My point with the value of the club is that you don’t need to make an annual profit for it to be a wise investment. I suspect you know that so I’m not sure why you fixate on the profits. It may not be the safest investment but there’s a reason why so many Americans have been invested in the Premier League and it’s because they believe there’s growth in it.
Investing in United has two benefits to Ratcliffe. Prestige and asset growth. Cutting costs to be make money is actually more defendable than doing it just because that’s how he does business. I’m not suggesting you are defending the cuts by the way but many here are and it’s pathetic.
In truth, A club like United should be construed as a prestige asset, rather than an investment. The normal business metrics we use in valuation do not apply.
As yet we do not know what kind of owner JR is. It's a way to early to make a call on that. Ultimately, he wants a club that is self financing, paying its own way. A club that doesn't require periodic cash injections from the owners. Currently, we are not that club. Winning and contending (revenue uplift) would get us there eventually, but in the short term some cost cutting is necessary.
And some isn't. Especially if its financially inconsequential. You would like to think that management has the wisdom to differentiate between the two, but it shouldn't surprise if they didn't. They are not infallible.
Arguing that each and every cost saving is necessary reminds me of the Glazer apologists back in the day. The Glazers could do no wrong either, right?
Anyways, a club that is continuously making break-even on the PSR\FPP test would require owners to prop it up periodically. And a club running at the permissible loss limit would require even bigger contributions.
And the reason: Costs (like youth development, Women's football) that you can deduct from your true pretax profit and loss in PSR\FPP are actual true cash paying costs. As is expenditure on facilities.
So the profit tests overstate true profitability and true cash availability.
In effect, to be truly self financing the club needs to be acing the profitability tests with a bit to spare. We were doing that, but not lately.
I have seen a huge pile of PSR\FPP workings on here and elsewhere suggesting that in theory we can spend 100s of millions easily. Most are gibberish and those that aren't fail to appreciate that what you can spend in theory isn't what you can spend in practice. What you can spend in practice is dictated by cash and cash availability. And we do have a cash flow problem.
Desperately poor recruitment has hurt both profitability (and thus PSR\FPP) and cash availability. Woodward and Arnold essentially borrowed from future earnings to buy players in the expectation that the growth in future earnings would cover both future installments for those players and new player expenditure. When the growth in earnings didn't happen, they used the RCF (credit card essentially) to bridge the gap. And then they doubled down, continuing to spend more than we could afford in the hope that earnings would recover. And soon one credit card wasn't enough, we needed another, and finally, we needed a third. And since we now quite frequently use all three, we are paying more interest. Paid interest is now around 40m annually.
The Club is currently generating about 120m cash annually from operations and this is what's available to support net spend, infrastructure, dividends, and paid interest. At current profitability, if we assume no dividends or infrastructure spend for the next 4 years we would have a maximum of around 320m available for net spend on players. Sounds good, right? The problem is that we have already spend it. As of 30/9/2024 (and after the INEOS splurge on new players), we owed other clubs around 320m net on players already purchased (we owe around 415m but are owed around 95m). That net football debt position is essentially our future net spend and it all will unwind within the next 4 years. Mostly before our earnings come through to meet it. Hence the need for using the RCFs. We don't really have much free cash lying around to support further investment in facilities or players either now or in the near future unless things change for the better. But don't we have actual money in the bank to help, you probably haven't asked? Well we did. 150m as at 30/9/2024. Not bad, but to get there we borrowed 200m from the old credit card during the first quarter.
So yeah, we are in a cash bind and further expenditure on players makes it worse. Selling players makes it better. As would (hopefully) increasing revenues through winning and contending. And being pragmatic, so too would cost cutting. Ideally, the cost cutting doesn't hurt revenues (either to hold what we have or our capacity to grow them should things pick up). INEOS believe they can achieve savings in the order of 40m to 50m annually. Even in a low growth scenario, that would greatly improve both profitability and cash generation. FPP\PSR problems become a distant memory and our cash woes ease considerably. I think they are being too optimistic. Our non-player operating costs have been hit hard by rampant inflation just like any other business. There might not be as much inefficiency to weed out as they think.
All of the changes we are witnessing aren't really being made to help with some bullshit profitability test. The really big tests are down the road. Getting our financials in shape to get the best possible terms in the next round of debt refinancing (coming soon) is a priority as is our ability to secure funding for a new stadium.
