me with an advance copy of the accounts and giving up time for questions so that I was able to prepare this review.

I’d also like to mention that the club has offered a more comprehensive set of accounts and a fuller strategic report than many clubs I have looked at. This enables us, as fans, to get a far deeper insight into the status of the club, the risks it is exposed to and how it works within our community.

Profit and Loss Account

As usual we start with the Profit and Loss account – the measure of the revenues and expenses of the club.

Here we see the first impact of the pandemic – a reduction in income. Although the total income only fell slightly from £11.6m to £11.3m, we can see how the lost games at the end of the season affected the ticket income. If the season had continued, then this number would not have fallen from the amount achieved in 2019. Additionally, there was the revenue from the sale of 55,000 tickets to the EFL Trophy final which due to its postponement and eventually being played behind closed doors meant that this money switched from being revenue to being a creditor owed back to fans – this will be apparent later in the review.

We can also see that Commercial and Merchandise income fell as the lost games meant lost income from the lounges and food stands.

Overall, the lost income from the shortened season (and the lost Bury fixture) amounted to £1.3m.

It may look odd to see that the income from the EFL and Broadcasting increased, but this is due to prize money from cup runs as well as increased TV money from the Southampton match and FA cup matches, which helped mitigate the lost revenue from the Covid impact.

Wages

Next, we move onto the payroll costs for the club, the single largest area of cost for a football club and one that must be carefully controlled.

Again, we see the start of the impact of the pandemic here. The first indication is on the employee numbers. The number shown in the accounts are the average number of employees through the year. The player and office headcount was unaffected by the pandemic as the club committed to retain all staff. Where we see an impact is on the casual staff. These are the stewards and hospitality staff that are employed on a match-by-match basis and therefore the loss of 5 home matches – the cancelled Bury match and the 4 remaining home games – reduced the average number of these employees across the year.

The proportion of income spent on wages rose, in part because the total wage bill reached a new high in the post-administration era of the club. This is not an undue concern as it is well within the level of sustainability. Additionally, the percentage will be affected by the revenue reduction from the early end to the season – if the season had finished normally then the percentage would likely have stayed at 64%.

Wage cap and SCMP

I’ll take a moment to mention the now aborted wage cap and SCMP.

Firstly, we can see from the numbers above just how the wage cap in League One would have affected the club. The wage bill shown above includes non-playing staff but the bulk of the cost is on playing staff. We can easily see how difficult it would have been to reduce the playing budget to £2.5m, and how the club was operating in a completely sustainable manner with its wage bill. Although the wage cap did not require immediate cuts due to the transitional rules, over a three year period the cap would have meant the club would have had to cut its player wage costs by nearly 50%.

Moving on to SCMP, this acronym stands for Salary Cost Management Protocol. This was the mechanism for managing financial fair play in leagues one and two before the salary cap was introduced. In short, it placed a limit on the percentage of income that player wage costs had to stay within, which for league one was 55%. It wasn’t a perfect system and was easily abused by inflating the income to a club by owners that would lend their club money and “promise” to not want it repaid. Pompey, however, stayed comfortably within the SCMP limits both on paper and also in the spirit of the rules as well.

The issue that PFC, along with all other clubs in leagues one and two, face is that with the scrapping of the salary cap it is understood that the fair play rules have reverted to SCMP. However, all clubs have seen their income levels reduced by the pandemic, although many sold full price season tickets for the year which mitigated this. Many clubs are likely in technical breach of SCMP this year. We understand that the EFL has waived the rules for this season, and we wait to see what rules the EFL will apply next season. Until all clubs know what the rules will be in 2021-22 it will be difficult for them to set their wage budgets, especially as income levels are still very uncertain.

Overall Profitability

Moving on to the two measures of profitability: EBITDA and Net Profit

EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) is the measure of whether the club generated enough income to cover its normal operating costs – i.e., the wages, administrative costs, etc.

Net Profit is the total profit or loss taking the EBITDA figure and then subtracting depreciation on the stadium and other assets as well as the writing off of player contracts.

For the second year in a row PFC made a significant EBITDA profit. There are two elements that contribute to this in 2019-20 – player transfer profit and the Government Covid support.

