Borussia Dortmund - Back In The Game

Last season was truly memorable for Borussia Dortmund’s many supporters, as their beloved Schwarzgelbenretained their Bundesligatitle and also secured the first double in the club’s 103-year history by winning the DFB Cup too. Not only did they avoid the dreaded second season syndrome, but they actually did so in record-breaking style by setting the highest points total (81) and the longest unbeaten run in a single season (28 matches). Germany’s leading sports magazine, Kicker, compared this achievement with Bob Beamon’s “unbelievable” long jump record in the 1968 Olympics.

They have admirably managed to cope with the loss of key players each season, so when they sold influential captain Nuri Şahin to Real Madrid in the summer of 2011, his place in midfield was effectively taken up by Shinji Kagawa, whose return from injury meant no loss in momentum. Similarly, when the Japanese international was sold to Manchester United this summer, Dortmund had already signed his replacement, the highly talented Marco Reus from Borussia Mönchengladbach.

In the club’s own words, Dortmund’s performance in Europe was “not as impressive”, as they finished bottom of their Champions League group behind Arsenal, Marseille and Olympiacos, betrayed by their young team’s lack of experience at this level. However, they appear to have remedied this weakness (so far) this season with fine victories over Real Madrid and Ajax plus much the better of an away draw with Manchester City.

"Götze - super Mario"

All this has been done with Dortmund playing an exciting, attractive brand of football that has been appreciated by fans everywhere. Under charismatic manager Jürgen Klopp, this is a side that attacks with pace and defends with great intensity, proving that teams can win with style.

They have also achieved the seemingly impossible task in football of combining victories on the pitch with financial success, though it is equally true that sporting success has helped lead to improved economic results. In 2011/12 Dortmund’s revenue rose by an imposing 42% to a record €215 million (€189 million excluding player sales), while pre-tax profits surged to a hefty €37 million. Despite higher bonus payments, the wage bill of less than €80 million can still be described as “merely average” for the Bundesliga.

These figures provide the most tangible evidence yet that Dortmund have made a remarkable recovery from their financial difficulties of a few years ago when they flirted with bankruptcy. In 2002 the club was forced to sell its famous Westfalenstadionto a real estate trust, having squandered the funds from its flotation on the German stock exchange.

Worse was to come as the club splashed out on expensive signings and high wages, effectively gambling on regular qualification for in the Champions League to fund this massive spending. When this was not achieved, they only succeeded in building up huge debts, leaving the club in a “life-threatening situation”.

"Hummels - Mats entertainment"

The club was saved by the “never say die” spirit of their supporters, whose “We are Borussia” campaign resulted in Dortmund’s community of citizens, companies and public authorities combining to help repair the finances. This included some very understanding creditors and bank managers, who deferred stadium rent and interest payments until 2007.

Dortmund also had to take out yet another loan to help pay the players’ salaries, while they were forced to shore up the balance sheet in 2006 with significant capital increases, which enabled the club to obtain a more manageable debt structure and improved interest rate terms. In particular, the club took out a 15-year loan of €79 million with Morgan Stanley, which facilitated the repurchase of the remaining stake in their stadium from the property fund.

The restructuring process was completed two years later, when €50 million of cash received after signing a new 12-year marketing agreement with Sportfive was used to fully repay the Morgan Stanley loan many years ahead of schedule. The club promised that this move would not only further reduce its liabilities, but would free up funds to improve its sporting competitiveness. Two Bundesligatitles later and it’s fair to say that the club has been true to its word.

"Lewandowski - Pole dance"

Dortmund have learned from their past mistakes (and excesses) and adopted a far more sustainable business model in the past few years. They now employ a solid financial strategy, based around the over-riding principle of “achieving maximum sporting success without taking on more debts.” The focus is primarily on youth, as explained by managing director Thomas Treß, “We learned that you have to invest in your youth, to develop your own stars, adding to your team with young players of potential.”

This investment in relatively cheap, promising young players, rather than he expensive finished article, has been assisted by the foundation in 2011 of the BVB Academy, a modern training centre to develop players between the ages of 19 and 23. Dortmund’s youth academy has been a veritable production line for the first team, turning out talent like Mario Götze, Marcel Schmelzer and Kevin Großkreutz, while other youngsters like Mats Hummels and Sven Bender have been further developed at Dortmund. Most of these players have signed long-term contracts with Dortmund until 2016 or 2017.

Bayern Munich’s outspoken president Uli Hoeneß took a pot shot at his rivals’ approach, “They had to do it that way, because they don’t have the money.” Well, exactly. Very few clubs have the financial power of Bayern, but it is surely better to make your suit from the cloth available, rather than spend money you don’t have on a fancy new outfit that falls apart a couple of years later.

Dortmund’s revised, more sensible approach has been epitomised by their dealings in the transfer market. In the five years leading up to the fateful 2004/05 season, the club’s net spend was a chunky €97 million, before their debt problems forced them to offload players, generating surpluses over the next three years, followed by very modest spend, so that “transfer income and expenses are balanced.” Over the last nine years, the club had net sales proceeds of €5 million – a stark contrast to their extravagant era.

Under sporting director Michael Zorc, Dortmund’s scouting has been focused on “value development”, so that “transfers should create substantial earnings potential”, as well as “sustainable sporting competitiveness”. This means that the young talent is likely to leave “to secure large transfer income”, though the club acknowledges that this strategy creates a conflict between financial considerations and sporting criteria. This can lead to a lack of squad depth, hence the uncertain start to this season in the Bundesliga.

In fact, over the last three seasons no fewer than nine clubs in Germany’s top flight have spent more than Dortmund’s net €2 million. In fairness, very few Bundesligaclubs spend big on transfers with the obvious exception being Bayern Munich, who spent €116 million in the same period. Dortmund’s chairman, Hans-Joachim Watzke, accepted this discrepancy, “I must point out that we continue to operate in different spheres. Bayern spent €70 million this year, including €40 million on Javi Martinez.”

Thomas Treß added, “We are not able to compete in the European soccer market with British or Spanish clubs in respect of transfer pricing.” That’s true, but you can also add a few more countries to that list, as can be seen by the above graph, which highlights the massive difference with other leading Europe clubs. At one end of the spectrum, we have Dortmund with €2 million; at the other end, three clubs, fueled by oil-rich owners, have splashed out around a quarter of a billion pounds: Chelsea, Manchester City and Paris Saint-Germain.

This summer saw a slight change of emphasis with the €17 million capture of Marco Reus, though even this was compensated by the €16 million received for Kagawa. Bayern’s former sporting director, Christian Nerlinger, conceded, “With this transfer they have established themselves as a major rival for the championship.” Dortmund claimed that this signing demonstrated that they were “the team to be for young, ambitious Bundesliga players”, though in fairness there were special circumstances here, as Reus grew up as a Dortmund fan and his parents live in the area.

Nevertheless, the suspicion remains that if they receive the right offer, Dortmund will continue to sell their best players, such as the prolific forward Robert Lewandowski. Watzke recently denied this, “We won’t give up Robert for any money in the world. We don’t want to open a bank”, but few would be surprised if the Polish international were to leave next summer.

