Liquidity Is the Key for Football Clubs To Avoid Insolvency
Research by Birkbeck Honorary Research Fellow Dr Richard Evans provides guidance on accounting ratios for football clubs to avoid insolvency.
It draws on the sports economics literature to identify the differing circumstances in four scenarios that have caused insolvency for football clubs, namely demand shock (exogenous events adversely affecting football club finance), exuberance (spending on wages in false expectation of sporting success to finance it), finance shock (loss of critical source of finance) and sporting distress (anticipated loss of revenue and/or reduction in wage spend pending relegation).
Discriminant analysis is applied to financial data from the published accounts of football clubs to identify the critical accounting ratios for each scenario. They are combined with their respective weightings and data for each club season to form an S-score as an indication of the financial sustainability of the club in each season.
The results show that financial liquidity is key in all of the scenarios and highlights the need, in particular, to be able to generate cash by maintaining a high level of current assets relative to current liabilities and restricting spend relative to the cash generated from operations. Whereas profitability, as currently used by UEFA, the Premier League and the English Football League to financially regulate football clubs, is found not to be a critical factor in any of the instances of insolvency.
The research goes further by identifying the financial tolerances required to provide a reasonable level of resilience for the financial sustainability of clubs in each scenario. This provides the recommended guidance for an industry regulator, and for the clubs themselves, aiming to avoid financial distress.