At true faith we’re going into as much detail as we can about Newcastle United’s recent published accounts.  Thankfully at tf towers we have a series of dedicated accounting and finance professionals willing to use their professional expertise to properly analyse Newcastle United’s accounts for the season 2016/17.  After Andy Trobe’s spectacular start, here’s David Baeston with his first piece for true faith.


In its accounts released on 22 May 2018, the Club notes that the operating loss for the 12 months ended 30 June 2017 (covering the Championship season) was £90.9M. On the Club’s website (and propagated by Mike Ashley’s (MA) press-partners), these results “reflect very clearly the financial consequences of relegation and the approach we adopted to help secure a return to the Premier League.”.

However, it must be noted that this operating loss was calculated using accounting rules. This means that many of the expenses included in the loss do not impact cash, and thus, do not have to be funded by MA or banks. Therefore, they don’t impact the day-to-day running or viability the Club. Examples of such transactions include:

• Depreciation of St James Park and associated infrastructure,
• Amortisation of player contracts.

In addition, this reported loss includes other non-cash extraordinary charges, such as provisions against onerous contracts. This occurred as a result of Rafa Benitez (Rafa) deciding that some players had no future with the Club (such as Jack Colback). The value of the charge is £22.0M, and represents the difference between the minimum payments under the contracts less the economic benefits to be received. For example, if Colback’s annual compensation package is £2.6M and he had two years left on his contract (£5.2M total), and we could only loan him out for £1.0M per year, then the charge would be £3.2M. Note that the £22.0M charge for onerous contracts is not required to be paid immediately; it will need to be paid over the life of the onerous contracts. If anything, this shows the sheer incompetence of the Club’s prior transfer dealings.

Therefore, due to the reasons outlined above, a better way to assess the direct financial impact of relegation is to look at net changes in cash, and cash flow, between the two financial years. This is because the cash shortfall has to be financed either by MA or a bank, and affects the future viability of the Club.

Between the 2016 to 2017 reporting periods, the Club had a cash shortfall of £13.6M from footballing operations, and invested a net cash amount of £11.4M in transfers. Therefore, the total cash loss from being in the Championship was £25.0M, of which £15.0M was funded by MA and the balance via cash on hand and bank overdrafts. This is a significantly lower figure than the £90.9M quoted by the Club.

Below is a more weighted-analysis of the actual impact of relegation, and whether Rafa was backed:

Impact to turnover

Revenue decreased from £125.8M to £85.7M (£40.1M, 32%) as a direct result of relegation. Note that the majority of this revenue would have been received as cash during the two financial years.

The reduction in Media was the biggest hit the Club took due to relegation, with the majority of the £47.4M earned relating to parachute payments.

More interesting is the reduction to Commercial income, which consists of sponsorships, merchandising, conference and catering. The Club would have lost out on the Premier League’s centrally-negotiated commercial deals totalling £4.5M, so a more comparable reduction to Commercial income would be 41%:

Of the components in the Non-PL Commercial, merchandising income should actually have increased, as purchases from Sports Direct increased to £1.3M from £1.2M in 2016, while similar Match day attendances would imply stable catering turnover.
Therefore, the majority of the reduction is likely to be due to relegation clauses in sponsorship agreements. When comparing to the prior relegation season in 2008/2009, Sponsorship income only decreased by 21% (£4.0M). So why has there been a significantly larger reduction this time? I assume it is a result of the first relegation from 2009, where the Club’s sponsors realised we could indeed be relegated.

Player trading –was Rafa backed?

During the 2016/2017 Championship season, Rafa generated a net transfer surplus £42.3M. However, many of the large transfer fees generated will be paid over time. The net cash generated from player trading for the Championship season was actually minus £11.4M, that is, we spent more cash on players than what we received. Below shows how much, and when, the Club will receive and pay for its transfer dealings from the Championship season:

• £22.0M to be received, and £17.1M to be paid before 30 June 2018; cash surplus of £4.9M
• £38.7M to be received, and £7.4M to be paid after 1 July 2018; cash surplus of £31.3M

In addition, from 1 July 2017 to 5 March 2018, the Club spent an additional £46.0M net maximum spend on transfers (including bonuses etc). Note though, that this commitment is less than the incremental income from being in the Premier League plus the net cash incoming as outlined above. This would indicate that the Club could have provided Rafa with additional cash for investment, though probably didn’t due to the financial risk of being relegated again.

Therefore, on the assumption that MA would not lend any additional money to the Club for transfers, nor allow it to generate commercial income via charging Sports Direct for its advertising, Rafa was backed as much as possible in the transfer market during the Championship season.

Note: with regards to the Andros Townsend transfer, it has been mentioned that we could have made the transfer possible by offsetting what we hadn’t yet received from Crystal Palace with what we would pay to buy back the player. However, given that Townsend activated a relegation sale clause in his contract, I would assume that the £12M received from Crystal Palace would have been in a lump sum, rather than structured over time, similar to our purchase of Lejune.

Player trading –what about the wages?

A lot has been mentioned about the Club maintaining Premier League wages in the Championship. The headline wage figure presented in the Club’s accounts was £112.2M, up from £74.7M in the prior season. However, the wages in the Championship season included a number of one-off factors, so are not directly comparable:

The 7% increase in wages on a comparable basis would indicate that the Club was indeed maintaining its wages from the prior Premier League season. However, there was also an increase in the number of staff both in terms of players/team management and administration:

So on this basis, the increase in wages looks like it was primarily due to investment in the number of employees the Club had. Borrowing some analysis done by Price of Football, even at £80.3M, the Club would have by-far the largest wage budget in the division:


So to conclude, it is fair to say that the Club maintained a Premier League wage structure in the Championship, though it is unfair to use their quoted amount of £112.2M. It was more like £80.3M.

Other interesting points from the financial report

• Sports Direct still receives free advertising around St James Park, which is why the Club’s commercial income is still below comparable Championship Clubs, such as Aston Villa. Perhaps this “compensates” MA for interest free loans to the Club totalling £144.0M?
• The Club has made a provision for an additional taxation charges as a result of the HRMC investigation. The amount is not stated, but it excludes interest claimed by HMRC.
• The Club generated £2.4M for other interest receivable in 2017. It is not clear what this relates to.


David Baeston