Indeed, player sales contributed nearly half (€17 million) of Dortmund’s very impressive 2011/12 pre-tax profits of €37 million, which were €27 million higher than the previous season’s profits of €10 million. After tax was taken into consideration, profits increased from €5 million to €28 million. That was much more than the previous five years when player sales produced profits on average of less than €5 million a year.

Operating profit grew by €17 million to €24 million, as revenue grew by an amazing €51 million (37%) from €139 million to €189 million, more than off-setting increases in the wage bill (£18 million) and other expenses (€17 million). Other operating income, largely due to payments from national associations for the release of Dortmund’s players, also improved by €3 million to €8 million.

As a technical aside, I am using the Deloitte definition of revenue here in order to facilitate comparisons with other European clubs, so have excluded transfer income of €26 million. Adding that to my revenue of €189 million gives the €215 million announced by Dortmund. The profit on player sales of €17 million is then obtained by deducting transfer expenses of €9 million and is largely due to the sales of Kagawa to Manchester United and Lucas Barrios to the Chinese club Guangzhou.

It is clear that “Borussia has developed itself economically and on a sporting level continuously over the last few years”, as Watzke put it. The profits made in the last two seasons represent a spectacular turnaround, as the club had previously reported losses in five of the last six years, including €55 million in the annus horribilis of 2004/05 and €23 million the year after.

In comparison, Bayern Munich, the “alpha male” of the Bundesliga with 22 league titles and four Champions League victories, have made profits 19 years in a row, consistently bettering Dortmund’s results off the pitch – except last season, when the Schwarzgelben’s€9.5 million was slightly higher than the Bavarians’ €8.8 million. Bayern will also have to go some to match Dortmund’s €37 million in 2011/12.

Dortmund re-entered Deloitte’s Money League in 2010/11 in 16th position with revenue of €139 million, even without the benefit of Champions League money. Their 2011/12 revenue of €189 million would have placed them 11th, assuming no growth at other clubs.

That is more than respectable, but the problem is that it is far below the leading clubs, such as Real Madrid €479 million, Barcelona €451 million, Manchester United €367 million and (crucially) Bayern Munich €321 million. The magnitude of Dortmund’s accomplishment in overcoming Real Madrid last week can be seen by the relative revenue figures last season with Madrid’s €514 million being nearly three times as much as Dortmund’s record €189 million.

Bayern’s revenue of €321 million is by far the highest in Germany, giving them a major competitive advantage over their rivals: Schalke 04 €202 million, Dortmund €189 million, Hamburg €129 million, Werder Bremen €100 million and Stuttgart €96 million (all 2011 figures, except Dortmund 2012). Moreover, only Dortmund have kept pace with Bayern’s insatiable revenue growth: since 2007, they have both increased revenue by just under €100 million. Schalke also grew revenue by €88 million, but their 2012 figure is very likely to fall back after the absence of Champions League revenue, which was worth €40 million in TV distributions alone in 2011.

Even though Dortmund’s revenue has been going great guns, rising 80% (€84 million), while Bayern’s actually dipped €2 million last season, the gap between the two clubs is still a mighty €132 million. This is nonetheless a lot better than the colossal €218 million shortfall in 2010, when Bayern’s revenue was literally three times as much as Dortmund’s.

Even so, Dortmund’s revenue growth has been hugely impressive, more than doubling from €90 million five years ago, especially as it was relatively flat during the three years between 2008 and 2010 at around the €105 million level. Last season all revenue streams contributed to the €51 million rise to €189 million: TV €28 million (mainly Champions League participation) to €60 million; commercial €19 million to €97 million; and match day €4 million to €31 million.

As we can see, the largest revenue category is commercial income. In fact, in 2010/11 Dortmund had the highest percentage of their total revenue from commercial (57%) of any Money League club. Although this has fallen to 51% in 2011/12, mainly due to Champions League money, this is still a very high proportion for a football club.

To place that into context, it is worth comparing the revenue mix with Arsenal, where commercial activities contribute only 23% of total revenue. In contrast, match day is worth 41% at the North London club, compared to only 17% at Dortmund. Looked at another way, the majority of Dortmund’s revenue is generated from companies, while fans bear most of the burden at Arsenal.

In fact, Dortmund’s striking commercial revenue of €97 million means that they are only behind the four marketing behemoths of the football world: Real Madrid €187 million, Bayern Munich €178 million, Barcelona €167 million and Manchester United €130 million.

The club’s commercial strategy is to secure long-term partners, as seen by their agreement with marketing partner Sportfive, who have signed with the club until 2020, by which time they will have been the club’s marketing partner for 20 years. All three main sponsorship deals are long-term in nature: shirt sponsor Evonik, whose agreement has been in place since 2006, extended from 2013 to 2016; stadium naming rights partner Signal Iduna also extended from 2016 to 2021; while new kit supplier Puma signed up until 2020.

Another objective is to sign up many secondary sponsors, known as “champion partners”, and a lengthy list now includes the likes of Opel, Sparda Bank, Sprehe, Wilo, Brinkhoff’s, Flyer Alarm, Hankook, Yanmar and West Lotto.

Dortmund have managed to grow all aspects of their commercial revenue: sponsorship and advertising rose 16% to €58 million, mainly due to new partners and an increase in the VIP hospitality occupancy rate to 100%; while merchandising and catering was also up an impressive 41% to €37 million.

Over a third of merchandising revenue is now earned through the online shop, while a fifth fan shop was opened in the city of Dortmund in September 2011. According to a survey by PR Marketing, die Borussen sold between 250,000 and 500,000 replica shirts in the 2011/12 season with only eight clubs selling more. Catering revenue also rose 9% to €10 million.

Despite these successes, Dortmund’s commercial income is still only around 55% of Bayern’s, partly due to the €38 million revenue the Bavarians earn from the Allianz Arena, though their sponsorship and advertising is also €23 million higher. Our old friend Uli Hoeneß said that Dortmund would need to have a more consistent track record of winning trophies if they hoped to match Bayern’s global appeal, but in truth they’re doing very well compared to almost every other club on the planet.

Evonik, a chemical company, has increased its shirt sponsorship to €10 million, according to the Frankfurter Allgemeine Zeitung, though this is still lower than deals struck by some other German clubs: Bayern (Deutsche Telekom), Schalke (Gazprom) and Wolsburg (Volkswagen). It is also a long way behind the mega deals at the likes of Real Madrid and Barcelona, though it does include hefty add-ons for sporting success. The Evonik chairman said that he was very pleased with Dortmund as a partner, due to their large crowds and title wins (“in a very exciting way”).

German clubs have proved very adept at securing valuable shirt sponsorship deals. Although the total value of such deals is higher in the Premier League, the average value of each deal is actually higher in the Bundesliga, as it has two fewer clubs (according to a study by International Marketing Reports).

Signal Iduna, the naming rights partner, has also increased its annual payment from €4 million to between €4.5 and €5 million after the deal extension.

Dortmund’s new kit supplier, Puma, is reportedly paying €6-7 million a season from July 2012, replacing Kappa, whose deal was only worth €4 million. Rather wonderfully, the new shirt has the inscription “Echte Liebe” (true love) on the inside of the collar. That’s good news, but it is still far below Bayern’s €25 million deal with Adidas (and, for that matter, Real Madrid’s €38 million agreement with the same company).

