The Independent Football Regulator (IFR) has produced a 'State of the Game' report, which has taken a forensic look at English football over the past 18 months, concluding that the game's finances are dangerously exposed, with the majority of clubs living on the edge of financial disaster.
The IFR added that interest and investment from around the world continues to grow within English football, but the underlying foundations of the pyramid are under intense strain and require urgent reform.
Despite over £9bn generated in revenue, 94 per cent of clubs are loss-making, with long-term security being put at risk through excessive short-term spending to keep up with rivals. This, the IFR says, has led to a "dangerous cocktail of rising debt and an over-reliance on owner funding, leaving clubs and their fans at risk".
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The report acknowledges that the success of the Premier League has driven economic success, making English football the "richest, best and most deeply competitive in the world".
However, it points to "financial cliff-edges between and within leagues", with the average Premier League club making more than eight times the revenues of an average Championship club, and the system of parachute payments paid by the Premier League to Championship clubs relegated contributing to significant overspend by clubs in the Championship.
Indeed, the report highlights player wage inflation leading clubs to take big risks chasing a place in the Premier League.
The State of the Game report found that lower down the pyramid the pressure from operating costs was also on the rise, with 17 EFL and National League clubs incurring costs exceeding revenues. These clubs would be loss-making even if they did not pay their players.
It uncovered too that more than 60 per cent of EFL and National League clubs are technically insolvent, with their liabilities exceeding the book value of their assets.
And it found that more than a quarter of clubs would be unable to survive for more than one month if owner funding was withdrawn, with the majority lacking a basic contingency plan to mitigate their risk.
'We're trying to take an interventionist approach'
Chair of the IFR David Kogan told Sky: "I think what we see in English football is two completely different positions.
"The first is £9bn comes in every year, yet we have 94 per cent of the clubs of the 160 we regulate are trading unprofitably.
"We have 32 clubs that have got less than 30 days' cash cover in their accounts. So if the owner walks away or drops dead, they're insolvent and go bust.
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"So what we see in football is rising debt. It's a problem of cash cover and liquidity within clubs, and it's a lack of management, and what financial management? And now we're in a position to help those clubs achieve a more stable future."
Kogan added: "What we're implying is today there's enough money going through into the Premier League and the EFL and into their individual clubs for the sun to shine. This is exactly the moment when we need to address structural issues because once that sun stops shining, those clubs will be in real trouble.
"So what we are trying to do is get ahead of the problem and take an interventionist approach with individual clubs that need it to help them get to the point of being stable and secure because too many clubs get close to the edge and depend on one thing and one thing only, which is a new owner coming down the track.
"That supply of owners may dry up, and supply of media money may dry out so we have to now get ahead of the game and give them levels of security and stability that allow them to go into the future."
The IFR's six-point plan...
The IFR report offered solutions, issuing a six-point plan to address some of the issues it has identified.
The plan includes measures for clubs to improve how they manage financial risk, including holding more cash and putting robust contingency plans in place in case owner funding is withdrawn; it also outlines how revenue distribution should be reformed to ease cliff-edges throughout the pyramid, urges action on rising losses and calls on clubs to show how they take fans' views into account, and the steps they are taking to improve diversity and governance in the boardroom.
It also highlighted yet again that the current distribution arrangements in English football create risk and should be reformed.
For several years the Premier League and EFL have been discussing and negotiating a new financial distribution model, but no agreement has yet been finalised. The IFR has consistently said, and has said once again in this report, that it is preferable that the Premier League and EFL come to an agreement themselves, but again mentioned that the IFR could apply a "back-stop" power to intervene if the Premier League and EFL do not come to an agreement.
The IFR said its goals on reform of the current distribution model were to:
- Maintain the Premier League as the leading football league in the world and the Championship as the leading second-tier competition.
- Maintain vital funding for the wider game.
- Mitigate the financial impact of relegation from the Premier League.
- Reduce the distortive impact that parachute payments have on financial incentives within the Championship.
- Protect clubs by giving clubs the opportunity to rebuild their balance sheets and reduce risk.
- Consider short-term support to clubs that face severe financial distress.
Kogan said: "There are three moves that are taking place that we think will help on this.
"First is that the Premier League and the EFL are currently discussing a new distribution deal with the game, which will radically change the amount of money going from the Premier League down to the lower leagues. And that will have associated with it controls on how that money is spent, which actually will go to the stability of those lower leagues, but we're going to see more money flowing down, assuming the deal is done, and we're going to see cost controls involved in that.
"The second is that from November onwards we're going to be licensing clubs, and by licensing those clubs we're going to intervene directly in individual clubs where we think they've got exposures that we can help them resolve and that includes things like having a business plan that involves having cash cover more than 30 days; it involves having genuine provision for the debts that they've raised.
"And the third thing we're doing is working with leagues to actually look at cost controls over a longer-term basis to actually build in financial stability as we go forward."