We can see here the impact of the profit made on selling Jamal Lowe and other players including Jack Maloney, Anton Walkes and Louis Dennis – a £2.2m addition to profit.

The Government support is included within the line in the accounts “Other operating income”. The figure in the accounts of £582k will include receipts from the Coronavirus Job Retention Scheme (furlough) and the measures put in place to provide Business Rates Relief for leisure and hospitality businesses. Together these measures will have provided the bulk of the figure shown and are why it has grown so much since the previous year (£62k in 2019). 

Therefore, we can work out what the underlying profit or loss of the club was by adjusting for these ‘one-off’ items.

Thus, we can see the impact of the early finish to the season and the lost revenue, an increase in underlying losses of over £1.2m.

Balance Sheet

The Profit and Loss account tells the story of the season, and now we move onto the Balance Sheet. This is a snapshot of the financial standing of the club at the end of the season – what assets does it own, who does it owe money to, etc.

We’ll start with the assets. These mainly comprise of the player contracts and the fixed assets such as Fratton Park, the training ground and shop and other plant and equipment.

To start with the club spent £2.3m on acquiring new players in the 2019-20 season, a significant jump on the monies spent in the recent past. With £2.2m having been primarily received from the sale of Jamal Lowe you can see that all of that was then put into acquiring new players.

On top of that £2.2m was spent on Freehold Property. We can see from the Strategic Report that £1.9m was spent on Fratton Park including the works to reclad and reroof the south and north stands. This means that approximately £230k was spent on other freehold property besides Fratton Park. It has been reported widely that the club has purchased properties in the surrounding area around Fratton Park which this will be the cost of.

Moving onto the subject of money owed to the club we can see that the club drew down an addition £2m from the £10m “investment fund” that was created then Tornante purchased the club in 2017. This leaves £4m left to draw. There have been questions raised on social media about how much of this has actually been spent which I will go into later.

Finally, on the Balance Sheet, we look at the money that the club owes – the Creditors.

It is good to be able to confirm that the club remains debt free with no monies owed to banks or the owners. But there are two large amounts in Creditors that are worth explaining.

Firstly, the figure labelled “Other Creditors”. This has grown from £276k in 2019 to £1.9m in 2020. The reason for this growth is the cancelled games, in particular the EFL Trophy final. Because the income for these games was uncertain at the year-end 30 June 2020 it had to treat it as a liability at the end of the season. This money was subsequently repaid in full in February 2021 when it was decided to play the game behind closed doors. Looking at the numbers in the accounts and in past years we can deduce that the vast majority of the increase of approx. £1.6m is this liability for the refunds of ticket money. If the season had completed, then this would have been income and reduced the losses that the club incurred.

We can also see the impact of the suspension of season tickets in the following season. The line in the creditors labelled “Accruals and deferred income” is where we see the amount of money that season ticket holders have paid in advance of the following season.

In 2019 this was £5.6m. That isn’t solely relating to the season tickets - there is an element that relates to the Tesco escrow money due to accounting rules that I won’t bore readers with.

In 2020 this has reduced to £1.8m. The reduction will be almost entirely due to the absence of season ticket advance payments. That gives us our first glimpse into the impact of the pandemic on the current 2020-21 season.

Cash Flow and Spending

I mentioned earlier that I would look at the amounts that the club has spent of the £10m that Tornante injected into the club as a condition of the sale by the fan owners.

This table shows the cash received and spent over the last 3 years calculated by adding the numbers in the Cash Flow statement for each of the three years. It shows that PFC has received £6.2m in transfer fees and spent £4.1m of that income on new players. The cash cost of running the club has needed £472k of spending to support it and that the club has spent over £7m on assets such as Fratton Park and other properties, the training ground and shop, as well as plant and equipment needed to run the club.

The net amount spent at 30 June 2020 is £5.4m which has been funded out of the £10m equity injection in 2017.

Summary of 2019-20 season

The overall picture from these accounts is of a season that was going well, financially speaking, until it hit the buffers of the pandemic and was cut short. Whilst many, if not most, fans understandably are less bothered about profits than success on the pitch, it is long term sustainability that underpins any club’s ability to deliver on the pitch.

