Show overview
The Championship has voted to follow the Premier League and move to squad cost ratio. In this episode of Summing Up, James Shipp is joined by Dom Smith to explain what the change means for Championship clubs, how League One and League Two have taken their own route, and why owner funding now has to be equity rather than debt.
Episode summary
James opens by noting that since Dom was last on, the Championship has voted to follow the Premier League and move from profit and sustainability rules (PSR) to squad cost ratio (SCR). PSR looked at the bottom line, with Premier League clubs allowed to lose £105 million over three seasons and Championship clubs £39 million. SCR looks at income and caps squad spending at 85% of it, which leaves far less room for the accounting tricks that had clubs selling academy players to meet the rules.
They work through both sides of the Championship calculation. Squad costs are player wages, manager wages and agents' fees, with no transfer fees or amortisation. Allowable income counts football income in full, non football income such as concerts on a profit basis, transfer fees on a net cash basis, and owner equity up to £16 million a year. Dom explains why a one off windfall from a player sale does not force a club to spend, because SCR tests whether the cost base is sustainable.
After a subscriber question, they move to League One and League Two, which use the Squad Cost Management Protocol: 50% of income on wages, with only half of an owner's equity usable in League One and a more generous tiered system in League Two, which voted to stay different. They finish on why funding must be equity rather than debt, and set up the next episode on billionaire owners and club valuations.
Key takeaways
The Championship has voted to move from profit and sustainability rules (PSR) to squad cost ratio (SCR), bringing it broadly in line with the Premier League.
Under SCR, Championship clubs can spend no more than 85% of allowable income on squad costs.
Squad costs in the Championship are player wages, manager wages and agents' fees. Transfer fees and amortisation are not included.
Allowable income counts football income such as gate receipts and TV rights in full. Non football income, such as a concert at the stadium, counts on a profit basis.
Transfer fees are measured on a net cash basis, so a sale paid over several seasons feeds into allowable income as the cash arrives.
Owner equity counts towards allowable income in the Championship but is capped at £16 million a year and £34.3 million over three seasons. It must be equity, not debt.
League One and League Two use the Squad Cost Management Protocol, with a 50% limit on player and manager wages. In League One, only half of an owner's equity injection can be spent on wages.
Dom's view is that the lower down the leagues you go, the more the rules are genuinely about sustainability.
Chapters
00:00 Introduction
00:54 The Championship moves from PSR to squad cost ratio
01:27 PSR versus SCR in a nutshell
03:42 The 85% rule for Championship clubs
04:45 Squad costs: wages, not transfer fees
06:24 Allowable income: match day, concerts and transfer fees
09:16 Owner investment and the £16 million a year cap
11:01 Selling a player: does a windfall force you to spend?
14:39 Why the Championship voted for SCR
16:19 League One and the Squad Cost Management Protocol
20:27 League Two: tiered equity rules and the vote to stay different
22:17 Promotion, relegation and the grace year
23:56 Sustainability, or big clubs protecting themselves?
26:30 Equity versus debt: why it matters
30:17 Next time: billionaire owners and club valuations
Guest bio
Dominic Smith is a Manager at Lovewell Blake and a Chartered Certified Accountant who advises businesses on accounting, bookkeeping, tax planning and financial management. He is also an avid football fan!
