Untold Arsenal: Arsenal News. Supporting the Lord Wenger in all he does » Arsenal and the money: what’s really going on?

By Phil Gregory

Here’s the first of a series of articles on the finances of the Premier League for Untold. There’s no hearsay going on in this series: all figures are straight from the accounts so you can trust the data I’m using is reliable (for most teams anyway!) and check it yourself as the accounts are publicly available.

Naturally we’ll start with Arsenal, and I’ll try to keep the accounting and finance language language to a minimum, for all our sakes. Anything that’s not common knowledge is explained, but just ask in the comments if you get lost at any point!

Matchday money

Matchday revenues doubled to £90million when we moved to the Emirates, and have grown solidly to over £100million since. TV money has increased too, partly as a result of an improved TV deal at the end of the 06-07 season but also due to much better European performances in recent years.

Commercial revenues aren’t great when compared to similar-sized clubs but they do have a strong trend of improvement (from £29million to £48million). The most recent figure of £48million is lower than that of Liverpool and light years away from Manchester United’s £70million (no figure is given for Chelsea). This is partly due to an under-achievement in this area in the past, but also due to the need to front-load (asking for a large amount at the start of the agreement, and the rest over the duration) the sponsorship agreements for the stadium work.

Such agreements aren’t popular with firms and so the concession was less money overall during the course of the agreement. Gazidis has brought in some big hitters to boost the commercial situation and we’ll no doubt see the benefit in the next few sets of accounts. Once the front-loaded deals come up for renewal, we’ll be able to push for the best possible deal and revenues will go up significantly accordingly.

Dare I say it, but a long-term part of the “Arsenalisation” project could be a the end of the sale of the stadium naming rights. Naturally, this would mean forsaking a revenue stream, but with the end of outgoings on interest in the medium term, we could afford it.

Commercial revenue

That said, there was a noticeable increase in commercial revenues in our first season at the Emirates Stadium. Despite all I said in the previous paragraph, the boost from the stadium move (likely thanks to greatly improved corporate hospitality facilities) more than compensated for lost revenue from front-loading commercial agreements.

Or to put it another way: the Emirates Stadium, despite boosting our commercial revenues by around 30% in a single season (further increases have been back to the trend growth of 10%) still has room to grow. Once the current commercial deals are renegotiated, we’ll see commercial revenues grow above trend for a good few years. With a board that doesn’t take any money out of the club in dividends (despite their entitlement to do so), any extra profit doesn’t just make the auditors happy, and will filter through to the playing squad. More money equals an ability to compete for the best players by offering the best contracts. Excellent.

Turnover

All these revenue streams are bundled together into turnover, which is simply all the takings of the club. Turnover stands at an impressive £225million, up from £138million in the 04-05 season. The move from Highbury boosted turnover significantly with a single-year rise of over £60million immediately after the stadium move.

Profit

Profit is a totally confusing thing for the average football fan, given there is an array of ways to quote profit figures and clubs only ever quote the one that shows them in a good light.

Operating profit shows the core strength of the business, and is often referred to a EBITDA (earnings before interest, taxation, depreciation and amortisation). Depreciation is just the general fall in value of club assets due to age, the other two are fairly obvious and I’ll touch on amortisation later.

For most clubs, the “ITDA” bit doesn’t account for a massive amount of money comparative to wages and the like, so you can trust an operating profit figure. Do however think it through: an operating profit doesn’t include interest so if David Gill of Manchester United is on 5Live telling you the club is fine, they turn an operating profit, ask him what the figure is if interest is considered!

If a club can’t make an operating profit, which takes into account the main costs and revenues, then it really is in a total mess. If any other business in a more sane industry was making an operating loss, the banks wouldn’t lend them money to cover their losses hand over fist due to the risk of default, but logic seems to go out of the window when people consider football clubs.

All the figures I ever quote for operating profit are before player trading as we are considering the core running of the club: if a club makes a loss of £30million, but then sells £50million of players, then it is fine for that season, but the operating loss will be roughly the same next year unless wages are slashed, and the club surely cannot sell £50million of players every season. Amusingly, certain clubs do actually try and do something similar to that, but I’ll save that for a separate article.

All Arsenal’s operating profit figures results have been consistently excellent, having not dipped below £11million since 04-05, and most recently stand at nearly £31million. ‘Nuff said.

Broadcasting

When I started writing this series, I only intended to quote TV revenue as a percentage of turnover in later articles about newly-promoted sides, but is worth mentioning here briefly. The measure itself is very easy to understand, and it’s implications are quite substantial.

