Breaking down Chelsea's latest financial accounts

Chelsea filed its 2013/14 financial accounts with Companies House early Saturday morning, and as we are wont to do, WAGNH took a detailed look at the accounts to see how the club performed off the pitch last season. We already knew that the club earned around £319m and netted a profit of £18.4m, but we didn't know much beyond that. We made some projections, and now that we have the full accounts in hand, we can take a closer look at the bottom line.

£18.4 million profit

One of the highlights is the £18.4m profit Chelsea recorded, a marked turnaround from the nearly £50m loss the club took in 2012/13. Revenues increased £64m, largely on the strength of the new Premier League broadcasting deal and a 36% increase in commercial revenues.

However, it's important to note that had Chelsea not sold David Luiz, Juan Mata, Kevin De Bruyne and Jeffrey Bruma, Chelsea would've taken a £47m loss. The club earned £65m in profit from player sales (which is not included in the £319m in turnover, by the way), and for what it's worth, the underlying numbers make that loss look quite a bit less scary, especially through the lens of FFP accounting and UEFA's break-even calculation.

Chelsea's reliance on profit from player sales underscores how important it is to ensure that the club's loan farm keeps producing. Chelsea has been extremely successful in acquiring top young prospects at a low cost and seeing their investment increase significantly after sending them on loan to develop, and the finances show that this will need to continue if the club wants to be able continue to spend heavily in the transfer market.

Speaking of profit from player sales, the accounts appear to show that the transfer fee for a certain geezer was quite a bit less than originally thought.

David Luiz' transfer fee was probably around £37m

As mentioned, Chelsea earned £65m in profit from player sales. The club specifically mentions the sales of Juan Mata, Kevin De Bruyne, and David Luiz as the reason for this considerable profit (Jeffrey Bruma was also sold).

I found it rather surprising that Chelsea recorded David Luiz' fee on the 2013/14 books. The transfer window didn't open until 1 July 2014, the first day of Chelsea's 2014/15 financial year, so it would seem natural to record Luiz' cost on on the 2014/15 books, even though the deal was agreed to before the window officially opened.

Chelsea agreed to buy Cesc Fabregas from Barcelona before the transfer window as well, but Chelsea will begin accounting for the costs associated with Fabregas on the 2014/15 books.

Why the disconnect?

As HK_soo pointed out to me on Twitter, Barcelona recorded the profit from selling Cesc Fabregas on its 2013/14 books as well. I took a look at Barcelona's accounts, and sure enough, it definitely seems like Barcelona's Fabregas profit is included in its 2013/14 books.

So, it seems that if an international transfer is agreed to before 1 July, the profit from the sale is recorded on the previous year's accounts, despite the fact that the player's registration can't officially move until 1 July and the cost to the buying club doesn't begin accruing on the books until 1 July (i.e. the subsequent financial year).

So, now we know that the profit from the Luiz deal was recorded on the 2013/14 books, but how much profit did Chelsea make?

First, some accountability: our original breakdown of the Luiz deal assumed that the transfer fee was £48m and the projected £36.5m profit from the sale would go on the 2014/15 books. We were clearly wrong about when Luiz's transfer would be recorded and it certainly seems like we were off on the transfer fee as well. Our assumptions were well-sourced and based on the best-available information at the time, but of course, we take full responsibility for our errors and apologise for any confusion.

Moving on, we know that Juan Mata was sold for £37.1m, and the club recorded a £25.25m profit. Note that we include any wages already paid as we're solely concerned with FFP costs in our financial breakdown. Chelsea accounts for wages in a separate line item (wage bill) on the accounts it submits to Companies House, so that's so that's where the £1.75m difference in our assertion of £23.5m FFP profit comes from.

If, as reported by the BBC and German outlets, Kevin De Bruyne was sold for £16.7m, then Chelsea recorded a £11.82m profit (again, Chelsea lists the £780,000 in wages already paid separately).

Jeffrey Bruma was also sold for around £2.5m, all of which was recorded as profit.

So, between Mata, De Bruyne, and Bruma, Chelsea earned £39.57m in profit. As Chelsea earned £65m in profit from player sales, the remaining profit, £25.43m, is attributed to the sale of David Luiz.

When Luiz was sold, there was £11.5m left in book value on the transfer fee paid to Benfica. As such, in order to record a profit of £25.43m, Luiz would have had to have been sold for around £37m, a far cry from the £48m or £50m that was being widely reported at the time. As for the significant discrepancy, this may have been a situation where the 48-50m figure was actually in euros and "€" was simply replaced with "£" without doing the proper currency conversion.

A £37m transfer fee and £25m profit for Jose Mourinho's third-choice centre-back is still an excellent piece of business, mind you, but as mentioned, at a much lower fee than originally thought.