Paradoxically, BVB are  helped commercially by the weak digital television market, which means that German clubs are televised more frequently on terrestrial channels than their counterparts in England, Spain and Italy, thus providing more exposure for their sponsors. As the old saying goes, it’s an ill wind that blows no good.

However, this also means that television income is not very high in Germany, as can be seen from the 2010/11 Money League, where Dortmund sat in 19th position. Their revenue of €32 million was around one sixth of the €184 million earned by Barcelona and Real Madrid, who benefit greatly from their individual domestic deals.

In 2011/12, Dortmund’s TV revenue rose €28 million to €60 million, very largely due to the €25 million from the Champions League with the remainder coming from the DFB Cup, which they won compared to a second round exit the previous season.

They received around €28 million from the Bundesligadistribution, a small increase on the previous season. TV revenue in Germany is largely divided among clubs via a points system based on their league position over the past four years, though some money is also allocated per the number of games televised live.

Performance is weighted in favour of the more recent years, so last season a factor of 4 was applied to 2011/12, 3 to 2010/11, 2 to 2009/10 and 1 to 2008/09. However, a form of equality is then applied, as the club with most points from this algorithm only receives twice as much money as the club that has the lowest number of points. In this way, as top club in 2011/12 Bayern Munich received €24 million for performance (excluding live fees), which was double the €12 million for last placed Augsburg.

The Bundesligarecently announced an increase in the value of their TV rights with the domestic deal for the four years from 2013/14 to 2016/17 rising 52% from €410 million to €628 million and the overseas rights increased by a similar rate to €72 million. The new total of €700 million will take it ahead of La Liga (€655 million) and Ligue 1(which actually fell to €642 million). The Bundesliga’schief executive, Christian Seifert, was ecstatic, “ We didn’t expect results like this, it clearly exceeded our expectations”, while Bayern’s chief executive, Karl-Heinz Rummenigge, described it as “a milestone in the history of the Bundesliga.”

Nevertheless, the TV rights for German football are still lower than Serie A(€944 million) and only half the Premier League deal (€1.4 billion). That is before the new English deal from 2013/14, which is estimated to be worth at least €2.2 billion, i.e. three times the “historic” Bundesliga deal.

Dortmund’s share of the TV revenue should rise to around €40 million, but this is still a lot less than the money earned by English clubs. Last season’s Premier League winners, Manchester City, pocketed €75 million, while even the bottom club, Wolverhampton Wanderers, received €49 million. The new Premier League deal is likely to deliver €110-120 million to the leading English teams.

Once again demonstrating their innovative spirit, Dortmund were the first German club to offer their own TV package, BVBtotal!, in January 2011, run jointly with Deutsche Telekom.

Dortmund’s allocation from the Champions League was worth €25.4 million in 2011/12, considerably more than the €4.5 million they received from the Europa League the previous season, even though they went out at the group stage. However, this was still a lot less than the €42 million Bayern received for reaching the final.

Interestingly, Dortmund (€17 million) still received more than Bayern (€14.8 million) from the TV (market) pool, due to the methodology used to allocate this element, which is as follows: (a) half depends on the progress in the current season’s Champions League, based on the number of games played; (b) half depends on the position that the club finished in the previous season’s domestic league. As three German clubs reached the group stage this season, the split will be: Dortmund 45%, Bayern 35% and Schalke 20%. The Champions League will be worth even more, as the overall prize money for the 2012 to 2015 three-year cycle has increased by 22%, but it will be higher for German clubs, as their TV deals have risen considerably, thus boosting their market pool.

"Grosskreutz - we need to talk about Kevin"

The Europa League is much less lucrative, though German clubs benefit from relatively high TV deals, so last season Schalke earned the same (€10.5 million) as the winners Atlético Madrid, even though they were eliminated in the quarter-finals.

Therefore, Dortmund will be gratified that Germany’s number of places in the Champions League has increased from 3 to 4 (at the expense of Italy), due to the improving UEFA coefficients. However, this might prove to be a double-edged sword, as it could mean that Germany’s TV pool has to be shared between more clubs.

European money has clearly made a substantial difference to Dortmund’s revenue, but Watzke has claimed that the club is not economically dependent on Champions League money and they could survive three seasons without it, thanks to their long-term sponsorship contracts – though they would have to make cuts.

Last season Dortmund’s incredible average attendance of 80,500 was the highest in Europe, ahead of Barcelona 79,600 and Manchester United 75,400. This was easily the largest average in Germany with the next highest teams being Bayern 69,000 and Schalke 61,200. The Dortmund fans’ interest shows no sign of slowing down, as they have just established a new Bundesliga record for season tickets for 2012/13 at a mighty 54,000 – and that was capped to ensure an adequate supply of tickets on the day of the match.

It is therefore a little perplexing to see that Dortmund have one of lowest match day revenues in the Money League with only €28 million in 2010/11 (€31 million in 2011/12), while the likes of Real Madrid, Barcelona, Manchester United and Arsenal all collect more than €100 million. There are two obvious reasons for this huge discrepancy: less matches and low ticket prices.

There are two fewer home games every season in the Bundesliga, while last season Dortmund only played three Champions League home games, bringing in €4.4 million, and one in the DFB Cup. This resulted in a total of 21 home games compared to 28-29 for the leading English and Spanish clubs.

Dortmund’s high attendances (and small match day revenue) can be partially attributed to the large number of standing places for which season tickets are priced as low as €187 (€109 for youths). Nearly 25,000 of these can be found on the famous Südtribüneterrace, known as the “Yellow Wall”, which is the largest standing area in European football and provides each home game with an intensely passionate atmosphere. Occasionally, that enthusiasm can go too far, such as the hooliganism seen at the recent Schalke derby when there were 200 arrests and water cannon had to be used.

It is surely no coincidence that the Bundesliga has the lowest ticket prices of Europe’s five major leagues and consequently the highest attendances. This is an important part of football culture in Germany, as seen recently when Dortmund fans staged a protest against Hamburg’s steep prices for away standing tickets, leaving their block after 10 minutes. Klopp gave them his support, “The league needs to think just how far they want to push prices.”

There are no such problems in Dortmund’s imposing stadium, now officially named Signal Iduna Park, which is the largest football ground in Germany and the sixth largest in Europe. This is obviously an extremely valuable asset that can also be used to host international matches, when the capacity is reduced to 67,000 by converting the standing areas to seats. The Times described it as the “most beautiful stadium in the world”, writing, “Every Champions League final should be held in Dortmund. The place was built for football and its fans.”

Even though the wage bill has risen by 67% (€32 million) since 2010 to stand at €80 million, this is still very much under control, as revenue has grown at an even faster rate of 80% (€84 million). In fact, the important wages to turnover ratio has actually fallen to a very creditable 42% from the peak of 48% in 2009, which is even better than the 50% targeted by the Bundesliga.

