Financial Fair Play - Chelsea
Whereas most Arsenal fans will argue that Arsenal didn’t buy their success, you certainly won’t get the same argument from Chelsea fans. However people forget that Chelsea were successful before Ambramovich came along and it is a little known fact that when Chelsea qualified for the Champion’s league in the year before Abramovich started piling his money in they did so without spending a penny on transfer fees at the start of the 2002 season, a feat no other English side has come close to equalling.
Chelsea’s last set of published accounts for 2010 showed a £67 million loss and the club have since splashed out over £200 million on new players, yet the club are confident that they can still comply with FFP, How come? If you believe the National press then Chelsea have very little chance of complying with FFP and their only hope of making the 2014 Champions league is if UEFA backtrack, but as usual the press are being lazy and sensationalist and Chelsea’s optimism is based on sound reasoning.
The first season clubs will be made accountable is the 2013/14 season, but under the FFP ruling losses made in the 2011 and 2012 seasons will be taken into account and the aggregate loss for those 2 seasons must not exceed £45 million, provided the club owner is willing to cover the loss. If the owner is not willing to cover the loss, then the club is only allowed to make a £5 million aggregate loss.
The last set of accounts when Chelsea lost £67 million relate to the 2010 season and as I mentioned in my overview article there are two major adjustments that need to be made to a club’s accounts when taking into account the FFP break even figure and this is the factor that is usually overlooked by the sensationalist press.
The first is the removal of any exceptional items from 2010/11, as they should not re-occur by definition (although exceptional costs will be included in the break-even calculations in future). The 2nd adjustment relates to expenses incurred for “healthy” investment, such as improving the stadium, training facilities or youth academy, which would lead to losses in the short-term, but will be beneficial for the club in the long-term.
FFP regulations have allowed the clubs a good deal of manoeuvrability, transfer fees for instance will be amortized over the length of the contract, so if the players Chelsea have signed in the last couple of windows have cost £100 million during the year, on five year contracts the amortised figure will be £20 million rather than the much more damaging £100 million total.
Let’s take a closer look at Chelsea’s 2010 accounts when the club lost £67 million and see how that translates under FFP (All figures are in £ sterling).
Turnover was £226 million and by the time the expenses were deducted the club made an overall loss of £67 million, this is the year before the 2 year FFP monitoring period and should give us some idea where Chelsea stand in regard to meeting the FFP target.
One thing smacks you between the eyes and that is the wages figure was by far the highest expense at £168 million and a dangerously high 75% wages to turnover figure. (United’s was 46% and Arsenal 55%).
As we have seen exceptional costs from 2010 will be excluded,(but will be included from 2011 onwards) basically, this was UEFA giving clubs every chance to clear the books as much as possible, before the monitoring period started. As such, Chelsea have been able to write off £28 million of expenditure relating to the sacking of Carlo Ancelotti and the £13 million signing on fee on Andre Vilas Boas, (surely one of the worst transfers in years). When you remove £42 million worth of exceptional items Chelsea were left with an almost acceptable £26 loss when you consider that the club were beginning their player re building programme. The “Healthy” investment in the 2010 accounts would have taken a further £18 million off of that final FFP total giving a final break even FFP figure of £8 million, well within UEFA’s figure of £45 million.
So how will the 2011 and 2012 accounts look, when the figures will have to come in at under £45 million? As usual, there is a sacked management team to pay for, AVB and his assistants have gone of course, but the impact on the accounts shouldn’t be too damaging as he has now found employment with Spurs, as have his assistants who went with him.
Although the extensive transfer activity will have a major impact on the debit side and greatly increase the amortisation figure, Chelsea have made sure that almost all of the new signings in the past 18 months have been signed on 5 year contracts, which will help to lower the annual amortisation figure. The other thing to note about the recent signings is that Chelsea have changed their policy, whereas they used to buy the finished article for a big fee, they are now buying young players. The fees are still big at times, but the important thing is that young up and coming players command far less in wages than established superstars. Also, where they used to pay over the odds for players they have done some shrewd bits of business in the last three transfer openings; Gary Cahill (£7 million), Victor Moses (£9 million), Marko Marin (£7 million), Kevin De Bruyne (£7 million), Thibault Courtois (£7.8 million) and Oriol Romeu (£4.8 million) all look like shrewd bits of business given current market prices, £20 million for Jordan Henderson anyone? Even the more expensive players such as Ramires, Mata and Luiz are looking like good long term value purchases at the moment.
