Dave Powell, Chief Business of Football Writer for Reach Plc and voice of The Bottom Line Podcast & Newsletter, analyzes the impact of Leicester City’s financial position.
The release of Leicester City’s accounts for the fiscal year 2022–23 on Tuesday made for especially depressing reading for Foxes supporters.
A season marked by relegation from the Premier League, a lack of European participation, and the financial burden of dismissing Brendan Rodgers resulted in an £89.7 million loss.
Falling through the relegation trapdoor into the Championship was not expected or planned for last season, since City finished fifth and eighth in the Premier League in 2020/21 and 2021/22, respectively.
The 2015/16 Premier League champions are one of those clubs that achieved success but struggled to retain it. The ‘big six’ continue to be the only clubs truly safe from peril in the world’s biggest football league.
In the club accounts, Leicester admitted that they anticipate being found in violation of the Premier League’s profit and sustainability regulations (PSR), the financial controls that will be replaced by a new set of rules as early as next season.
Next season, Leicester aims to return to the top flight, but they will face the chance of starting the season with a points deduction, adding to the already high risk of dropping back down the season after promotion.
That increased threat, along with the reality that Leicester will need to take measures to address their losses and navigate to a stronger balance sheet, will have an influence on transfer spending, making the quest to remain in the Premier League elite even tougher.
A look at the three clubs who have been charged with PSR by the Premier League tells their own narrative. Leicester, Nottingham Forest, and Everton have the three greatest wage-to-turnover ratios over the last 12 months. The Foxes have 116%, Forest 94%, and Everton 92%.
Tottenham Hotspur (46%), Arsenal (51%), and Manchester United (51%), have the lowest UEFA squad cost ratios, while Manchester City (59%) and Liverpool (63%) are both well below the 70% criteria. Chelsea, which has spent more than £1 billion to achieve mid-table mediocrity in the last two seasons, is the only ‘big six’ team to exceed the 70% threshold, at 79%.
The figures should be instructive. PSR is set to be replaced by a scheme similar to UEFA’s, albeit with some opportunity for flexibility.
UEFA’s model calculates wages, amortisation costs (which is the accounting of transfer fees), severance costs, and intermediary fees. That is then offset against operating revenue and player trading profit (the best performing year of the last three) and used to give a percentage. UEFA has allowed clubs three years to reach the 70% figure, with it reducing on a sliding scale from 90% last year.
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While nothing specific has emerged regarding the Premier League’s own proposal, reports have claimed that clubs competing in European football on a regular basis may be limited to a 70% squad cost ratio, while other clubs may have as much as 85%.
Replacing the unfit-for-purpose PSR, which enables losses of up to £105 million over three years with deductions for infrastructure, women’s football, community activities, and the academy, is unavoidable.
But for clubs like Leicester, Everton, and Forest, it will still require significant work to be undertaken to fall in line with the regulations, and that will be impactful when it comes to how competitive the clubs can be on the pitch.
In Leicester’s case, using the 2022/23 financials as an example, the club has payroll costs of £205.7m when including all obligations such as pension and social security costs. UEFA’s rules only use the wages for players and head coaches, so for Leicester, that will ease some of the cost burden, although it is players and head coaches that make up the vast majority of the payroll.
Amortisation costs stood at £77 million for the period, and this, added with the wage costs and cost of sacking Rodgers, which has not been itemised but where we can use a conservative £10 million, against the revenue of £177 million, and the player trading profit of £74.8 million from the sales of Wesley Fofana and James Maddison, would place the Foxes at a rough squad cost ratio of 115%, some 30% above where the club would need to be to be compliant with the potential 85% that the Premier League
Cost-cutting measures are unavoidable, even with promotion to the Premier League, and while the owners’ continued support means that there is no concern about the club’s ability to continue as a going concern, a change in financial controls will not make the outlook any brighter for Leicester, nor will it allow any ground to be made up on the biggest sides, who have now sailed off into the distance.
For Leicester, the future seasons will have to be about sustaining a Premier League presence while spending substantially less, which is no easy task.
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