A lower-table side highly reliant on TV money is basically totally dependent on its Premier League status to remain viable. For sides near the top of the table, the reliance is more on European football, particularly the Champions League.

We’ve all heard the stories of how Arsenal budget to hit the group stage once in every four years or some such conservative expectation. Some cite this as a low level of ambition, but it is simply great financial planning: the Premier League is highly competitive, and with 4th place now only yielding a guarantee of 180 minutes of knock-out football, consistently banking on the group stage is highly negligent for any club, especially ones who start with the letter L.

The Emirates Effect

The move to the Emirates greatly reduced our reliance on TV money: it went from contributing 40% of turnover to only 32.5% in the most recent set of accounts, with the lowest figure being 22.1% in the year immediately after the stadium move. Indeed, these figures would be even lower if I could adjust them for European success: we are generally going further in Europe in recent years, which yields more TV money. Due to the overall revenue growth, TV money contributes a smaller percentage of turnover with the result that we wouldn’t have to slash wages even if we dropped out of the Champions League for a few years.

Wages

The wage bill has gone up substantially since the days of 04-05, from a shade over £66million to over £100million. Not to worry however, as turnover has gone up by a much greater amount to compensate.

The only time wages as a percentage of turnover rose to anything approaching dangerous levels was 2005-2006 (60.5%) and that was most likely due to the inevitable boom in revenues once we moved home to the Emirates; the figure quickly fell back to a mere 45% and it now stands at 46.2%.

If we look at spending on wages compared to points gained, it has risen over the period to £1.46million, reflecting heavy pressure on wages due to the rise in revenues from the Emirates Stadium move. The move to the Emirates also resulted in a big jump in other operating charges (an umbrella term for various smaller financial costs) which were up by around 30%. This is likely simply due to the greater utility bills and general maintenance to a larger stadium, and isn’t anything to worry about.

Amortisation

Amortisation is simply the transfer fee paid for a player divided by the number of years on his contract, and it is simply a way to get large transfer fees into the accounts. It does however offer a good insight into transfer spending.

For Arsenal, amortisation has risen substantially in percentage terms over the period, but from a very low base. It now stands at just under £24million, substantially less than comparable clubs (United – £38million, Chelsea £57million, Liverpool £46million).

This is partly due to the fact that a lot of our first team players were bought in young and so had very little amortisation cost. Another reason is simply the fact we don’t spend much on new players: when we do buy, we spend wisely and almost always turn a profit on the trade too.

Wenger has regularly said that every new transfer is a gamble, and much better value for money is got by promoting from within. This is reflected in the amortisation figures. Some may cite these figures as a lack of ambition, but its common knowledge that transfer spending has no relationship with final league position, but wages do. And anybody can see our wage bill is up there with the rest of the top four.

Bank interest

Money spent on bank interest is down substantially since the move to the Emirates, peaking at £36.7million in the 06-07 season but then falling substantially to a mere £16.6million in the most recent season. For me, this completely justifies Wenger’s (likely self-imposed) frugality in recent seasons.

Take the summer after a sub-par 08-09: massive profits on Kolo and Adebayor, and only the addition of £12million Vermaelen. The Belgian’s transfer wouldn’t even have accounted for Wenger’s original transfer kitty, let alone the windfall from the sale of the two Africans. Yet no more money was spent as the team was stronger, both on the field and on the financial side. I believe the money that went unspent was directed with into paying down the debt (with Wenger’s consent, if indeed the idea was not his to begin with!).

Just look at the interest figures I quoted: we’re saving roughly £15million every year compared to the peak level of interest payments courtesy of Wenger’s prodigal transfer dealings allowing us to accelerate debt repayments, and that doesn’t even take into account the very recent reduction of the debt after the property development covered its costs and now yields pure profit.

Moreover, paying down the debt also means less years of paying interest in the future, so the saving to the club is potentially enormous. Once that debt is gone, the money can sustainably be poured into the squad. And all thanks to Wenger not spending what he could and instead seeing greater long-term benefit to himself and the club in paying down the debt.

In a nutshell – by paying down the debt Wenger is saving the club money and also bringing the day that we are debt free much closer. Such a day is the day that all our profits can be translated into investment into the playing squad, and Barcelona can become our feeder club (if indeed, or world-class youth facilities don’t produce all the players our first eleven ever needs).

One final note – all the above is considering only the football side of Arsenal. I didn’t want to distort the figures and make them look even better than our rivals by including the highly-profitable property development business.

This series will continue with analysis of the accounts of our rivals.  And if you by any chance felt that the above was a little short on laughs, just wait until you read what’s happening at some of the other clubs – Tony
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