Arsenal: 4 Questions to Ask About the Club's Finances

H Andel@Gol Iath @gol_iathAnalyst IIISeptember 12, 2012

DENVER, CO - MARCH 23:  Stan Kroenke (L) along with his son Josh Kroenke (R) watch from courtside seats as the Denver Nuggets host the San Antonio Spurs at the Pepsi Center on March 23, 2011 in Denver, Colorado. The Nuggets defeated the Spurs 115-112. NOTE TO USER: User expressly acknowledges and agrees that, by downloading and or using this photograph, User is consenting to the terms and conditions of the Getty Images License Agreement.  (Photo by Doug Pensinger/Getty Images)
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There are three fundamental distinctions to be made when talking about Arsenal's finances vis-a-vis whether or not there is money to spend; or, at any rate, what money exactly there is for spending.

This is important because (and to take an example) readers who read the prelude to this article (find it here) will be aware that the article was followed by severe criticism from three people (not counting a few that joined the party, claiming that I had run them out of town two or three years ago!).

These fellows indicted me on the idea of cash flow (inflow/outflow) claiming that I mistook that with cash on hand, while, in fact, that (that is, my focus on cash flow) wasn't the case. 

For them, to take note of that particular aspect instead of what they construed to be the "actual" cash on hand was misleading and idiotic.

It is important, therefore, that we clarify these points for the benefit of the neutral reader. I also hope that readers who follow my writing and are inclined to trust my judgment will be reassured.

Some want Alisher Usmanov to take over Arsenal so he can "inject" cash into the club. One critic claims that I am Stan Kroenke's stooge, which is why, according to the person, I ran them out of town some time ago. Getty Images.

1. What are the basic things to know about the club's finances?

The bone of contention in the previous article revolved around three things: Net profit, cash flow and raw cash on hand.

Net profit

Careful readers would note that that was my focus in the former article.

Net profit is synonymous with net income, bottom line or net earnings. In basic terms, it is what results when all deductibles, such as expenses, depreciation, interest, earning before interest and taxes and taxes (themselves) are accounted for.

It is, in other words, the cash you are left with when you apply this basic formula: Revenues minus expenses equals income.

This is the formula that in the former article I said the reader should apply to determine what money there is for Arsenal to spend.

(Further, but not really important to our purpose, it is the index that determines the appreciation of dividends.)

Cash flow

This is the item with which my critics took umbrage.

I referred to this item in the graph I had culled from Swiss Ramble (funny that these critics later reverted to making references to this same article, but now claiming that I had misread the article).

So what is the problem here?

Well, we can't know until we determine what this item means.

In basic terms, it is the difference between what a company (in this case a club) has earned and what it has spent. In other words, what remains when you take away expenditure from earning.

Its importance for our purpose lies in the fact that it is the cash (the difference, that is) used to meet obligation such as payment to creditors or, as the case may be, payment to owners. 

Note that this difference does not include monies used to meet the company's or the club's expenditures, but is what remains when this is done.

Here's why I referred to this item in the former article:

It is important because (and here I will use the words of Ross, Westerfield and Jordan: scroll to p.34) "it tells us...whether a firm's cash inflows from its business operation are sufficient to cover its everyday cash outflows."

(The determination of this item, at a practical level, tells us what cash we have on hand to meet certain obligations.)

Applying this to the context of the discussion in the former article, therefore, we can construe this as the monies available to cover immediate obligations, which as the case may be, may be interpreted (for our purpose) to mean monies we have in hand to cover purchases of players and the wages thereof.

(And here we are no longer talking about existing wages as is, since we assume they've been taken care of in the latent wages in the report, but wages as they may vary due to increase, or due to addition of new players.) 

This interpretation is quite in order because that difference normally takes into account the amount reinvested into the firm.

This we equate to investment in players in terms of new purchases, wages and bonuses to current squad members. In this case, the reinvestment will have to be accounted for in the final or subsequent statement.

It is appropriate at this point to recall the Swiss Ramble graph in question:

Here we see that in the last row, the Swiss Ramble has given us the breakdown of cash flow from a sample covering six years. In the last column, he gives the net total of these six years. This amount for 2011 was £32.6 million.