The €18 million increase in the total wage bill in 2011/12 was largely due to sporting success, namely higher performance-related bonus payments, though there was also a rise in administration staff. Treß emphasised that the club had a “very flexible cost structure”, so any lessening in performance on the pitch should mean a smaller wage bill. The wage bill is not analysed in the accounts, but the cost of the football squad has been estimated at €60 million.

Even after this growth, Dortmund’s total wage bill of €80 million is still only about half of Bayern’s €158 million, though the gap has come down a fair but from 2010 when it was as high as €118 million. In fairness to the Bavarians, their revenue is also substantially higher, but that does not make it any easier for BVB to compete.

This point is even more relevant on the European stage, where some of the leading clubs can boast wage bills far higher than any in Germany, e.g. Barcelona, Real Madrid, Manchester City and Chelsea are all above €200 million (though the Spanish figures are inflated by other sports). To provide an English comparison, Dortmund’s wage bill is about the same as Sunderland, Everton and Fulham, which shows just how extraordinary their achievements have been.

That said, the price of success is that Dortmund’s wage structure will come under pressure, as their policy of signing stars to long-term contracts will mean higher salaries, as seen with Götze’s improved deal.

Dortmund’s executives have also been handsomely rewarded for the club’s success with Watzke earning €2.2 million in 2011/12, including a €1.4 million bonus, and Treß trousering €1.4 million, including an €875,000 bonus.

The other staff cost, player amortisation, is incredibly low at €8 million, which is a perfect demonstration of Dortmund’s conservative transfer policy. As a comparison, player amortisation at big spending Manchester City and Real Madrid is around €100 million, while Bayern book €33 million.

To explain this concept, football clubs do not expense transfer fees completely in the year of purchase, but treat players as assets. So the cost of buying players (in accounting terms) is spread over a number of years by writing-off the transfer fee evenly over the length of the players’ contract via amortisation. As an example, Marco Reus was bought for €17 million on a five-year deal, meaning the annual amortisation is €3.4 million.

In contrast, other expenses of €74 million seem fairly high, though this does include €25 million for match operations, €17 million advertising, €12 million materials (primarily merchandising) and €11 million administration. Note: I have excluded transfer expenses from my definition.

There is further strong evidence of Dortmund’s financial recovery with the decrease in net debt (financial liabilities) from €150 million in 2006 to €42 million in 2012, including an €18 million reduction last season alone. This is made up of €47 million gross debt, largely a state-backed loan for stadium expansion of €32 million (repayable in 2026) and a €12 million fixed-interest loan (repayable in 2013), less €5 million cash. The average weighted interest rate of the long-term liabilities is 5.5%. The club also has access to an additional €15 million overdraft facility.

In fact, the balance sheet is quite strong with net assets of €155 million, including €183 million of property assets, namely the stadium, former offices at “Am Luftbad” and the training ground at Dortmund-Brackel. In addition, the club possesses what it describes as “hidden reserves” among the playing staff, following its policy of recruiting young talent with a lot of potential. Their value in the books is only €26 million, while their real worth in the transfer market is considerably higher – €211 million according to the Transfermarktwebsite.

Dortmund have generated positive net cash flow for the last two years: €7.8 million in 2011 and €6.4 million in 2012. As a sign of the board’s confidence, the club has proposed a dividend for the first time since it went public in 2000 with a total payment of €3.7 million scheduled to be discussed at the Annual General Meeting in November.

"Weidenfeller - the Roman empire"

The Bundesligaitself is in fine shape, as Klopp explained, “We have the most competitive and the most attractive league in Europe with the best stadiums. The fans are great.” This is reflected in the situation off the pitch: only the Premier League (€2.5 billion) has higher revenue than the Bundesliga (€1.7 billion), while the German league is more profitable at an operating level (€171 million) than its English counterparts (€75 million) with all other major leagues reporting losses.

As part of the German rules, clubs have to provide a balanced budget before each season in order to receive a license, which forces them to act in a sustainable manner, as seen by an average wages to turnover ratio of 50% (compared to 70% in the Premier League).

In addition, the “50+1” rule, which dictates that members must own a minimum of 50% of the shares plus a deciding vote, theoretically prevents the club being subject to the whims of an individual owner and taking on excessive debt. This has very largely worked, e.g. debt levels in the Bundesliga are less than a third of those in the Premier League, but the system is not completely foolproof, as seen by the problems experienced by Dortmund and Schalke among others.

A club as well run as Dortmund should be one of the main beneficiaries of UEFA’s Financial Fair Play (FFP) regulations, which encourage clubs to live within their means. As Watzke explained, “If FFP is implemented and rigorously enforced, we have a chance to be one of the strongest teams in Europe.”

Even the losses made between 2008 and 2010 were within UEFA’s limits: the allowable losses are an aggregate €45 million for the first two years (then three years), but this is only €5 million if losses are not covered by the owners, which might be more relevant here. In any case, they can exclude certain expenses, including depreciation on tangible fixed assets and expenditure on youth development and community activities, which I estimate would be worth around €13-15 million.

Watzke himself has gone further, imploring the regulators to act tough, “UEFA must find the thin line between sponsorship and excessive back-door funding – they must show strength to expel big clubs. No tycoon should be allowed to pump crazy money into a club with sponsorship from five companies he controls. If that happens, financial fair play will fail.” Of course, some might find such a talk a little rich, given Dortmund’s own checkered history, especially as they were given a €2 million loan at the height of their problems by Bayern Munich (of all people).

"Bender - Sven you're young"

As to the future, Dortmund are cautiously optimistic. Watzke sees “additional growth potential” with net profit for 2012/13 likely to be “in the single digit million range”, assuming exits at the group stage of the Champions League and the second round of the DFB Cup.

The chairman said that Dortmund were at the fifth stage of a five-point plan: “The first was the struggle for survival, the second restructuring, the third was development of a sporting philosophy, the fourth implementation and the fifth is sustainability.” This is not just a reference to the club’s financial status, but also the ability to maintain their performance levels on the pitch. It will indeed be a tough challenge to establish themselves in Europe, while also figuring prominently in the race for the Bundesligatitle.

The club has attempted to ensure management stability by extending the contracts of the “holy trinity” of Watzke, Zorc and Klopp to 2016, but there are no guarantees in football. If Klopp were to leave, that might be a hammer blow to Dortmund’s ambitions. No manager is irreplaceable, but whoever followed the magnetic Klopp would certainly have a tough act to follow.

"Rolls Reus"

In the meantime, we should simply enjoy the fabulous spectacle at Dortmund, where they have proved that a football club does not have to throw money at the problem, but can win in the right way. First-class management, astute scouting and a belief in youth development have delivered trophies to some of the best fans around, while the team’s dazzling displays have gained admirers throughout Europe.

That’s some accomplishment, especially as they have combined their sporting excellence with a remarkable recovery from near collapse to a solid financial position. Coldplay may not be everyone’s cup of tea, but the lyrics from their breakthrough single seem strangely apposite; “Look at the stars/Look how they shine for you/And everything you do/Yeah, they were all yellow.”

