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Schalke’s failure to check spiralling expenditure could cost them dearly.

Five months after Felix Magath quit last season’s Bundesliga winners Wolfsburg for Schalke, his decision is still hard to fathom. Trading a Champions League odyssey and a symbiotic relationship with their backers at Volkswagen for a club renowned for chronic instability and underachievement was never an obvious career move – and after recent revelations of Schalke’s ever-worsening economic position, Magath may be thinking he has bitten off more than he can chew.

If Schalke were a bank, clients would be queuing in the street to close their accounts and the wheelbarrows would be out en masse. Over the past year, total debts have increased 30 per cent to £136.5million, annual profits have collapsed (£11.5m to just £0.45m) and cash flow has slowed to a trickle, so much so that, according to former general manager Rudi Assauer – and he should know – the club are not paying wages on time…which is a capital offence in these parts.

The cheque, it seems, is always “in the post”. A credit agency, D&B Germany, claims the Gelsenkirchen outfit pays invoices an average of 30 days late and that the club’s stadium subsidiary is even more tardy, only coming up with monies owed some seven weeks after the due date.

No wonder Magath – who is coach, chief executive and board member – declared with typical bluntness: “We have a lot of passion but no money.”

Needless to say, the global economic downturn has played its part in Schalke’s troubles. But their bean-counters deserve their share of the blame too, particularly for the way they have allowed personnel costs to spiral out of control. The club had hoped to make large-scale reductions in this area, yet contrived to do the exact opposite, with the wage bill increasing last year by £4.5m to £61m. The improved contracts offered to first-teamers such as Jermaine Jones, Heiko Westermann and Benedikt Howedes simply were a step too far and it says everything about the laissez-faire attitude in the corridors of power that former coaches Fred Rutten, Mike Buskens and Youri Mulder, plus ex-general manager Andreas Muller, continue to draw salaries.

All the indicators point sharply downwards to a paradise lost. Out of European competition for the first time in eight years, Die Konigsblauen (the royal blues) have kissed this important source of income goodbye. Meanwhile, interest payments on loans – mainly relating to the financing of their Veltins-Arena home, which was built in 2001 – come to £18m a year and generally they are mortgaged to the teeth.

Back in 2002, UK-based financier Stephen Schechter granted the club a £76m loan securitised against gate receipts until 2025, and in the past 12 months Schalke have been driven to the seemingly extreme measure of selling off portions of their largest sponsorship agreements – with the Russian energy concern Gazprom and kit supplier Adidas – to investors.

Straitjackets have more wiggle-room. With liquidity apparently in short supply, Schalke apparently have to find £18m before the end of the year and another £9m before mid-2010. Should new finance chief Peter Peters – who recently replaced the now discredited Josef Schnusenberg – manage to clean up this mess, he will be worthy of an economic brief in the cabinet of freshly re-elected chancellor Angela Merkel.

Peters must act fast. Next March the German league will be looking at the books prior to granting a licence to operate in the Bundesliga and if they do not like the look of the balance sheet and the projected figures, Schalke will be out – a thought to make the massed ranks of their supporters wake up in the wee small hours in a cold sweat.

While Schalke’s top brass insist the situation is not as bad as portrayed in the media, they do accept that substantial across-the-board savings are a must and, with new commercial partners hardly likely to step forward in the current climate, their focus is now likely to be on enforced salary cuts and player sales.

Magath claims there will be no fire sale of talent in the January transfer window, saying: “Whoever thinks we will be selling players below their market worth is making the wrong assumption.”

But the matter might be out of his hands. Not only would the sale of Brazil right-back Rafinha and Peru attacker Jefferson Farfan generate much-needed capital, it would also get two big earners off the books.

One crumb of comfort for Schalke in these troubled times was the warm glow of victory after they beat Ruhr rivals Borussia Dortmund 1-0, with a Farfan goal.

It was just the tonic the Gelsenkirchener needed. For one weekend, at least, they could forget all about deficits and cost-cutting.

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