Swansea City 2018/19 accounts: relegation leads to significant cost-cutting as revenue falls

Swansea City had to significantly adjust financially following relegation from the Premier League.

Swansea City have announced their accounts for the financial year ending 31st July 2019, with the 2018/19 season being the club's first back in the Championship since 2010/11 after they suffered relegation from the Premier League in 2017/18. The club made a pre-tax loss of £7m, compared to a £3.2m loss the previous year. Some key performance indicators from their accounts are the following:

Revenue This fell sharply during the 2018/19 period from £126.8m to £68.2m, a drop of around 46%. The main factor which caused this drop was the fact that broadcasting revenue fell by £53m from £104.6m, a drop of over half as the club received its first instalment of parachute payments following relegation, payments granted by the Premier League to clubs who suffer relegation for the next 3 seasons (or 2 if a relegated club would have been relegated after merely one season), unless during that time a club achieves promotion back to the Premier League. These parachute payments are awarded to clubs in the following manner: In the first year, 55% of revenue received from: equal share of UK TV revenue by Premier League clubs as well as equal share of overseas TV revenue by Premier League clubs. In the second year, the percentage falls to 45% (unless a club achieves instant promotion back to the Premier League), whilst in the third year, if clubs are eligible to receive this payment, the percentage drops to 20%. During the previous financial year (2017/18), in which they suffered relegation from the Premier League, Swansea City were heavily reliant on revenue from broadcasting, as the club generated a total of 82.5% of its revenue from broadcasting. This proportion in 2018/19 fell slightly to 75.7%, though clearly Swansea depend heavily on revenue from broadcasting. Matchday and commercial revenue fell by £5.6m from £22.2m in 2017/18 to £16.6m in 2018/19, a drop of around 25%. However, for time being no breakdown has been provided in terms of the split in matchday and commercial revenue. In 2019/20, as Swansea City did not achieve instant promotion back to the Premier League, they will continue to receive parachute payments, though these will drop by approximately £8m. Furthermore, during the 2018/19 season the Welsh side earned £1m in revenue from advancing to the FA Cup quarter-finals, though this season they were eliminated in the third round and hence will earn no revenue from the FA Cup, hence a further drop in revenue of £1m. In addition, at the end of the 2018/19 season, Brighton & Hove Albion appointed manager Graham Potter after they had sacked Chris Hughton, and thus it is believed that they paid Swansea City £3m in compensation, though Swansea will not receive this payment in 2019/20 (or in any other financial year). During the 2018/19 season, average league attendance fell from 20,623 to 18,737, although the club played four more league games at home as a result of playing in the Championship. So far in the 2019/20 season, average attendance has fallen to 16,258. Due to being in the Championship, commercial deals usually tend to be less lucrative than in the Premier League. Therefore, it is not unreasonable to suggest that matchday and commercial revenue will fall further from £16.6m in 2019/20, and it is reasonable to estimate that this drop will be of around £3m (that said, this is an estimate based on the assumption of lower attendances and less lucrative commercial deals). Therefore, whilst this is only an estimate which is based on numerous assumptions, revenue in 2019/20 for Swansea City will fall to around £53m. Wages As a result of suffering relegation at the end of the 2017/18 season, the club sharply reduced its wage bill from £92.5m to £49.6m, a fall of 46.4%. Also, the drop in wages partly arose from the fact that the club reduced its staff members from 409 to 359, meaning that relegation led to loss of jobs in a bid to cut costs. The wages to turnover ratio increased very slightly from 71.5% to 71.7%, though this is a respectable ratio and clearly highlights how the club managed to effectively offset the fall in revenue by lowering wages, as it is not uncommon for clubs to see a sharp increase in the ratio as generally revenue tends to drop significantly more than wages at a faster rate. Furthermore, in the Championship several clubs tend to have a wages to turnover exceeding 100%, meaning that clubs spend more than £1 in wages alone for every £1 in revenue generated (Birmingham City, for example, had a wages to turnover ratio of a staggering 202% in 2017/18, meaning that they spent £2.02 in wages for every £1 earned in revenue). Their wage bill of £49.6m would have placed them in the top 5 for wages by Championship clubs in the 2017/18 season - for some comparison, in the 2018/19 season Stoke City (who were also relegated at the end of the 2017/18 season together with Swansea) incurred a wage bill of around £56m. At the end of 2018/19 season, the club released several high-earning players such as Wilfried Bony, Leroy Fer, Borja Baston at the end of January, Luciano Narsingh and Martin Olsson, whilst they also sold Dan James and Oli McBurnie (though the latter two were not on particularly high wages). Bony spent half of the season out on loan, and he was on a reported salary of £120k per week, and if it is to be assumed that Swansea paid none of his wages whilst out on loan and therefore paid wages for half of the year, his departure from the club will probably mean a reduction in the wage bill of around £3.1m. Fer, who spent all of last season at Swansea, was believed to be on a weekly wage of £45k, and thus his release means a fall in wages of around £2.3m for the year. Meanwhile, Narsingh spent all of last season at Swansea and was believed to be on wages of roughly £50k per week, and his release means a likely reduction in wages of around £2.6m. Olsson was reported to be on wages of approximately £30k per week, and having spent all of last season at the club, his release leads to a cut in the wage bill of around £1.5m. Taking into account the release of players who spent time at the club last season, it is estimated that Swansea's wage bill will fall by around £9.5m, though this is a mere estimate as it is unclear as to how much (if any) wages Swansea were covering of players out on loan (such as the Ayew brothers and Borja Baston, as well as Jefferson Montero) and it is not inconceivable that the club further reduces its wage bill in 2019/20, particularly since it is highly probable that revenues will fall further. Amortisation When a football club signs a player, rather than include the cost of signing a player immediately in the income statement - the club depreciates a player's transfer fee over his contract ("useful life"), known as amortisation. If for example team X signs player A for £20m on a 5-year contract, rather than show £20m as an expense in the income statement in the year player A was signed, the club shows £4m in amortisation for the 5 years of his contract. This figure decreased drastically for Swansea in 2018/19, as this fell from £51.9m to £22.3m, a decrease of over half. One key thing to note here, however, is that it is not uncommon for clubs who suffer relegation from the Premier League to impair (reduce) a player's book value, with the thought that a relegated club would probably receive fairly low transfer fees for certain players who might have been acquired for fairly substantial transfer fees, in a bid to reduce amortisation costs (since the amortisation would then be re-calculated on the player's new book value) for future years as a means of complying with the Profitability + Sustainability regulations set out by the EFL, which necessitate that clubs should not make losses of more than £13m per season (this limit increases to £35m per season if a club was in the Premier League that year). In fact, Swansea recorded £14.8m in impairment during the 2017/18 season. Therefore, the fall in this figure is partially explained by the fact that the Welsh side sold players following relegation such as Lukasz Fabianski, Federico Fernandez, Sam Clucas, Roque Mesa and Alfie Mawson, though some of this fall is also explained by impairments the club would have carried out. For 2019/20, due to the impairments the club would have carried out in 2017/18, it is not so easy to predict the change in amortisation, however, the fact that several players were released at the end of the 2018/19 season will likely mean that the amortisation figure will see further cuts.

