25/11/2013 07:27 GMT | Updated 25/01/2014 16:01 GMT

Financial Fair Play and It's Impact on the Championship

UEFA's Financial Fair Play (FFP) has been lingering around European football for a few years now, having been first agreed to in principle in 2009. However, this season will see FFP firmly applied across the continent. The implications of FFP on the Premier League have been and will continue to be well documented, with more analysis due after BT Sport paid nearly £900 million for the Champions League and Europa League TV rights, which will mean more financial reward for clubs competing in those competitions.

However, this article will focus on England's second division, the Championship, and will investigate the effect and implications of FFP on the second tier of English football. To do this, we must first understand the process that all clubs competing in the Championship will undergo regarding their financial situation. As you can see in this graph (1) , all competing clubs have to submit their financial records by 1st December 2014 for calculation of their current situation.

Championship clubs are allowed to lose up to £3 million a season, which will incur no sanction or punishment. If a club loses between £3-8 million that season, then the owner of the club is required to cover the loss, which if done, then there are no further sanctions. If the owner cannot or will not cover the loss, then a transfer embargo is placed on the club until they can demonstrate an acceptable financial situation (losses of less than £3 million or a profit).

If the club loses over £8 million for that season, then the punishment depends on whether they were promoted or not. If promoted, the club will pay a Fair Play Tax (FPT) out of the revenue produced from competing in the Premier League, with the proceeds going to charity. The FPT has only recently and controversially been applied to FFP in the Championship, with many clubs wanting the FPT proceeds going back to the clubs that abide by the rules. Nevertheless, if a club has not been promoted, then the transfer embargo will be placed upon that club until they can demonstrate an acceptable financial situation.

Now that we understand the process and actions of FFP in the Championship, we can review the potential effect on the clubs. To do this we must look at the financial condition and profit/loss situations for each competing club. The most recent financial records released are from the 2011/12 season, meaning there are different clubs that competed, but we shall still use the statistics from the 2011/12 season to form a hypothesis for the impact of FFP in the Championship.

This graph (2) created by SwissRamble, lists the profit/loss after tax for the 24 clubs competing in the Championship in 2011/12. Out of 24 teams, only six of them broke even or made a profit - Birmingham City, Blackpool, Peterborough, Burnley, Leeds United and Barnsley. The remaining clubs made financial losses for that season. Only Reading and Crystal Palace would have avoided any sanctions in the FFP model for this season, having made losses of less than £3 million. Watford, Doncaster United, Millwall, Derby County and Hull City would have all fallen into the £3-8 million losses category, which means that their respective owners would have been responsible to cover the loss. The remaining clubs would have all potentially been punished with a transfer embargo.

This is obviously a hypothetical situation, but does represent a problem for Championship clubs. All the clubs would have created measures over the last two seasons to rectify their financial situations for FFP, but many clubs are already letting their fans know that they will be fined. For example, Blackburn Rovers announced losses of £27 million for last year. Another example is QPR, who will potentially receive a record fine after announcing losses of £80 million for 2012/13. This means that they would be fined £62 million, or their complete Premier League income, if promoted.

So, what will happen? You would like to assume that most of the clubs have put themselves into a situation where they can deal with FFP, but it isn't that easy. What is evident, however, is the greater importance of gaining promotion. There is already a huge financial reward for finishing in the top two or winning the playoffs with TV money, competition rewards and parachute payments going to help combat FFP. Additionally, with BT Sport showing that they can compete with Sky for TV rights, the next time the Premier League rights are up for bidding, the price could potentially increase to an astronomical amount, thereby resulting in more money for the clubs in the Premier League.

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