We can see that the over the last three years the club has run its ordinary operations at a small loss which is topped up by either player sales or from the equity reserves. Then the pandemic brings that to a halt with a season ended early which caused a loss of income of £1.3m but thanks to support from the Government Covid relief schemes, the profit from selling Jamal Lowe, the fortune of having the Southampton match to boost TV income and a good FA cup run the club was able to finish the year with a small profit.

Looking forward to the 2020-21 season and beyond

Clearly the current 2020-21 season has been deeply impacted by the Covid-19 pandemic.

After extensive consultation with the PST and the Tony Goodall Fans’ Conference (TGFC) the club took the decision to suspend traditional season tickets and introduce the Flexi Season Ticket. This was widely appreciated by us at the PST and the members of the TGFC as a good way forward that ensured that fans were not going to be paying for matches that did not go ahead.

From the club’s point of view, this has meant that ticket income has fallen massively in the year, and hospitality income has fallen to near zero. Although the club is seeing increased iFollow sales and there were two matches with reduced attendance, this is nowhere near the normal income level for PFC. The club have stated in interviews that this amounts to near £700k a month, which does not seem an unreasonable estimate to me.

This reduction is offset in part by continued Government support via furlough payments and rates relief as well as the bailout from the Premier League to Leagues 1 and 2. In particular the club has received more than most from the bailout which was in proportion to the level of lost gate income suffered by each individual club, but it has to be noted that Pompey has also lost more than most from not having fans in attendance for the dual reason that we have a larger normal attendance and because season tickets were not sold.

Nevertheless, I am expecting to see very significant losses for the 2020-21 season and in discussions with the club that has been confirmed. Whilst PFC does not want to be drawn on exactly how big the losses for the current season will be, I anticipate that the funding for them will all but wipe out the remaining £4m of the equity put in by the owners in 2017.

The impact of Covid-19 has, of course, been felt by all clubs across the EFL. Most clubs chose to continue to sell season tickets and have compensated fans for lost games with iFollow passes. This has obviously protected those clubs from the full impact of the pandemic as their income drop has been lower, and it costs them next to nothing to issue an iFollow pass. From our perspective, we are pleased that PFC decided to suspend season tickets so that fans would have the choice on whether to spend money on iFollow, particularly as many fans are also suffering reduced incomes at this time.

Looking further ahead, it seems likely that 2021-22 may well be an even tougher season, financially speaking, for football.

It is unlikely that full attendances will be permitted in August for the new season. This will make it very difficult for many clubs to sell season tickets when they cannot guarantee that they will be able to allow everyone to a game. Additionally, even if restricted attendance is allowed, there will be former season ticket holders that are still reticent to go to events with large numbers of people, and some that will simply have found a new routine for Saturdays who will never return. This will disproportionately affect clubs like Portsmouth with larger crowds who sell out their stadiums. Whereas clubs who only sell 50-60% of their capacity will see a lessened impact from reduced attendance.

A second Premier League bailout is very unlikely and if there are any restrictions to attendances in the 2021-22 season it is going to be very tough for clubs that are already sailing close to the wind on their finances. Demand for a Government bailout similar to that seen in the arts and other sports will grow but doing that for football would not be without some public controversy.

Looking specifically at Pompey, I am confident that the commitment for support from the owners is there. In any case, even without the pandemic effect, the club will need some investment to continue its programme of infrastructure additions and with no significant player sales this year or likely in the near future, any new players will also come with a cost that needs funding.

Longer term, there is still the open question of whether Fratton Park will be redeveloped or whether relocation is the future. This decision is the key to the future of the club and will need to be made soon and will bring its own demand for significant amounts of investment.

The PST will maintain its dialogue with the club through the Heritage and Advisory Board and the Tony Goodall Fans’ Conference to discuss when and how this funding will be made now that the previous tranche of funding is all but used up. The decision on whether it will be made by equity or debt will obviously be a sensitive one given our history.

The accounts published today show the club in a reasonably healthy state as the pandemic started, and we know that it has weathered the storms of the past year thanks to a combination of prudent management and the equity reserves in the club. The next 12 months may be equally tough and may threaten the future of some other clubs, but Pompey look capable of overcoming that challenge as well with the support of the owners.