Arsenal - The Song Remains The Same

It has been a mixed start to the season for Arsenal, as promising away performances at champions Manchester City and a rejuvenated Liverpool have been balanced against a disappointing home defeat to Chelsea. However, there is an air of quiet optimism among the fans that Arsène Wenger’s new-look side will be able to mount a challenge once the new players have fully gelled. It certainly feels better than last year when the Gunners were on the wrong end of an 8-2 thrashing by Manchester United.

In fact, Arsenal recovered well after that disastrous start to finish in a creditable third position, securing qualification for the Champions League for a hugely impressive 15 seasons in a row. Even Wenger was moved to describe this feat as a “miracle”, citing the thrilling 5-2 victory over Spurs in the North London derby as the turning point. Nevertheless, it was a close run thing, as Arsenal only made sure of qualifying with a last day victory at West Brom.

The team’s inconsistent performances can be partly attributed to the significant amount of turnover in the playing squad, exacerbated by losing some of the club’s best performers each summer. Last year Cesc Fàbregas returned to his spiritual home at Barcelona, while Samir Nasri moved north to join Manchester City’s project. In the recent transfer window, it was the turn of leading scorer Robin Van Persie to head towards Manchester, though he opted for Old Trafford, while Alex Song joined the long list of Arsenal players transferred to Barcelona.

"Mertesacker - the power of Per-suasion"

Good arguments can be put forward that each of these sales may have made sense individually, e.g. RVP was in the last year of his contract, while the offer for Song was too good to refuse given his tactical indiscipline, but taken together they do give the impression that Arsenal have become a selling club, not overly bothered if their best players leave.

At least Arsenal appeared to have more of a plan this summer, recruiting international replacements before the departures, including the highly talented creative midfielder Santi Cazorla from Malaga, the experienced German forward Lukas Podolski from FC Köln and last season’s top scorer in Ligue 1Olivier Giroud from Montpellier. Furthermore, the return of Jack Wilshere and Abou Diaby after lengthy absences through injury enabled the club to wheel out the tried-and-tested “like a new signing” line.

However, many fans remain baffled that a club of Arsenal’s immense financial resources did not aim higher in the transfer market, such as buying a striker of the calibre of Napoli’s Edinson Cavani or Atlético Madrid’s Radamel Falcao. Of course, either of these would have broken Arsenal’s transfer record by some distance, but the money is clearly available to fund a purchase of this magnitude.

"Cazorla - Spanish eyes"

To the outside world, it appears that Arsenal have paid rather more attention to strengthening their balance sheet, as opposed to the squad, an impression that was reinforced by last week’s announcement of a hefty profit for the 2011/12 season, described by Peter Hill-Wood as “another healthy set of full year results.”

As is the chairman’s style, that was a beautifully understated description of a thumping great profit before tax of £36.6 million, which was up from £14.8 million the previous year. This was split between £34.1 million from the football business (up from £2.2 million in 2010/11) and £2.5 million from property development (down from £12.6 million).

The massive £32 million increase in football profit was mainly due to profit on player sales rising £59 million to an enormous £65 million, largely from Fàbregas and Nasri, though recurring revenue also rose £10 million to £235 million with more than half of the growth coming from commercial operations.

However, this was offset by substantial increases in staff costs of £40 million: wages climbed 15% (£19 million) from £124 million to £143 million; player amortisation surged 70% (£15 million) to £37 million after last summer’s acquisitions; and a £6 million impairment charge was booked to reduce the value of players “deemed to be excluded from the Arsenal squad.”

Net interest charges continued to fall, down to £13.5 million from £14.2 million (£18.2 million in 2009/10).

As anticipated, there was a further slow-down in the property business with turnover falling from £30.3 million to £7.7 million, as the Highbury Square development is now almost entirely sold.

Chief executive Ivan Gazidis was at pains to emphasise the club’s self-sustaining model, claiming that the club “can and will forge its own path to success”, though he must be concerned about the continuing decline in operating profits, which have fallen from a £31 million peak in 2008/09 for the football business. In fact, excluding property development, the club actually reported an operating loss of £18 million last season, compared to the previous year’s £9 million operating profit. This £28 million turnaround was due to operating expenses (£38 million) rising much faster than revenue (£10 million).

Nevertheless, the bottom line is that Arsenal once again made another sizeable profit, even if it was largely on the back of player sales. There is no doubt that the club’s record off the pitch has been superb, especially in the unforgiving world of football, where large losses are frequently the order of the day. In fact, the last time that Arsenal reported a loss was a decade ago in 2002, amply demonstrating its self-financing ethos. The last five years have been particularly impressive, at least financially, with Arsenal accumulating staggering profits of £190 million, an average of £38 million a year.

Arsenal have consistently been one of the most profitable clubs in the world, though they are not quite the only leading club to make money. Both the Spanish giants have recently reported large profits for 2011/12: Barcelona £41 million (€49 million) and Real Madrid £27 million (€32 million). In addition, Bayern Munich have been profitable for 19 consecutive years. Manchester United slipped to a £5 million loss (before tax) last season, dragged down by £50 million of interest charges, though they made a £30 million profit the previous year.

At the other end of the spectrum, clubs operating with a benefactor model reported enormous losses. Manchester City’s £197 million loss in 2010/11 was the largest ever recorded in England, while Juventus, Inter, Chelsea and Milan all registered losses of around £70 million. As Gazidis put it, “we see clubs struggling to keep pace with the financial demands of the modern game.”

That said, the arrival of UEFA’s Financial Fair Play (FFP) regulations, not to mention the economic difficulties of many of the clubs’ owners, has produced a clear change in behaviour. Milan and Inter have been selling their experienced, more expensive players, while City were relatively restrained in the transfer market (by their own exalted standards) this summer. Even Chelsea’s spending has been on younger players with a future resale value.

So far, so good, but Arsenal’s profits have been very reliant on player sales and (to a lesser extent) property development. In 2011/12, if we exclude the £2.5 million profit from property development and the £65.5 million profit from player sales, the football club would actually have made a sizeable loss of £31.3 million.

No other leading club has been so dependent on player sales as part of its business model. In fact, over the last six years, selling the club’s stars has been responsible for £178 million (or over 90%) of the £195 million total profit. That’s great business, but it makes it very difficult to build a winning team, as Arsenal seem to be perpetually two pieces short of the complete jigsaw.

There’s little sign of this slowing down either, as the sales of Van Persie and Song were made after the 31 May accounting close, so will be included in next year’s accounts, contributing another £37 million of profit.

These “once-off” sales are all well and good, but they have been disguising Arsenal’s increasing operational inefficiency. This can be seen by the decline in cash profits, known as EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), which has virtually halved from a peak of £66 million in 2008/09 to £35 million last season. That’s still pretty good for a football club, but, to place it into context, it is less than 40% of the £92 million generated by Manchester United, who also forecast growth to £107-110 million this season.

This may be a tiresome accounting term, but it is important, as it represents the cash available for a club to spend – unless it sells players or increases debt. Assuming no change in overall strategy, this means that Arsenal will continue to sell players unless/until they grow revenue or cut their wage bill.

As Gazidis explained, “The reason we talk about the financial results at all is that it provides the platform for us to be successful on the field.” Given this truism, let’s look at some of the challenges facing Arsenal.