(One of my critics who presumed to criticize me on a supposed error could not even understand the difference between the net total of six years and the result for 2011.)

Following Ross, Westerfield and Jordan, we can say £88.5 million was the amount available for Arsenal (sans other cash, and this I will explain shortly) to use either in reinvestment in players or in payment to stockholders.

It is noteworthy that following this graph the Swiss Ramble asks a pertinent question, "where has all the money gone?"

In view of the criticism I received from the fellows in question, it is important to consider the exact tenor of this question. 

When the Swiss Ramble refers to "all the money," he can't be referring to £389.3 million gross total from the sampled six years, can he?

It can't be, since when we scroll down, we find that the money is depreciated by the following items: capital registration, capital expenditure, interest received/(paid) and taxation received (paid).

In other words, we no longer have £389.3 million, but £75.9 million. The figure changes from £75.9 million to £88.5 million due to financing activities, which, if the reader notes carefully, becomes negative figures from 2009 to 2011.

The remaining £12.7 million, therefore, results from 70.4 million financing activity carried out in 2006. As to what exactly this is or how it came about isn't my purpose here.

Suffice it to say that from the graph in question, it is clear that what the Swiss Ramble refers to in wondering about "all the money" is the £88.5 million net cash flow; the money available to Arsenal, either for reinvestment, or for paying to owners and shareholders (the outflow).

This being the case, I fail to see how or why I should be deemed wrong for referring to this item, since it is the actual money on hand (sans other cash, which I said I'd talk about shortly). 

In essence, what the criticism amounted to was either witch hunt for the sake of it or a demonstration of ignorance flowing from improper understanding of the subject in hand.

Raw cash on hand

When I have twice used the phrase "other cash," it is to this I refer. But it is an oxymoron, since, as the reader will see, it isn't really cash on hand, not in terms of what is available for spending.

I should note first that when you calculate inflow, you must subtract interest, since it is part of your expenditure. You have also to take out every other expenditure. What you are looking for is the net profit, which was the subject of my concern in the first place.

Were it not for the confusion of my critics, I wouldn't include "raw cash on hand" in this discussion, since it is nonsensical. The following graph represents the object of their criticism.

The item for which my "knowledgeable" critics indicted me for I have highlighted above by placing it in a red box. This is the item that comes under "financing" in the highlight of the 2011 financial report.

We find that it is listed under "cash" and is worth £160.2 million. For 2010, the amount was £127.6 million. This is the ostensible amount available for spending, according to my zealous critics.

But, first, let's ask the question: If this is the case (that this money is available for spending on players), why is it listed under financing? Asked differently, in accounting, what do we mean by financing? Is it the money available to run or undergird a business or a company?

If this, in fact, is the case, then, put negatively, it is the money without which a business can't be run. In other words, it is the money that must be available to keep a firm solvent, in lieu of which it collapses, or in the very least runs into serious financial trouble.


The confusion for my zealous critics is that, noting that this money comes under cash, they immediately concluded that it is money for spending. This is very odd given the fact that they claim to know about accounting, so much so that they call me an idiot.

An accountant, I'd suppose, will not make such naive assumption, nor anyone with minimal understanding of the subject in hand.

What is worth noting here for the reader is that under "financing" in the graph above, three items are listed: Cash (the amount in question), debt (that is gross debt) and net debt.

The reader would observe that the net debt is the difference between the gross debt. Put simply, the actual amount Arsenal owed their creditors as of the time of this report was £258 million.

However, Arsenal had liquid cash reserved for the purpose of running the club (the £160.2 million), which, had the club no need to reserve this cash, could have been used to service the gross debt, and had they done so, Arsenal's debt would have depreciated to a flat £97.8 million as of the time of this report.

Or put differently, if Arsenal creditors had any ground to be mean at this time (to use a crude example), they could have taken this £160.2 million to cover part of  £258 million, in which case they'd have a remainder of £97.8 million to recoup.

To summarize, this is an amount that has been reserved by the club for "financing" purposes, whatever that means.

Secondly, this amount is the difference between the club's gross £258 million debt and its net debt of £97.8 million, the "actual" amount the club owes, were it simply to use its reserve cash to service the gross debt.