Commercial revenue up 36%

Commercial revenue increased from £79.6m to £109m, buoyed by £14.2m increases in kit related-revenue (£10m more from adidas, £4.2m more from Samsung) and increased sponsorship opportunities.

This is significant, especially when you consider that back in 2008/09, Chelsea (£53m) and Arsenal (£48m) were only £5m apart in commercial revenues. Fast forward to today, and the gap has widened to £32m (£109 compared to Arsenal's £77m).

Here's how Chelsea compares to the world's largest commercial clubs, along with Arsenal, Atletico Madrid, and Everton (I purposely left off PSG, as its commercial revenue is massively overinflated by the QTA deal and has been adjusted down to reflect fair market value by UEFA for the purposes of its FFP break-even calculation).

2013/14 commercial revenues

• Bayern Munich - £228.9m
• Real Madrid - £190.5m
• Manchester United - £189.3m
• Manchester City - £165.8m
• Barcelona - £132.6m
• Chelsea - £109m
• Borussia Dortmund - £108.9m
• Arsenal - £77.1m
• Atletico Madrid - £29.2m
• Everton - £12.7m

Chelsea's wage bill up to record £190.6m

Chelsea's wage bill went up £14m, to £190.6m. This is Chelsea's highest-ever wage bill, just beating out 2010/11, but it's important to note that Chelsea's wage to turnover ratio (an infinitely better metric of financial stability than wage bill numbers) is at its lowest in many, many years

Wage bill through the years

2013/14 - £190.6m

2012/13 - £176.6m

2011/12 - £171m

2010/11 - £189.5m

2009/10 - £172.5m

2008/09 - £165.6m

Wage to turnover ratio drops to 60%

Wage to turnover ratio is the percentage of revenues a club spends on wages (lower is better). As Chelsea earned around £319m in revenue and spent around £191m in wages, its wage to turnover ratio sits at just under 60%.

50% is considered excellent, and the European Club Association recommends a maximum ratio of 70%. Personally, I consider wage to turnover ratio to be one of the better financial metrics for an accurate picture of a club's finances, and here's some perspective on how Chelsea's ratio compares to its domestic and European rivals:

Wage to turnover ratios (2013/14)

Juventus - 66%

AC Milan - 61%

Chelsea - 60%

Manchester City - 59%

Arsenal - 56%

Barcelona - 51%

Manchester United - 50%

Real Madrid - 45%

Bayern Munich - 44%

The non-Chelsea figures sourced from the always-excellent Swiss Ramble (specifically, chart entitled "Wages - Leading Clubs 2013/14" in a recent blog on Manchester United's finances).

Abramovich spent £1,000,000 on tickets and hospitality

Rather than just taking however many corporate hospitality boxes he wanted, club owner Roman Abramovich insisted on paying for everything. As Chelsea would have sold the boxes and tickets Abramovich wasn't using for himself and his guests, Abramovich paid the value of the services to better Chelsea's accounts.

This is called a related-party transaction, which in and of itself is not a problem, but whenever an interested party conducts business with the club, it must be for "fair value." Had Abramovich instead paid £10 million, UEFA would've adjusted the value down back down to £1 million when doing its FFP break-even calculations and likely hit Chelsea with a sanction for attempting to engage in financial doping. This is how PSG got in trouble and what Manchester City is currently contending with.

Miscellaneous notes

• Chelsea spent £152.7m on player acquisitions.
• Chelsea valued its players as having a total transfer value of £353m prior to this summer's transfer deals (but including the sale of David Luiz). When we add the value of Diego Costa, Cesc Fabregas, Filipe Luis, Loic Remy and the continued development of the existing players, Chelsea is rapidly approaching £500m worth of players.
• Chelsea reduced the football staff (managers, players, coaches) to 89 (95 in 2012/13), but added over 45 new administration and commercial staff and a further 30 new match day employees.
• Chelsea is only liable for £2.75m in potential add-ons to its transfer fees should any performance clauses be met (not including purchases made this summer).
• Chelsea hasn't received any money from sell-on clauses in at least two years.
• The club made £2.9m in charitable contributions (up from £750k in 2012/13).
• The club originally missed the filing deadline by ten days. Accounts were due by 31 December, and it's strange that a global football club and KPMG (Chelsea's accountants) would miss a deadline, especially since it seems like the accounts had been completed by 30 September. There's no real penalty to missing a deadline (£150 late fee), but I just thought it rather odd as a matter of principle.

Final thoughts

2013/14 was, by far, Chelsea's strongest financial year in club history. Turnover increased 25%, the club smashed through the £300m barrier for the first time, and 1) with commercial revenues finally starting to catch up to the club's global stature and 2) broadcasting rights skyrocketing in value, Chelsea should continue to enjoy steady growth.