1. How will the club grow revenue?

Looking at the club’s revenue of £235 million, which is the fifth highest in Europe, it is difficult to imagine that this could be an issue, especially as it is only surpassed by Manchester United in England (£331 million in 2010/11, £320 million in 2011/12), while it is way ahead of clubs like Liverpool £184 million, Tottenham £164 million and Manchester City £153 million.

However, there are three problems here: (a) the gap to the top four clubs is vast; (b) Arsenal’s revenue has hardly grown at all in the last few years; (c) other clubs have continued to grow their revenue.

Real Madrid and Barcelona generate around £200 million more revenue than Arsenal. Even though this shortfall would come down if the current exchange rate of 1.25 Euros to the Pound were used instead of the 1.11 prevailing when Deloitte produced their survey, the disparity would still be around £150 million, which makes it difficult to compete.

Although revenue rose £10 million last season to £235 million, this is effectively the only revenue growth since 2009, when revenue was £225 million. The largest increase in this three-year period came from broadcasting, which rose £11 million from £73 million to £85 million in 2012, as a result of centrally negotiated deals for the Premier League and UEFA (for the Champions League), so Arsenal’s board cannot take a great deal of credit for that.

Much was made of commercial revenue rising £5.6 million to £52.5 million, but this is only £4.4 million higher than the £48.1 million received in 2009. In other words, this crucial revenue stream has only grown by a miserable 9% in three years. Even though Gazidis stated in an interview with the club website that commercial partnerships were “well ahead of our five-year plan”, I would suggest that to date there has is not exactly been a scintillating return on investment in the expensive new commercial team.

"Giroud - handsome devil"

The most important revenue stream for Arsenal, match day income, has actually fallen from £100 million to £95 million, despite ticket prices being raised last season.

It is imperative that Arsenal manage to find ways to profitably grow their revenue, as Gazidis acknowledged during the results presentation, “Our activities to increase revenue are important. Increased revenues allow us to be more competitive and to keep pace with the ever present cost pressures in the game.” The club’s Chief Commercial Officer, Tom Fox, re-iterated this, when he described his role as “to build and grow the multiple revenue streams at the club in order to maximise the money available for the board and the manager to spend on the squad.”

Arsenal’s real revenue problem is that while they have struggled to increase their revenue, other leading clubs have continued to grow their business. In the three years since 2009, Real Madrid and Barcelona both grew revenue by around £90 million. Madrid have just announced record-breaking £411 million (€514 million) revenue for 2011/12, while Barcelona are not far behind with £381 million (€476 million).

For English clubs, United’s revenue fell back to £320 million in 2011/12 after their earlier Champions League exit, but still represented growth of £42 million since 2009, while the 2012/13 revenue outlook they provided to analysts was a mighty £350-360 million. The only leading club whose growth was anywhere near as low as Arsenal’s was Chelsea, but their 2011/12 figures will be much higher, due to the Champions League victory and new commercial deals.

Arsenal’s Achilles’ heel from a revenue perspective has been commercial income, which is extremely low for a club of Arsenal’s stature. Even after the 13% increase to £53 million in 2011/12, this still pales into insignificance compared to the likes of Bayern Munich £161 million, Real Madrid £156 million and Barcelona £141 million.

The story is no better in England, as Arsenal’s £53 million is less than half of Manchester United’s £118 million. While Arsenal have barely registered any commercial growth since 2009 (just £4 million), others have steamed ahead, including Manchester City (£41 million growth) and Liverpool (£17 million growth). The discrepancy will be even worse when those two clubs publish their latest accounts, as the 2010/11 figures do not include the increases for new sponsorship deals with Etihad and Warrior respectively.

Arsenal’s problems in this area can be highlighted by a comparison with Manchester United, who admittedly are the commercial benchmark for English clubs. Back in 2007, Arsenal’s commercial income of £42 million was just £14 million lower than United’s £56 million, but since then Arsenal’s revenue has only risen 26% to £53 million, while United’s has rocketed 110% to £118 million, leading to an annual difference of £65 million. Mind the gap, indeed.

Arsenal’s weakness in this area arises from the fact they had to tie themselves into long-term deals to provide security for the stadium financing, which arguably made sense at the time, but recent deals by other clubs have highlighted how much money Arsenal leave on the table every season.

The Emirates deal was worth £90 million, covering 15 years of stadium naming rights (£42 million) running until 2020/21 and 8 years of shirt sponsorship (£48 million) until 2013/14. Following step-ups the shirt sponsorship deal is worth £5.5 million a season, which compares very unfavourably to the amounts earned by the other leading clubs, who have all improved their deals in recent seasons, so Liverpool, Manchester United and (reportedly) Manchester City earn £20 million from Standard Chartered, Aon and Etihad respectively.

In fact, no fewer than eight Premier League clubs now have a more lucrative shirt sponsorship than Arsenal. As well as the usual suspects, Arsenal’s deal is behind Sunderland’s barely credible £20 million deal with Invest in Africa, Tottenham £12.5 million (Aurasma £10 million plus Investec £2.5 million), Newcastle £10 million (Virgin Money) and Aston Villa £8 million deal (Genting).

The news is no better with Arsenal’s kit supplier, where the club signed a 7-year deal with Nike until 2011, which was then extended by three years until 2013/14. This now delivers £8 million a season, compared to the £25 million deal recently announced by Liverpool with Warrior Sports and the £25.4 million paid to Manchester United by Nike.

Gazidis talks a good match, “we continue to be successful in attracting top brands to sign on as commercial partners”, but the reality is that Arsenal have been outpaced in this area. Yes, they have indeed signed some new sponsors, such as Carlsberg, Indesit, Betsson, Bharti Airtel and Malta Guinness, while other like Citroen and Thomas Cook renewed for a higher sum, but there has been little tangible revenue improvement. Furthermore, Manchester United continue to attract more secondary sponsors than Arsenal, including seven since 1 July 2012 alone.

Indeed, much of the commercial revenue growth was down to the overseas tour to Malaysia and China, which is something of a double-edged sword, as it may well have had a detrimental effect on the players’ pre-season preparation.

"Jenkinson - corporal punishment"

More positively, Arsenal will have a fantastic opportunity for what Gazidis calls “a significant uplift in revenue” when the main sponsorship deals are up for renewal at the end of the 2013/14 season. If they could match the £45 million currently received by United and Liverpool for main shirt sponsor and kit supplier, that would imply a £32 million increase in revenue.

Great stuff, but the trouble is that the bar is being continually raised in sponsorship deals, so United have recently announced a truly spectacular deal with Chevrolet. Not only will this rise to an astonishing £45 million ($70 million) in 2014/15, but the sponsor will even pay them £11 million in each of the previous two seasons – while Aon are still the sponsors. Not only that, but United have also persuaded DHL to pay £10 million a season to sponsor their training kit.

In other words, there is no guarantee that Arsenal’s new sponsorship deals will ride over the hill like the seventh cavalry to save them, especially if the brand is damaged by a failure to qualify for the Champions League (though that has not prevented Liverpool from securing superb deals). Gazidis has said that “in terms of the financial impact, it will be as significant a step forward as the stadium was in 2005”, but his commercial team will have to significantly up its game – or Tom Fox will be considered about as effective “in the box” as Franny Jeffers.