Apart from the said confusion above, my critics then run into a misconception, something I'm apt to qualify with my favorite "insinuation," in terms of which is the conclusion that since this cash is "available" and it isn't being spent on player purchase, it must mean it is there to service the owner's greed.

That is, it adds to the value of the club and subsequently the value of shares, the dividend of which the owners can reap by selling their shares.

Knowledgeable readers have dispense with this misconception by noting that Arsenal haven't been paying out dividends, so this criticism is moot.

But if, in fact, it is the case that this cash isn't being reserved for the owners' immediate benefit per se, what is it for?

This is where I should explain to the reader my reason for not mentioning this figure in my former article. 

It wasn't, by any means, because I was unaware of this figure, contrary to the flawed conclusion of one of these critics. There is a more natural explanation for this.

My purpose in the article in question, the reader would recall, was to focus on actual cash on hand to spend. In the graph above I highlight it with a bold red arrow, but even so, note that the amount is before tax. After tax, it becomes £12,633,000.

This is the amount, sans any additional cash from sales of players, that Arsenal had on hand at the end of May 2011 for actual purchases of players, not the £160.2 million reserved for financing purposes.

I didn't include the £160.2 million because in essence (and this commonsensical) it is, by all intents and purposes, part of Arsenal's expenditures, and, since it is thus, it'd be nonsensical to refer to it, since my purpose was to examine actual monies that could be used to buy players in the transfer window that followed.

To conclude that this lack of reference is tantamount to not being aware of this amount is either to say that I should take club's gross earnings (for example) as my axiomatic position (which would be stupid), or to fail to understand what is to be taken as matter of course, the so-called enthymeme.

It is an enthymeme (or self-evident) because when you draw an accounting of what is available for spending, you can't include expenditure, because it isn't available for spending, being, as it is, reserved for financing purposes, or, put more colloquially, for the service of Arsenal's bonds.

Some fans can't forgive the fact that Arsenal moved into a new stadium, since it is by reason of this the club has been unable to buy stars in the last seven years, which is why it has been trophyless. Getty Images.

What is this money for?

To pose this question at this point is either to be rhetorical or to show that one doesn't understand the complex business of running a big club such as Arsenal.

First, common sense would dictate that a firm must have cash in reserve, beside what is immediately available for spending.

Secondly, the fact that this amount is put under "financing" should alert the careful auditor that this isn't money readily available for spending on owners or shareholders, or, as the case may be, on player purchase.

I provide two answers for this (some readers must have encountered them in the comments section of the former article):

On page 53 of the 2011 financial report in question, the following accompanies the £160.2 million, which is listed under, "cash and short-term deposits."

The Group is required under the terms of its fixed rate bonds and floating rate bonds to maintain specified amounts on bank deposit as security against future payments of interest and principal. Accordingly the use of these debt service reserve accounts is restricted to that purpose.

Two key phrases are worth examining, the first of which is, "the Group is required under the terms of its fixed rate bonds and floating rate bonds to maintain specified amounts on bank deposit as security against future payments of interest and principal."

The second is "specified amounts."

There is, therefore, on the one hand, a "required" amount to be deposited as security against the club's "fixed rate bonds and floating rate bonds." I'm tempted to call this a collateral. (Although I may be misapplying the term.)

This amount we find is required by "the terms" of Arsenal's loans. Within the ambit of these terms resides the specific amount to be so held for security.

This is important because it relates to the question in regard to the exact amount the club is to hold.

Only the person privy to these terms can determine it. So the question whether 30 percent or 50 percent of the £160.2 million suffices for the said security is redundant.

We should just admit at this point that we don't know. (Although I'd be happy to know if my critics are privy to these terms.)

There is, though, another consideration in regard to this amount, and it is the second answer:

The Swiss Ramble states the following under question 16 of his essay on "Arsenal Finances—21 Questions."

Some fans look at the club’s cash balances of £160 million, up from £128 million a year ago, and think that more money must be available, but the club has to maintain a debt service reserve for the stadium financing and also has to consider the seasonal nature of cash flows, e.g. money taken from season ticket renewals at the beginning of summer will be used to pay expenses over the next few months.

In essence, the Ramble states, that £160 million isn't money readily available for the purchase of players, contrary to what my critics may construe.