Profit on player sales When a player is sold for a higher transfer fee than his book value, this gets recorded as profit on player sales which is a non-cash item. The figure for 2018/19 has not yet been stated and is not easy to predict due to the effect of impairment charges which took place in the 2017/18 season. However, the sale of Oli McBurnie in the summer of 2019 for a reported £20m means that the club will have profit on player sales of £20m as McBurnie's small transfer fee had been written off over the duration of his contract. Conclusions As a result of suffering relegation from the Premier League, Swansea inevitably saw a large fall in revenue, and as a result of this opted to significantly cut costs and adjust their finances to the level in which they are competing, unlike for example Stoke City who opted to spend significant money and retain high-earning players in a bid to try earn promotion to the Premier League at the first attempt (but failed spectacularly). It is likely that, unless Swansea bounce back to the Premier League, revenues will continue to fall quite considerably for 2019/20 and 2020/21, before another fall in 2021/22, after which revenues would remain fairly stable. Therefore, in a bid to remain financially sustainable for the long-term, Swansea must continue to reduce their wage bill and will likely have to continue to sell players in a bid to balance the books. As the club opted to drastically cut costs in order to cope with the losses in revenue following relegation, in all probability, Swansea are well-placed to comply with the Profitability and Sustainability (P&S) regulations set out by the EFL. Clearly, the Premier League finances are extremely lucrative, and significantly transform a club's finances, thus it may explain why many clubs in the Championship spend crazy amounts of money in a bid to win promotion.