flamy symbolAt the closing of the summer transfer window on 31 August, it was announced that the Premier League had splurged a record-breaking £1.165 billion on player transfers. To put that in context, that is roughly equivalent to the GDP of the Central African Republic but was spent by 20 English clubs in a two month period.

It is widely believed that this 35% increase in spending (up from £859m in 2015) is due to the new £5bn three-year TV deal, whereby each Premier League club is due to receive between £30m to £50m for the 2016-17 season. This increased revenue and spending suggests two things: (i) that the rewards of being in the Premier League are higher than ever; and (ii) clubs are spending record levels of money in order to secure their place and achieve the biggest slice of what is on offer.

So what about the non-Premier League clubs? Historically, football clubs have been very insolvency-prone. Since 1992, R3 estimates that an alarming 46% of Football League clubs have been through some form of formal insolvency process. Delving into some of the financials, the reasons become apparent. Unsurprisingly, the way to get promoted to a higher league and to share in the higher rewards is to have the best players. The best players demand the highest wages. Clubs are therefore spending a disproportionately high percentage of their turnover on wages. In the 2014/15 season, Championship clubs (the second tier of English football) spent an average of 99% of their turnover on player wages (down from 106% in 2013/14). The comparable figure for the Premier League is 63%. Whilst financial controls are being brought in for clubs in Leagues 1 and 2 (the third and fourth tiers of English football), capping the percentage of turnover that can be spent on wages to 60% and 55% respectively, no such cap currently exists for the Championship.

On any basis, such wage expenditure will cause lower league clubs to have cash-flow issues. If clubs get promoted, then the rewards may justify the increased risk, but given that the figures above were an average across the Championship and only 3 clubs can get promoted to the Premier League each season, only a small proportion of the clubs will receive the rewards. If clubs do enter a formal insolvency process, then this often leads to a downward spiral, as the Football League imposes penal points deductions on clubs that enter administration. This may lead to relegation, which in itself causes more financial hardship (just ask a Portsmouth fan).

Whilst there has not been a high-profile insolvency of a football league club for over two years, it is clear that clubs are still in financial difficulty. Just last season, Northampton Town and Bolton Wanderers were the subject of winding up petitions, both brought by HMRC. The petitions were only avoided after a change of ownership of both clubs, with the petition debt being paid as part of the deal to buy each club. It is therefore apparent that the financial rewards on offer within English football are still resulting in clubs raising the financial risks in order to try to get their hands on the rewards.