Transfer Window Closes; FFP Restrictions… Myth or Fact?
Transfer Window Closes; FFP Restrictions… Myth or Fact?
As the dust settles on the end of another transfer window, we now know the players we have to rely on to achieve Premier League safety for the 2019/20 season. Will the outlay of £10.5m be enough and why haven’t we spent more money? All of this and more will be discussed as part of this article.
It is with mild frustration that once again we see fans question the “excuse” of Financial Fair Play (FFP) / Profit & Sustainability. The accusation being that the club are using FFP as a smokescreen. Nothing can be further from the truth. FFP is real and if my forecasts are correct, we are close to the limits again. Whilst I cannot foresee a situation where the sale of Villa Park is challenged or the value disputed, we cannot just go out and spend further amounts if we are near to the limits. The regulations prohibit us from doing so!
As things stand, we were one of only 2 clubs (Sheffield Utd were the other) to bring in 4 players or more (Samatta, Drinkwater, Reina and Baston) and whilst the individuals, Samatta apart, might not be of the perceived quality required, the acquisition of Reina and Drinkwater introduces proven winner pedigree. Is Baston good enough? Well…. Following Davis’ recent withdrawal from U23 action following a pulled hamstring, it at least gives us cover. Our transfer strategy at least has logic to it, these days.
FFP limits in the Premier League – A reminder
As discussed previously, whilst Premier League clubs can lose upto £35m per annum, for an accumulated loss of £105m over a three year rolling period, promoted clubs have transitional regulations which apply. Therefore, our upper loss limit for the period June 2017 – May 2020 is £61m. This is calculated as being 2 seasons at EFL limits of £13m per annum and one Premier League season at £35m. If we stay up this season, our upper loss limit next year will be £83m for the period June 18 – May 2021. If we are relegated, it’ll be £61m again.
However, it is worth bearing in mind that these are only the FFP limits. In order to spend the amounts of money we have this season, we have required significant capital injections from our owners. Whilst FFP is based on the Profit & Loss account (P&L), the actual day to day running of the club is impacted by working capital and cashflow. Very crudely, and I’ll discuss my forecasts in more detail below, whilst the accounts for this season (2019/20) may show a loss of c.£30m, the cash outflow could be -£120m*, even with the Premier League broadcasting rights.
* This is a worst case scenario based on all transfers being paid upfront. It does demonstrate the difference between profitability in accounting terms and the actual cash required to operate the business.
Based on the latest available accounts (2017/18), I have allowed for movements and changes to the current year:
Based on the forecast (left), I believe our accumulated losses (for FFP purposes) currently stand at - £52.5m. Therefore, leaving us approximately £8.5m within FFP limitations. As my forecasts are derived using assumptions and information in the press, there is clearly a margin for error in these figures. In fact, if I was to doubt any of the assumptions above, I would say that our commercial and sponsorship revenue of £36m is possibly optimistic (these figures were arrived at using figures from our previous stay in the PL under the Randy Lerner era). Whilst I expect significant progress to be made in this area in the future under the current regime (subject to Premier league status), it might be optimistic to assume we would automatically reach that level in Year 1 back in the Premier League. However, this is also offset by huge membership numbers by way of “Claret members” and “Cubs” we have seen this season. The club have confirmed that we have approximately 28,000 members which equates to approximately £8m in revenue. Amazing what a little bit of restricted supply does to demand for a product/service! The point being however that, as you can see, for FFP purposes, it isn’t a huge leap to realise that if only a few of the revenue items are lower than we assume, or expenditure be higher than assumed… we would be very close to breaching the Premier League FFP regulations this season.
Could we have spent more money? My conclusion is maybe a little more. However, £150m invested in the squad is a very significant amount.
Player acquisition strategy
Again, a criticism often levelled at the club is the fact that we haven’t brought in “proven experience”. Whilst I agree to an extent that some additional experience wouldn’t have levied a huge financial burden on the club, such as Mooy from Huddersfield (as an example). Proven Premier League experience usually means older players on large contracts (who would be unwilling to insert relegation wage clauses). Instead, we have gone down the route of buying younger, undervalued players, who have potential to grow and develop. This is absolutely key to developing a sustainable business model, which is something we must strive to do. Younger players will have a drive to improve, will be more likely to remain should we go down and will be more accepting of relegation wage clauses. Furthermore, their value is likely to increase.
The key point though is the lower wages these players demand. From my forecasts and assumptions, it is forecast that our annual wage bill for the current season is c.£90m a year. To put this into context, under Xia, in the EFL, our wage bill was c.£73m. Also, in our last season in the PL under Lerner, after cost cutting, the wage bill was c.£93m. Therefore, our wage bill has increased by c£17m compared to year one under Xia. However, revenue is over £70m (!) higher than that Xia season with parachute payments. If we are relegated (i hope we are not!), I would expect the wage bill to trigger 30% reductions, on average. Therefore, a wage bill of £69m in year one (post relegation), before players leave e.g. Jack. Whilst still a huge amount on tumbling revenue, it is a position which could be managed.
In summary, our cost base will be lower (in the event of relegation), which means that we will be able to use any parachute payments to hopefully give us a competitive advantage in bouncing straight back. Whilst this is obviously not hoped for, the strategic planning has to allow for the possibility of relegation. We must never jeopardise our club again. As we have done unde rboth Lerner and Xia.
If you are interested in reading further details on this type of player strategy, there is an excellent piece produced by Talksport on Brentford and their approach. A non-ad version of the article can be found here.
And so, there we have it. Our existing transfer policy is sensible and understandable given the circumstance. Spending additional amounts in the January window could have seriously jeopardised our club (with FFP penalties being very harsh in this day and age) and I, for one, am fed up of our club being gambled with, time and time again. AVFC is not a toy.
We have 13 games left to secure our future for another season. Once the latest accounts are released, I will break these down and revise my forecasts for the current season. I will also do a “relegation piece”, should that event materialise. Here is to hoping I am writing an article in May about securing our Premier League status and the implications of doing so.