"The club has to maintain a debt service reserve for the stadium financing," he says. He also adds that the club has to "consider the seasonal nature of cash flows." 

Enough, then, on this question. I'll however welcome the input or correction of anyone with sufficient knowledge in this matter.

Some critics would wring my neck if they could. Getty Images.

2. In light of the above, was my former article misleading to the reader as my critics averred?

Only to the extent that you could say I misled readers by neglecting to even mention the following: the £15 million (or thereabout) annual debt the club must service; the club's gross and net debts; the effect of commercial revenue on the entire situation, to take just three examples of items I didn't mention.

Every article must have a focus, just like there are things that must be taken for granted. For example, the fact that someone should know that an item listed under financing does not necessarily means it is available for spending on players, especially given the fact that it is listed under "cash and short-term deposits."

Why is it a deposit if it is ready for spending? And to say this isn't in lieu of the fact that financing could involve servicing players. This depends on the real purpose of this cash vis-a-vis the terms of bonds it is laid up in security for.

This can also be the case only insofar as the reader can claim that I said that there is absolutely no money to spend on players, something I never said.

On the contrary, I did focus on "actual" money available for spending on players. Besides, the fact that I chose 2011, not 2010 or 2012, should alert the reader to the fact that the analysis predicated a variable, affected by the income, expenditure and profit of any given year.

3. Should I not write on financial matters if I'm not an accountant?

This is a fallacy as well as being an impossible criterion for anyone, although I know that it is often a strategy used by critics on opponents they seek to discredit. This assumes that only a rocket scientist should write on the subject of rocket science, and so on.

What is interesting is that, when pushed, my critics admitted that they aren't accountants themselves.

If one cares, one could ask them by what judgment do they criticize me, then, since they are not experts themselves, and, therefore, may not have sufficient knowledge (or at any rate may be mistaken about) the subject they presume to criticize  me for?

A sufficiently educated person can write on any given subject, considering, of course, that he or she understands the subject on a commonsensical level, and considering that he or she researches the topic. Careful readers can determine whether or not a person is talking sense in the context of a given topic.

Besides writing, I have an area of expertise, and I can always tell when a person who delves into that area is not an expert, but that doesn't mean it is always the case that the person is talking nonsense. 

So far as a person is not claiming to write a learned treatise in an area outside his or her area of expertise, I don't see that this criterion holds.

If it does, then my critics have no ground by which to criticize me, given their admission that they themselves aren't experts in the area.

In any case, even in that former article, I said I was open to contribution and correction from any reader who finds that I misrepresent an issue.

This, moreover, is the reason I make copious references to Swiss Ramble and provide links to his articles on Arsenal finances. It is so the reader can crosscheck the fact I present against his.

This whole thing revolves around the departure of players from Arsenal. Getty Images.

4. When it comes to Arsenal's finances, whose report should we trust?

Some have wondered whether or not Arsenal may not misrepresent their figures. Here is why I think it is difficult for them to do so.

Match-day earnings, which form a huge chunk of the club's earning, are easily determinable. So it is difficult, or, at any rate, foolhardy to do so.

Secondly, broadcast earnings are easily determinable as well. In fact, they are allocated by an outside body, so these can't be distorted without raising a red flag.

Thirdly, earnings from the Champions League are allocated by an outside body as well. So Arsenal can't distort those and get away with it.

Fourthly, we know how many commercial partners Arsenal have and how much the sponsorship monies are. Again, to distort this would be foolhardy.

As to the monies that used to come in from the property sales of the Highbury ground, an outside investigator can easily determine the number of properties sold and at what amount.

Corruption here will occur as a result of collusion between seller and buyer, but even in this case, the amount made public at the sale must be maintained in the financial report.

Besides all this, outside analysts do scrutinize Arsenal finances. Should there be discrepancies anywhere, they'd be bound to come to light.


I thank the readers for their patience in reading this. Contributions (even corrections) are welcome.

Read related parts of this article here:

Part I: Theo Walcott Situation Highlights the Problem at Arsenal, Part I

Part II: Why Walcott's Contract Highlights the Problem at Arsenal

Part III: Bacary Sagna and the Case of a Selling Club

Part IV: Profit or Ambition, Where Does the Truth Lie for Arsenal?


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