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Breaking down Chelsea's financial results, the future, and financial fair play

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Yesterday, Chelsea announced that it lost £23.1m for the 2015 financial year (1 July 2014 to 30 June 2015). This represents a significant swing of over £40 million from the previous year's £18.4m profit.

Chelsea earned £314.3 million, a slight decrease over the previous year's £319.8m.

The £314.3m includes income received from matchday revenues, broadcasting revenues, and commercial revenues, and does not include the profit received from player sales. However, the £23.1m loss does include profit from player sales.

How did Chelsea go from nearly £20 million in profit to over £20 million in losses?

There are two primary factors.

A ~£30 million increase in player costs

Chelsea added around £30 million to its player costs from 2013/14 to 2014/15 from wages (including bonuses for winning the league), a smaller profit on player sales (around £11 million less in 2014/15), and amortisation (i.e. the annual hit on the transfer fees for Diego Costa, Cesc Fabregas, Juan Cuadrado, Loic Remy, and Filipe Luis).

Additionally, the costs of Mo Salah and Nemanja Matic doubled from about £5.5 million in 2013/14 to about £11 million in 2014/15. As they both joined Chelsea in January 2014, they only had 6 months worth of costs, as compared to the full year in 2014/15 (Chelsea paid all of Salah's wages when he was at Fiorentina).

An ~£11 million reduction due to weaker Champions League performance

Chelsea earned £27.6m in Champions League prize money and its share of the TV money in 2014/15, a £7.2m reduction from it's £34.8 million in 2013/14 (the weaker Euro didn't help, as that's the currency UEFA uses to distribute to clubs). Chelsea also had two fewer home games, which represents, at the very most, a £4 million reduction in matchday revenue. So, at most, Chelsea realised £11.2 million less as a result of its weaker results in the Champions League.

On financial fair play

Despite what you may have heard, financial fair play still very much exists, and Chelsea continues to prioritise compliance with these regulations in every move it makes.

Chelsea's £23 million loss will be much closer to breaking even once all of the financial fair play exemptions are taken into account, and, as ever, Chelsea has nothing to worry about as far as UEFA is concerned.

For those interested in the details, Chelsea's three-year losses amount to around £55 million, which is well over the currently allowed £21 million. However, the exemptions, particularly with regards to youth activities, put Chelsea well under the threshold (it's also worth noting that starting this season, women's football activities are excluded as well, which should further incentivise Chelsea to invest in its league-winning squad, and which I firmly believe will eventually become profitable on its own as commercial opportunities in the women's game continues to grow).

The club doesn't report this information, but I conservatively estimate Chelsea's youth development activities around £12 million per year. (and it could very well be more). The club has sixty full-time staff members who work exclusively with the academy, not including scouts, over a dozen teams, and hundreds of players.

Additionally, the hundreds of soccer schools and football academies the club runs all over the world are complete write-offs, either as youth development or community development (as an aside, these academies are ideal marketing tools, and as they're also exempt from FFP calculations, we've seen many of the top European clubs planting flags in emerging markets this way).

When the £12 million per year for youth development is excluded from the FFP break-even calculation, this puts Chelsea under the £21 million threshold on its own before even considering the schools, academies, and other exemptions.

On the importance of the loan army

The extent to which Chelsea's loan army is firmly engrained into the club's overall strategy cannot be understated. It is fundamental to how the club approaches both youth development and player acquisition and the amount of resources dedicated to this project are likely to continue to grow.

Chelsea has heavily relied on profit from player sales over the past two seasons, earning over £110 million from players deemed surplus to requirements. Granted, David Luiz, Juan Mata, and Andre Schurrle were never part of the loan army, but Romelu Lukaku, Kevin De Bruyne, Ryan Bertrand, Thorgan Hazard, Patrick van Aanholt, and Jeffrey Bruma certainly were. This £110 million figure also doesn't include the wages and loan fees that help supplement the existing costs of the 30-plus players on loan.

Being paid to have another club develop your young player into a potential first team footballer at Stamford Bridge, or at the very least, a lucrative asset that can be sold for profit, is the ultimate low-risk, high-reward proposition. While it may sound callous to describe a player as an asset, this is the reality of the current football landscape, and in order to be successful, a club must adapt to the challenges of an evolving market.

On January's transfer window

Chelsea's latest financial results will have little material effect on how the club approaches the rapidly approaching winter transfer window. Rather, it will be results of the next six or seven fixtures that will determine how much the club spends.

If the win the other day at Norwich was a sign that things are finally getting back on track and Chelsea climbs up the table, then expect Chelsea to spend, and spend heavily.

If Chelsea struggles, then we should naturally expect some shuffling, but don't expect Chelsea to add a significant amount to its overall player costs, and any purchases will have to be offset by sales (whereas when Chelsea typically sells players, it is in the pursuit of maximising resources and shifting investment from the end of the bench to the starting eleven, not because of anything to do with attaining some ideal "net spend" figure*).

