Debt in Football: Accounts Explained – Opinion

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The column of the week has a technical character. Taking advantage of the fact that I am in the process of building the new “Report Convocados +?: Finance, Market and History”, soon to be published in partnership between the consulting firm Convocados and a large organization heavily involved in the modernization of Brazilian football, let’s talk about some of the topics that always raise doubts when discussed In the press and by fans.

We’ll start with the most controversial debt.

In everyone’s life, debt is what you have to pay someone else. These are the amounts that come out of your checking account and come from your salary or the money you earned from work. The logic is the same in the company, and it is relatively easy to calculate this value from the balance sheets.

Based on the formation of this accounting piece, which is the basis of financial analysis, we have the following:

So, in theory, debt is the sum of liabilities, which can be called total debt. In an academic and, in a way, somewhat archaic model, debt is the sum of liabilities, discounted from short and long-term assets, except for what was previously called permanent, i.e., fixed assets, investments, and intangibles.

When we get into the real world of finance and the way the financial market sees the topic, we see that there is a certain difference in these accounts. We measure this by typical market demand for corporate debt control procedures. These are the so-called “covenants”, which are nothing more than formulas for monitoring the financial aspects of the company, in particular the indebtedness.

From the construction of the “undertakings,” we see that the financial market defines debt as the sum of loans and financing, bonds, leases, and ultimately a particular type of debt that characterizes the industry. For example, in trading, it is necessary to include advances in this account.

This means, for monitoring purposes, only the use of items that may in some way hamper the business of the company. All other liabilities, even liabilities payable, have less of an impact on the company’s ability to survive. This calculation is usually completed by deducting only the monetary value, which is the certainty of the resources provided by the company.

In finance there is a phrase that says: “The debt is certain, but the origin is uncertain.” We’ve recently seen the case of Corinthians, who fired the contract with Taunsa in revenue, switched to accounts receivable and, as far as we know, wasn’t paid.

When we calculate indebtedness in football using this academic and far from market reality measure – total liabilities (-) current and non-current assets – we are not wrong, but perhaps lazy.

In liabilities, we only consider accounting records, such as future income allowances and records, while in assets we assume amounts that will never be received, or which may have great difficulty in receiving.

In addition, looking at the behavior of football, we can technically use the values ​​of athletes’ registrations to calculate the net debt, since the trading of athletes is part of the operational activity of the clubs.

In a car rental company, cars are recorded as fixed assets, but for the purposes of indebtedness and liquidity accounts, they are transferred to current and non-current assets, where they are usually traded in within 36 months. These adjustments are necessary to understand the reality of business.

Therefore, in my analysis, I am careful to separate the liability data so that we can clearly see the numbers that could cause problems for clubs. Thus, the calculation consists of the sum of:

(+) Loans and Financing
(+) Suppliers
(+) Amounts due to clubs and agents
(+) Taxes in installments
(+) Salaries, image rights, social fees, taxes and contributions
(-) Availability

We can add advances, liabilities that will not be paid in cash, but with supply, while also representing less money in the future. I chose to leave them outside because while the club is in operation, developments tend to recur.

In other industries, salaries and fees will never be debts, but as in football, a month usually lasts 90 days for many clubs, it is necessary to include them in the calculation. I also exclude receivable assets, as they are not always liquid and certain.

I work pragmatically: Late payments can be a huge problem for clubs, and the way to avoid delays depends on having cash on hand.

Then there’s another aspect: You can’t talk about debt using the number alone. We always need to compare with some other value. After all, which is worse: owe 1,000 earn 5,000 or owe 1 million and earn 10 million?

These comparisons allow us to analyze two dimensions: the size of the debt and the ability to repay. In the real life of the financial market, it is usual to compare debt with the generation of cash, the so-called EBITDA, which is the difference between revenue and cash costs / expenditures. With this, we were able to check whether the remainder of the operation was able to pay the financial cost and the debt itself.

In football, this account does not work well. Football is a volatile EBITDA industry, given its competitive characteristics, so I always choose to avoid this comparison. Then we move on to the second figure for comparison, which is related to revenue.

Technically, this does not mean evaluating the ability to repay, because before the debt is repaid it is necessary to pay costs and expenses, or the company stops working. This ratio measures the size of the debt. As in the example above, having 10% of the income is much better than having 50% of the debt. In football are the best comparisons.

Therefore, when we do this slow arithmetic of liabilities (-) assets to determine debts, and compare them to income, we make a mistake, which is double arithmetic. The portion of assets representing accounts receivable is usually passed through revenue first. If we calculate debt by removing these assets, and then comparing them with revenue, we use the same number twice. for example:

Imagine you have 100 liabilities, 50 assets, and 100 income. But out of those 100 returns, 20 are still on the asset to be received (specified). What will be the results of the comparison between debt and income?

With an all-inclusive account, the percentage will be 50%. But if we exclude the specific revenue value, the ratio will be 62.5%. If we choose to exclude from assets, the ratio will be 70%.

That is, the use of everything distorts the account.

I know the topic is boring, technical, but it is important to bring the topic up for discussion, at a time when accounts and reports are presented. I can’t say that the models other than the ones I’m using are wrong. incorrect.

However, I prefer the more conservative arithmetic method, but pointing out the weaknesses that are very important for management to have effective tools to deal with their challenges.

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