In the last two transfer windows, Chelsea have spent a lot. They are comfortably
the biggest spenders in the Premier League, with transfers totalling €611.5;
and to put that in perspective, that’s more than every Bundesliga team put together.
So, while there is a reported strategy
behind this spending, it’s clearly a risky one. The full picture won’t be clear until next year’s
financial results are out, but the club’s recently released 2021-22 accounts do shed some light on
those potential risks.
Chelsea reported revenues of 481 million pounds in 2022, a club record. But they also reported
the second lowest profits in the league with a loss-before-tax of 121 million pounds.
And that’s including 123 million pounds
of profit on player sales. Exclude that, and other exceptional items, and you’d see an operating loss
of 224 million pounds. This is comfortably the lowest in the league – for context, the second
lowest loss is Everton’s at 92 million pounds.
So, let’s look at the key line items in the accounts one by one, starting with revenue.
Chelsea’s revenue growth of about 8% in the last three years is healthy on the face of it,
but what’s worrying is that it’s all come from broadcasting income, with matchday income and
commercial revenue pretty much flat.
The growth in broadcasting revenue was largely driven by Chelsea’s performances in the Champions
League, including, of course, their win and then victories in the Club World Cup and the
Super Cup. Chelsea’s UEFA coefficient is currently high because they won the tournament recently,
meaning they get a disproportionate share of Champions League TV money.
However,
performances in the league this season have been abject, and it is mathematically impossible for
Chelsea to finish in the top four. In fact, it’s a very real possibility that Chelsea will not play
in any European competition next season.
This would significantly impact their broadcasting revenue – for context, Chelsea earned about 92
million pounds in European TV money in 2021-22 which is about 40% of total broadcasting revenue.
It will be critical for Chelsea to find alternate sources of revenue next season.
Next, let’s address the
elephant the room – transfer spending. Transfer accounting has lately become synonymous with two
words – amortization and impairment.
Player amortization is the practice of dividing a transfer fee over the duration of the player’s
contract and thereby reducing the amount booked in the profit & loss accounts of a club in a
particular season.
Player impairment is the accounting practice of writing off some of the remaining value in
the player’s contract in any given year thereby reducing the amortization charge on that player
in future seasons.
As an example, if a player was signed on a 4-year contract for 40 million pounds,
the amortization charge would be 10 million pounds per year. But if after year two, the club wrote
off 10 million pounds of the remaining contract value (which would be 20 million at that point),
then the book value would change to 10 million and the amortization charge in years 3 and 4 would be
5 million pounds in each year.
In both cases though, ultimately the entire transfer fee of 40 million pounds has to be
expense. Impairment and amortization are simply accounting solves to optimize the timing of that
expense.
So, why is this important for Chelsea? Firstly, Chelsea’s annual player amortization charge is
already the highest in the Premier League at 160 million pounds. This is BEFORE accounting
for all the new Todd Boehly signings.
The club knows that amortization will go up, given the creative and very expensive way in
which they have signed players on high fees and long-term contracts. So, they’ve taken a huge
player impairment charge this season and written off contract values of some players currently on
the books.
Player impairment went up to 77 million pounds in 2021-22 for Chelsea, which is the highest
ever for any Premier League club in any season by a distance. The second highest
is Stoke City’s in 2019-20 at 43 million pounds. This is a bad sign of things to come.
On a positive note, Chelsea’s
£123m profit from player sales is comfortably the highest in the league in 2022 and is indicative of
a very strong youth academy. It’s expected that Chelsea will continue to leverage player trading
to offset losses – it has been consistently important financially for the last five years.
A couple of other noteworthy
items include wages and money spent on managerial changes. Chelsea have a wage-to-revenue ratio of
71% (highest of the traditional ‘Big Six’), which could become a big problem if Europe TV
money is impacted. It’s therefore more than likely that the bloated squad will need trimming by the
new full time Manager.
Chelsea also spent 45 million pounds on managerial changes recently which will reflect in next year’s
financials – 10 million pounds to pay-off Thomas Tuchel, 21.5 million pounds to Brighton to
secure Graham Potter and ultimately 13 million pounds as pay-off to Potter. Needless to say,
Chelsea would benefit financially if they got the next appointment right.
So, what does this all mean? Well,
Chelsea’s reliance on broadcasting revenue, combined with precarious levels of transfer
spending and a high wage bill (as a percentage of revenue) are portents of an ominous future.
Of course, things could turn
around with the right manager coming in, taking the right decisions with the squad and finding
winning form. But the strategy so far has been extremely high risk with limited-to-no reward.
Todd Boehly and the team will definitely be hoping for happier days to come.