It's natural to think that the opposite might be true, for if Chelsea is struggling, then why wouldn't they spend heavily to in a last-ditch effort to try to buy their way back into the top four? Simply put, if Chelsea can't reasonably rely on the Champions League revenue next year, then it will be hesitant to add to its existing player costs. With an uncertain budget and financial fair play dictating that a club can't spend much more than it earns, if Chelsea is double digits away from fourth place during the window, it would be very difficult for Roman Abramovich (or more likely, Marina Granovskaia and Chelsea's accountants) to sanction a huge winter of spending.

For perspective, Manchester United reported that it lost nearly £50 million from not participating in European competition last season, and that was before the UK rights to the Champions League were sold for £900 million (£300 million annually), a half-billion pound increase over the previous £400 million deal (£133 million annually). That deal took effect this season.

Were Chelsea to miss out on the Champions League, it would lose a significant amount of ground to its direct competitors domestically, at least in the short term, and a bit of ground to its competitors in Europe (the Premier League continues to separate itself from the rest of the world with regards to broadcasting revenue, and this would help Chelsea offset the loss of Champions League revenue). As United and Liverpool have shown, from a commercial perspective, an established global club can withstand temporarily missing out on the Champions League. However, on-pitch performance will no doubt suffer, as Chelsea will not only not be able to spend the £50 million-plus on improving the squad, but it will also essentially gift that £50 million-plus to whatever Premier League club takes Chelsea's spot in the Champions League, thereby helping that club improve their squad.

* "Net spend" is a largely useless metric, and especially when applied to top clubs. It has no practical application in football finances, as every club in Europe's top eight leagues (and the vast majority of clubs in the other European leagues) capitalises and amortises transfers, rendering net spend completely irrelevant to how any of these clubs do business. An example: Sami Khedira and James Milner signed with Juventus and Liverpool respectively on free transfers last summer. The "net spend" calculation on both of these deals would be zero, but both clubs are adding around £6 million per year to their overall player costs, as wages must be factored in.

Or, with Chelsea, when Michael Essien, Frank Lampard, Ashley Cole, and Samuel Eto'o left the club following the 2013/14 season, there is no positive "net spend" credit, but Chelsea was able to save over £25 million in player costs, that the club then redistributed to help pay for the likes of Diego Costa, Cesc Fabregas, and Loic Remy.

On Manchester City

Chelsea's relatively weak financial performance underpins how successful Manchester City has been in turning their club into a model of success, both on and off the pitch.

In a year when Chelsea took a £40 million step in the wrong direction, Manchester City took a £33 million step in the right direction, having turned a £23 million loss into a £10 million profit.

Chelsea has built one of the best executive teams in football - chairman Bruce Buck founded the European division of one of the largest law firms in the world (for perspective, his firm, Skadden, earns several times what Chelsea does). De facto CEO Marina Granovskaia is a financial expert, who along with technical director Michael Emenalo, engineered the club's innovative loan system. The club's latest high profile hire, Christian Purslow, who serves as the global head of commercial activities, co-founded a private equity firm that runs billions of sterling pounds in investments.

That Manchester City has been able to significantly outpace Chelsea, despite being hamstrung by the poor timing of financial fair play, is a testament to the club's efforts. The club's globalisation strategy is second to none, and City now enjoys a tangible presence on six continents. Manchester City's executive team is unlikely to get the credit they deserve due to the longstanding mischaracterisation of some of their commercial deals, but they have done a fantastic job in the face of hurdles that were designed to be insurmountable.

On Chelsea's financial future

Despite the losses this season, Chelsea remains in very strong financial health.

Looking ahead, the Yokohama deal kicked in this season, and at £40 million per year, is more than double the previous deal with Samsung (£18 million per year). Additionally, as Christian Purslow continues to help Chelsea monetise the club's brand across the world, commercial revenues beyond the ultra-lucrative shirt and kit deals should continue see steady increases.

Other positives

  • The new stadium, once built, could see Chelsea earn an additional £50 million per year.
  • The new Premier League broadcasting deal kicks in next season, which will further separate Chelsea and the rest of the league from its European counterparts.
  • As mentioned, the new Champions League broadcasting deal kicks in this season. Since Chelsea won the league last season, it will take home the largest share of the first 50% the market pool. The remaining 50% is determined by the amount of matches each club plays, and should Arsenal fail to advance, that puts more money into the pockets of Chelsea and the Manchester clubs.
Losses are never ideal, nor is a drop in earnings, even the drop of less than 2% that Chelsea experienced, but if a club is going to lose money, you want it to be because it spent heavily on players. This is exactly what Chelsea did, and for the fans, it should only reaffirm what we've known since Roman Abramovich took over the club - Chelsea will always spend as much as it can in the pursuit of winning trophies.

We'll have more information once we get the full report (due at the end of the year), and we'll take a closer look at Chelsea's financial outlook then, but next season should see Chelsea back in the black, with earnings estimated at £350 million minimum (which would beat the club record, set in 2013/14, by over £30 million).

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