The Football League has clarified an important aspect of how their FFP rules operate within League and League 2. Interestingly, the FL have confirmed that their Salary Cost Management Protocol (SCMP) rules permit 'benefactor' owners to finance a club's ongoing losses (something that is restricted within UEFA, the Premier League and Championship rules).
The League 1 and League 2 rules require clubs to submit regular financial forecasts to the Football League. Only if a club is operating within the permitted limits are clubs allowed to sign new players - clubs that are clearly heading for an overspend will have a transfer embargo imposed. Within League 1, clubs need to keep their total wage-spend below 60% of club Turnover (the limit is 55% in League 2). When a club's forecast brings them within 5% of the permitted threshold, the Football League will start to take a much closer interest in the club's finances. There are no restrictions (in themselves) on the amount a club can lose or spend on transfer fees. For the SCMP rules, the crucial issue is the definition of 'Turnover' as this is used to determine the maximum wage-spend.
From a traditional accounting perspective, there are only three elements of turnover:
- Match-day Income
- Commercial Income (such as sponsorship)
- TV revenue (and any 'merit payments' based on league position)
The Football League have confirmed that their definition is broader definition of Turnover than is usually used. Crucially, the FL Turnover figure includes donations from the owners to the club and injections of equity. Although loans from club owners are understandably not included in the Turnover figure, the inclusion of cash injections from the owner is particularly interesting. In League 1 and League 2, a wealthy owner can fund the club spending in a way that is not permitted in other divisions. Manchester City and Leicester for example seem set for punishment for their excessive losses (from UEFA and the Championship respectively) despite the fact that the owners have injected hard cash into the club to finance the spending - an approach that is permitted in League 1 and 2.
The 'benefactor' model can operate unrestricted in League 1 and League 2 and there is nothing to prevent a wealthy owner purchasing a lower division team and funding a huge overspend via cash injections (although it is worth pointing out that the lower divisions are not awash with wealthy owners willing to throw money into their club. Permitting benefactor donations to a club is interesting; benefactor-spending of course has an inflationary effect on the wages in the division (something clubs are keen to avoid). Coventry's manager recently confirmed that the club owners will inject cash into their club to fund player wages - without equity injections being included as 'Turnover', Coventry would be operating under a transfer embargo.
Championship clubs are currently discussing the introduction of new rules and it seems they will probably also introduce interactive account-projections into their process (rather than the current retrospective assessment process based on filed club accounts). There has been some significant support for spending constraints amongst a number of member clubs and in the Championship and it remains to be seen whether Championship club will adopt quite such a relaxed approach to their equity-injection criteria.
Posted by Ed Thompson.