Saturday, May 21st, 2011 « Untold Arsenal: Arsenal News. Supporting the Lord Wenger; coach of the decade

By Phil Gregory

Right, in order to head off some of the usual confusion around what we have to spend I thought I’d put together this article.

The big question surrounds this mythical, unspent war chest that stubborn old Arsène likes to sit on and shout “NON!” when anyone asks about it. Do we actually have a fund like that? Not really, in my view. Arsène’s war chest is whatever cash the club produces each year plus proceeds from player sales. There’s no unscrupulous outgoing that accounts for money that isn’t spent (the board don’t take dividends), so any surplus will technically pass on to the next transfer period. More realistically, the surplus is generally less than we presume due to the cost of wages, signing on fees etc.

The  intention with the “spend what you earn” model is sustainability:  money that can be spent on players is the “extra” money produced by the club so we can afford to spend it while player sales are a windfall and can too be spent on players sustainably. That’s the model we work under, so let’s see what numbers that gives us to spend.

Cash the club makes is – in accounting terms – “operating profit” which is basically the cash the club makes from it’s operations (TV, commercial and matchday activities).  Our 2010 operating profit for the football business was £56.8m, which is a sizeable sum.  I’m specifically using the football side of the business as property profits are a one-off. If we go and blow property profits on  Messi, we spend a large sum of money based on a temporary income stream and are left paying his wages for a good number of years.

Hence, given our preference for a sustainable business model, I don’t believe the amount of “property cash” we have to be of any use in regards to our transfer funds. It’ll probably be spent on hard infrastructure – facilities and the like – that will benefit the club but not result in us incurring substantial costs.  The best indicator of our summer spending power is how much extra cash the club’s business produces: our £56.8m operating profit.

Unfortunately, that doesn’t mean we can go out and spend £56.8m.  Even with no new additions, the general level of wages rises. Players who come from nowhere such as Wilshere will likely have been (or will be) handed a new contract and substantial pay rise. Big name players such as Nasri have yet to sign extensions whilst there were several youth and reserve team players who have signed on the dotted line. What that means is that general wage growth is quite high: between 2009 and 2010, our wage bill was up over 6% (an increase of over £6m if you like) whilst since 2005 the wage bill is up nearly 70%.

Those figures do, however include the wage growth as a result of new signings. While a new signing’s wages will probably be mostly offset by the wage saving from a player sale,  it seems reasonable to expect that buying players will boost wage growth. Since we’ve been at the Emirates,average year on year wage growth has been 7.5%. That includes the wages of new signings, so for our “current squad” wage growth figure I’m going to use a  slightly lower figure of 5%. That shaves £6m off the fund, leaving us with roughly £50m, from which any potential transfer fees and wages need to be deducted.

Now let’s imagine the impact of two signings on that £50m. Player one is a “big name” signing, costing £25m and on £100,000 a week. Player two is an Arsène special, costing £10m and on £40,000. Signing player one will cost the club in his first season £30.2m (his transfer fee and a year”s worth of wages). Signing player two will cost the club £12.8m in transfer fees and wages during that first year. Buying both would mean the club have £7m left in the coffers for any January acquisitions. The following summer, assuming everything remains equal (bar the trend 5% wage growth) the available cash for transfers would be down roughly £13m due to the additional wage costs of these two signings plus the trend wage growth (rough budget of £37m)

I think that illustrates the problem well. Unless we can offload players and put the cash recouped on transfers and wage savings towards transfers, these apparently huge sums of money we have don’t actually go very far. Even if we forget about player one and instead expect three signings in the  “player two” bracket, we’re still looking at £30m on transfer fees and over £6m extra per season on wages.

What this also demonstrates is how wasteful transfer fees are. Read back: buying player one and two leaves us with a mere £7m at the end of it, but the following summer (when the budget is down only due to their wages) the budget would be  £37m – even taking into account wage inflation – yet we’d already have a big name player and a Koscielny/Vermaelen type. The wages of individual signings don’t est up the budget too much, it’s the general wage growth that proves costly (the trend increase of 5% is the equivalent of an extra £100,000/week player on the wage bill). Tranfser fees on the other hand do eat up the budget rapidly. Much better then, to avoid spending on transfers (say, by having a great youth academy) and only dip into the market occasionally when needed.

So with some of the transfer targets being banded around, how does this all shape up? All of this assumes Cesc stays: selling a player for £50m does tend to change the budget somewhat…

For my money, I’d like to see us bring in an offensive wide player. Hazard seems the most likely target, but having signed a long term contract, his fee and wages would likely account for about half of our budget. There’s also been a few concerns around the defence,with Squillaci’s signing not having lived up to expectations. Kyle Bartley certainly seems to have potential so could be in the centre back mix, but if we did look for an external candidate, someone such as the much-linked Vertonghen would cost around £12m-£15m.

These two alone would pretty much account for our budget and would represent a fair increase in the wage bill, so some departures seem probable. With my suggested wide player coming in and Ramsey’s return to fitness, I can’t see Tomas Rosicky getting much game time and with him being a senior player he’s probably earning quite well too. While he wouldn’t yield too much of a fee, I expect his wages could cover the best part of a Hazard-type signing. Nasri and Clichy’s contracts are yet to be signed but we tend to leave those until the summer anyway so it’s not like they’re at an impasse in negotiations. If however either of those two didn’t sign, they’d be sold to cash in while we can.

As an aside, each year the  same old controversy always happens after the transfer window shuts and the year accounts come out, showing substantial cash in the bank, prompting howls of protest. There’s a few misconceptions amongst those screaming bloody  murder at Wenger: One, he in no way profits from not spending, neither do the board. In a normal business, post-tax profits can either be reinvested into the business or given to shareholders as dividends. Our board don’t take dividends and haven’t for a while, so anyone who believes Wenger’s frugality is given the okay from above as the board line their pockets is simply wrong.

The nature of the club means that after season ticket renewals, our expenses generally exceed our income on a week by week basis. Because of this, club cash is always going to be high at the start of the season and then be drawn down over the course of the season, with the biggest requirement during the summer when there are no games played but wages still due. Cash in the bank at this point is in no way our leftover transfer war chest.

For those accounting types reading, it’s worth noting that while I’ve deducted transfer fees off operating profits, transfer fees don’t actually appear on club accounts. Instead they are amortised over the length of the contract (fee paid/length of contract) and charged to the accounts bit by bit. As this doesn’t reflect when the cash actually goes out of the club it’s a pretty pointless system and isn’t much use at all in my opinion.