Match day income of £95 million is the fourth highest in Europe, only behind Real Madrid, Manchester United and Barcelona, but that makes the club very reliant on the revenue generated in the stadium – “more so than any other club”, as Gazidis stated. Wenger confirmed its importance, “We are very lucky because we have good support and the income of our gates is very high.” Indeed, the £3.3 million that Arsenal generate per match is more than twice the amounts earned by Tottenham and Liverpool.

However, this revenue stream seems to have reached saturation point, as Arsenal continue to register capacity crowds of 60,000 and their ticket prices are among the highest in the world. In fact, match day income was actually higher in 2008/09 at £100 million, largely due to the high number of home games played (or old-fashioned success on the pitch). Furthermore, revenue per match has also fallen from the peak of £3.5 million in 2009/10.

Indeed, after the deeply unpopular 6.5% ticket price rise in 2011/12, most prices were frozen for this season, though 7,000 Club Level members were asked to pay an additional 2%. The media made great play of the cheapest tickets for the match against Chelsea (an A category game) being an obscene £62, though they have been less voluble about the 28% reduction in prices for C category games from £35 to £25.50. In addition, Arsenal have introduced a number of pricing initiatives, e.g. discounting lower-tier tickets to £10 for the Capital One Cup game against Coventry City.

The other issue here is what would happen if Arsenal failed to qualify for the Champions League, even if the inferior Europa League was on offer, as the season ticket includes the first seven cup games from European competition and the FA Cup. The club would surely have to issue credits, potentially leading to a 10-20% reduction in revenue.

The majority of Arsenal’s television revenue comes from the Premier League central distribution with the club receiving £56 million in 2011/12, unchanged from the previous season. Each club gets an equal share of 50% of the domestic rights (£13.8 million) and 100% of the overseas rights (£18.8 million) with the only differences down to merit payments (25% of domestic rights) and facility fees (25% of domestic rights), based on how many times each club is broadcast live. This methodology is very equitable with Arsenal only receiving £4.4 million less than champions Manchester City.

However, the signing of the £3 billion Premier League deal for domestic rights for the 2014-16 three-year cycle, representing an increase of 64%, will “provide clubs with a significant boost to their revenue” per Gazidis. If we assume (conservatively) that overseas rights rise by 40%, that would increase Arsenal’s share by around £30 million (using the same allocation system).

Of course, other English clubs’ revenue would also rise, though lower placed clubs would not receive as much in absolute terms, but this would certainly help Arsenal’s ability to compete with overseas clubs, especially Madrid and Barcelona, who benefit from massive individual deals.

The other major element included in TV revenue is the distribution from the Champions League, which was worth around £24 million (€28 million) to Arsenal in 2011/12. The amount earned depends on a number of factors: (a) performance – a club receives more prize money the further it progresses; (b) the TV (market) pool allocation – half depends on the progress in the competition, half depends on  the finishing position in the previous season’s Premier League; (c) exchange rates – the 2011/12 figure was adversely affected by the Euro’s weakness.

In this way, Chelsea earned more than twice as much last season as Arsenal with €60 million after their triumph in Munich. Interestingly, Manchester United (€35 million) also earned more than Arsenal, despite being eliminated at the group stage, as their share of the market pool was higher after winning the previous season’s Premier League, while Arsenal finished fourth. Potentially, Arsenal could increase their revenue by €30 million if they managed to emulate Chelsea’s success, but, by the same token, they could lose €30 million if they missed out on qualification to Europe’s flagship tournament.

However large the differences are between the English clubs that qualify for the Champions League, it is still much better than the Europa League, where the highest amount earned by an English representative was the €3.5 million that went to Stoke City. Financially, the Champions league is the only game in town, especially now that the prize money for the 2012 to 2015 three-year cycle has increased by 22%.

2. Are expenses out of control?

Last season saw the first operating loss in many years after expenses rose at a much faster rate than revenue. In particular, the wage bill shot up 15% from £124 million to £143 million, despite the sale of Fàbregas and Nasri, two of the highest earners. Part of the increase was presumably due to rushing in the likes of Per Mertesacker, André Santos and Park-Chu Young last summer without enough time for meaningful salary negotiations.

In addition, a once-off charge of £2.2 million was included to top-up the pension provision, while Arsenal’s lack of trophies and commercial growth did not prevent Gazidis’ package rising 24% to £2.15 million (salary £1.366 million, bonus £675,000, pension £100,000).

The explosive wage growth is nothing new. In fact, since 2009 wages have gone up £39 million (38%), while revenue has only grown by £10 million (5%), leading to a significant worsening in the wages to turnover ratio from 46% to 61%. This is by no means terrible (most Premier League teams have a ratio above 70%, while Manchester City notched up 114% in 2010/11), but is of concern, especially as Manchester United have managed to maintain their ratio around 50%. Though not the only reason, this helps to explain why so little has been spent in the transfer market.

The problem is that wages in football resemble a sporting arms race, as other clubs continue to set the agenda, notably Manchester City, who have increased their wage bill from £36 million to £174 million in just four years. Arsenal’s wage bill of £143 million is now the fourth highest in England, behind City, Chelsea £168 million (2011) and Manchester United £162 million (2012).

Arsenal’s performance in regularly finishing third or fourth in the Premier League means they have slightly outperformed expectations based on the wage bill, though Tottenham fans would note that they ran them very close last season with £30 million less wages.

"Wenger - train of thought"

One issue at Arsenal is the equitable wage structure, which means that the top salaries are not enough to attract the world’s best, while fringe players like Sébastien Squillaci and Marouane Chamakh are handsomely rewarded for sitting in the stands. Arsenal’s wage bill is sufficient to sign world-class players, but that would mean reducing the salaries of lesser lights. This has been tacitly admitted by Gazidis: “Can we compete at top salary levels? Yes we can, but we have an ethos at the club - the way Arsène expresses it is that it is not about individual players, it is what happens between them.”

The difficulty is in getting the unwanted players off the payroll at their high wages, hence loans for Nicklas Bendtner, Denilson and Park when the club would have preferred to sell them. However, there are signs that the club is now acting on this with numerous departures this summer and the hard line over contract discussions with Theo Walcott. This is a tricky balancing act for the board: if they extend contracts too early, they risk paying over the odds in wages; if they wait until the last minute, they risk losing the player for nothing on a Bosman.

The other expense impacted by investment in the squad, player amortisation, has also risen significantly from £22 million to £37 million. For those unfamiliar with this concept, amortisation is simply the annual cost of writing-down a player’s purchase price, e.g. Mikel Arteta was signed for £10 million on a 4-year contract with the transfer reflected in the accounts via amortisation, which is booked evenly over the life of his contract, so £2.5 million a year.

Many of the players that have been sold were fully amortised, so amortisation was reduced much by the departures, but it has increased following investment in new players. To give this some perspective, it’s still a lot less than Manchester City (£84 million), but significantly more than previous years.