As we saw earlier the biggest expense in the 2010 accounts was the wages bill at £168 and it Is here that Chelsea have made huge in roads into reducing that figure and it’s interesting to note that Chelsea are the only club from the “Big Six” who have managed to reduce their wage bill in recent years. The following players have all left the club since and would have been earning close to or more than £100,000 a week. Alex; Nicholas Anelka; Didier Drogba; Jose Bosingwa; Yuri Zhirkov; Joe Cole; Ricardo Carvalho; Michael Ballack, Juliano Belletti, Raul Mereilles and Deco. Torres and Hazard have since arrived on big wages, but those two apart the new arrivals will almost exclusively be on less than £50,000 a week, which will make a substantial difference to the bottom line when the 2011 and 2012 accounts are released.
The other major cost cutting exercise Chelsea have undertaken is to loan out a large number of players. The current number of players on loan is 22 and the benefits to Chelsea are twofold. Older established players such as Essien and Benayoun who are big wage earners are having all or part of their wages paid for by other clubs, making a significant reduction to the final bottom line. Although the younger and less established players will be on a pittance compared to a player like Essien, when you multiply their wages by 20 the savings are significant over the year furthermore clubs are also often paying a loan fee for the services of the player. It all chips away at the bottom line helping the club to move in the right direction.
The 2nd benefit is what I have dubbed “The Bertrand effect.”
Chelsea have loaned Ryan Bertrand to a number of clubs over the past few years and as a result he had played over 200 league games before eventually becoming a regular squad member last season. His rise has been meteoric since then; a start in the Champions league final, an Olympic campaign and a first England cap. If Chelsea were to sell Bertrand now they could command a seven figure fee for him and the need to spend big on a replacement left back for Ashley Cole has been avoided. Ryan Bertrand is the way the Champions league contenders will be looking to go if they are to eventually break even. An ex youth team player who cost nothing, or a very small fee (£125,000 in the case of Bertrand). His wages have been paid for by the clubs he has been loaned out to and he comes back to his parent club as an experienced and accomplished young player in his early twenties, with his best years ahead of him. Most importantly under FFP, he is not only worth a seven figure fee, but has also negated the need to spend money on a replacement left back.
Chelsea have often been criticised for not bringing young players through the ranks, but it appears to have gone largely unnoticed that it the past 4 years Chelsea have reached the Youth cup final three time times and have won it twice, which is why they are now in a position to send out so many young players on loan. If the club can produce another Bertrand every other year then the finances will take care of themselves. Even if the loanees are nowhere as successful as Bertrand, then expect many more Miroslav Stoch’s; Stoch was sold to Fenerbahce for 5.5 million Euros after a successful loan spell with FC Twente, and a handful of sales in similar situations every year once again chips away at the bottom line.
I expect it to be close run thing at the end of 2013, but as long as Chelsea don’t go crazy in the next few transfer markets, it would be a surprise if they did not comply with the FFP regulations. Given the dire consequences of not doing so if UEFA are serious, which they appear to be, I would be amazed if the club were stupid enough not to do so, although qualifying for the Champions league in the next two seasons will be vital if they are to comply. Failure to do so would almost certainly necessitate the sale of a few big name players.
Chelsea have been pretty smart in the way they have gone about approaching FFP, although failure to win last year’s Champion’s league final would have seen the whole pack of cards come tumbling down after failing to automatically qualify last year. They have signed a whole raft of young players on long term deals and almost two teams of players are out on loan gaining valuable experience and increasing their market fees should they be sold on. Future spending should be minimal and as long as they qualify for the champion’s league and don’t run up any more silly bills on managers then the future is looking bright at Abramovich towers.
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