In a recent blog, we touched on the subjects of amortisation and player book value.
If you do not have time to firstly read this blog, amortisation is the accounting tactic of spreading the cost of a player’s transfer fee over the length of his contract – with it being further amortised if a player extends.
Meanwhile, a player’s book value is the difference between what we bought a player for, minus what the value of the transfer fee already amortised for. Book value is a more important metric at assessing profit / loss of a player than the simplistic net profit.
To take this thinking a step further, and to try and look into the future, I thought it would be interesting to look at the players that could possibly leave us this summer and assess:
- What their book value is
- What profit (or loss) we are likely to see if they are sold
- What saving they would make us in amortisation costs if they were sold
As discussed in the previous blog, book value is important as it is this difference that determines if you show a profit or loss in your accounts following a player sell.
Sell for less than their book value and you have to use additional funds to offset the difference, whilst it is the amount your sell for above the book value that becomes available to purchase replacements (and not the entire incoming transfer fee).
Assessing the amortisation saving is also important as that determines what can be spent on new incoming transfers without us needing to increase costs – IE if Player A was costing us £10m a year and we sold them, and signed Player B for £50m on a 5-year deal, our outgoings per year would be the same (without taking into account wage differences, agents fees and bonuses).
Together, book value profit determines your new cash flow when buying a player, whilst amortisation helps you understand how much space you have in your accounts to add additional costs (once the outgoing players costs have been taken off).
Note: Ramsdale’s book value has been incorrectly calculated. It should be £8m, with £16m amortised. That would increase his book profit to £17m and make the total book profit £126.12m.
Now a caveat before I start, as I know a few of you will be jumping to the comments straight away – the market value is taken from Transfermarkt. Whilst I understand that this is not accurate (as a player’s value is based on what a club will pay for them, not on an algorithm), it is a good place to start.
Every player that looks overvalued (Tavares, Nketiah) is offset by someone that is undervalued (Ramsdale, Lokonga). I think if we received north of £150m for the 8 players mentioned above, we will be doing well.
So this is where what we learned in the last blog can be put into practice.
£158m incoming transfer fees will equate to a book profit of £126.12m. That means that once the remaining unamortised transfer fees is accounted for, we will still be showing a nice profit.
When you consider I have a 5 man hitlist for the summer (yes, I know my list means nothing), which should come to around £180m in spending, we would only need to find an additional £70m in cash money to pay for these new signings.
When it comes to amortisation savings, things are maybe not quite as rosy.
The 5 players that did not come through our academy cost us in the region of £21.44m a year in amortisation costs. I am going to round this up to £21.5m. If you take me £180m and divide it by 5 (all likely to join on a 5 year contract), then the amortisation costs of those coming in will cost £36m. That is a difference of £14.5m
What is interesting is that the amortisation saving, over a 5 year period, comes to £107.5m. So not too far off the £126m we would make in book profit.
So I can comfortably say that if we sell the 8 players mentioned above, we can spend around £110m with it having zero impact on our finances – again, we are not taking into account wages yet. A blog for another day that.
So where does the additional £60m that we need in cash flow come from, and £14.5m in additional amortisation costs? Well that is not an easy answer.
The additional funds will come from one of two places – making savings and increasing further revenue.
Under making savings are things such as wages – if the 5 coming in cost less per annum than the 5 leaving, that saving can simply be transferred across to the amortisation line of the accounts (think when you adjust your budget on Football Manager).
You get Partey’s £200k salary off the wage bill and replace him with someone like Martin Zubimendi on £115k a week, that is a saving of £4.4m a year.
Likewise, I have not accounted for Mohamed Elneny and Cedric Soares. The pair will leave us for nothing at the end of the season (Elneny’s amortisation is so low after 8-years at the club it was not worth factoring in), but cost us around £6.5m a year in wages.
Considering they will not need to be replaced, that is a huge saving that can be put towards covering the increased outgoing.
The second one is further increasing revenue.
Champions League revenue for this year will make a huge difference. We can probably expect to earn around £80m more from this season’s European exploits in comparison to last year’s Europa League. That would more than pay the difference.
We can also look at selling some of the academy graduates that are not up to grade – I am thinking Arthur Okonkwo (who since writing is leaving us on a free) and Charlie Patino. you would expect those two to raise us around £10m combined. That £10m can go straight into purchasing new players.
So if we get things right in terms of outgoings this summer, we could comfortably finance a move for £180m worth of new signings without our costs increasing dramatically.
And whilst the net profit merchants will point to a £70-80m net spend, we will all know this does not really matter. What matters is what is in your accounts and that is amortisation and book value.
In the 3rd installment of this mini-series, I will explore the 5 players on my list, and the financial implications of signing them against what we could be selling. I will also further explore the salaries of those who might leave compared to those coming in and see if we can end up with a “net zero” summer.
Have a great day.
Keenos
She Wore A Yellow Ribbon 