3. Where has all the money gone?

After so many years of large profits, it is difficult for most supporters to understand where all the money has gone. Gazidis is adamant that it has been spent on football, “We generate revenue and we reinvest all of that revenue in football. We don't pay dividends, the money doesn't come out of the club. All of the money we make is made available to our manager and he has done an unbelievable job in managing that spend.”

That’s sort of true, but the reality is that very little has been spent on bringing in new players with net player registrations of just £4 million in the last six years. Instead, the vast majority has been gone on the new stadium, property and other infrastructure (e.g. enhancements to Club Level, “Arsenalisation” projects, new medical centre) with more planned for development at the Hale End youth academy.

Since 2007 Arsenal have generated a very healthy £376 million operating cash flow, but have spent £71 million on capital expenditure, £110 million on loan interest and £64 million on net debt repayments, while the cash balances have risen by £118 million. Astonishingly, only 1% (one per cent) of the available cash flow has been spent in the transfer market.

Although Arsenal have laid out a fair bit of cash on buying players in the last two seasons (nearly £90 million), this has been more than compensated by big money sales, so their net spend has still been negative. In fact, since they moved to the Emirates stadium, they have made £49 million in the transfer market, where they are the only leading English club to be a net seller.

Of course, Manchester City and Chelsea have been the big spenders in recent years, splashing out £444 million and £235 million respectively since 2006/07. Little wonder that Peter Hill-Wood complained, “At a certain level, we can’t compete.” That said, in the same period, Liverpool, Manchester United and Tottenham have also all spent considerably more than Arsenal.

Following the elimination of the property debt, the club has managed to reduce its gross debt to £253 million (down £5 million from last year), leaving just the long-term bonds that represent the “mortgage” on the Emirates Stadium (£225 million) and the debentures held by supporters (£27 million). Once cash balances of £154 million are deducted, net debt is now only £99 million, which is a significant reduction from the £318 million peak in 2008.

Despite the high interest charges, it is unlikely that Arsenal will pay off the outstanding debt early. The bonds mature between 2029 and 2031, but if the club were to repay them early, then they would have to pay off the present value of all the future cash flows, which is greater than the outstanding debt. In any case, the 2010 accounts clearly stated, “Further significant falls in debt are unlikely in the foreseeable future. The stadium finance bonds have a fixed repayment profile over the next 21 years and we currently expect to make repayments of debt in accordance with that profile.”

4. How much is available to spend?

This question is provoked by Arsenal’s incredibly high cash balances of £154 million, which are significantly higher than any of their competitors with Manchester United the closest with £71 million (down from £151 million in 2011). Of course, not all of this is available to spend for a couple of reasons: (a) the seasonal nature of cash flows during the year, e.g. the May balance will always be high following the influx of money from season ticket renewals, but this money is used to pay annual expenses, including wages; (b) as part of the bond agreements, Arsenal have to maintain a debt servicing reserve, which was £34 million in 2012.

Nevertheless, there is clearly still a large amount of cash available to spend, especially as the cash balance does not include £26 million to come from the Queensland Road property development (though this is only payable in instalments over the next two years) and more (£10 million?) from the two remaining “smaller projects” on Hornsey Road and Holloway Road. It also excludes any money from this summer’s transfer activity with the accounts giving a positive net impact of £11 million.

Although this is probably the figure most fans want to know, it is actually almost impossible to calculate what could be spent in the transfer market for many reasons. For example, most transfers are funded by stage payments, so all the money is not needed upfront. In addition, Arsenal could easily take on some additional debt, given the strength of the balance sheet. Nevertheless, I estimate that Arsenal could safely spend £50-60 million from cash resources.

"Diaby - king of pain"

The other point that people often raise when discussing the transfer fund is that it would also have to fund a new signing’s wages, so if the club bought a player for £25 million on a five-year contract at £100,000 a week, that would represent a commitment of £50 million. That is undoubtedly true, but it is a little disingenuous, as it ignores the fact that this would be at least partially offset by the departure of an existing player, not least because of the limitations imposed by the 25-man squad rule, as highlighted by Wenger himself.

5. Will FFP come to Arsenal’s rescue?

It is no secret that Arsenal hope that UEFA’s FFP regulations will reward their prudent approach, as these aim to force clubs to live within their means, thus restricting the ability of benefactor-funded clubs to spend big on players. Indeed, Gazidis stated that the advent of FFP meant that “football is moving powerfully in our direction”, while the results press release was actually entitled, “Results confirm Arsenal strongly placed to meet UEFA’s new financial rules.”

On top of that, there are discussions at the Premier League to introduce similar rules domestically. However, although there are some signs of clubs modifying their behaviour, Arsenal’s faith in the new system may not work out as planned.

First, there is much leeway in the FFP rules, e.g. clubs are allowed to absorb aggregate losses of €45 million (around £36 million), initially over two years for the first monitoring period in 2013/14 and then over three years, as long as they are willing to cover the deficit by making equity contributions. In addition, certain costs such as depreciation on fixed assets, stadium investment and youth development can be excluded from the break-even calculation.

Furthermore, there is a sliding scale of sanctions for offenders, so it is far from certain that clubs will be excluded from UEFA competitions. This is without considering the threat of a legal challenge from a leading club.

Second, it is evident that FFP will benefit those clubs that have the highest revenue, as they will be able to spend more on their squad, but, as we have seen, other clubs continue to power ahead, so Arsenal are likely to always have a shortfall against some clubs.

"I am Vito Mannone!"

With the new commercial deals in 2014 plus more money from better central TV deals for the Premier League and Champions League, Arsenal should surpass £300 million revenue in two years, but Real Madrid and Barcelona are already around £400 million, while Manchester United are projecting £350-360 million next year.

That said, Arsenal’s revenue will place them in the revenue elite (“the top five clubs in the world with separation from the rest”, said Gazidis), so they will be very handily placed to benefit from FFP, though it is unlikely to act as some kind of magic potion to solve all of their financial issues.

In many ways, Arsenal’s self-sustaining approach has been admirable, though it has often felt like the club has been overly cautious. Gazidis speaks of avoiding “the many examples of clubs across Europe struggling for their very survival after chasing the dream and spending beyond their means”, but Arsenal are a long way from such an awful predicament. As we have seen, Arsenal do face issues around lack of revenue growth and an ever increasing wage bill, but they still have much more room to manoeuvre than most.

"Vermaelen - Tommy, can you hear me?"

The price of Arsenal’s self-sustaining model has been to regularly sell the club’s best players, while charging the highest ticket prices in the country, so this is not quite the financial Utopia that has often been portrayed in the media. For the fans, it must be particularly galling that the club’s two majority shareholders, Stan Kroenke and Alisher Usmanov, are both billionaires, but there is little sign of either making any investment into the squad.

Arsenal’s financial results are undoubtedly impressive and they have done well to consistently finish in the top four, but whether the current strategy is enough to bridge the gap to the leaders and actually win an important trophy is debatable.

The board wastes no opportunity in telling supporters how ambitious the club is, e.g. last month Peter Hill-Wood argued, “We have a pretty good chance of challenging for the Premiership. I don’t see why we cannot win it this year”, but  whether the fans believe that this is credible is another matter, especially when the club does not use all the resources at its disposal.