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It's a good time to be a Chelsea fan.
The club ran away with the title, added a League Cup to its growing trophy cabinet, and could end up as the first Premier League side in history to have fewer than four losses across all competitions. If that wasn't enough, the club has also locked up PFA Player of the Year Eden Hazard for another five years and as rumour has it, Jose Mourinho will be signing a new long term deal as well. Also, Chelsea was the only club not to lose a single match in the Champions League this season (okay, that last one, while definitely true, was grasping at straws).
What's really exciting, though, is the fact that the squad is only going to get stronger this summer.
How much stronger?
Well, after crunching the numbers, a conservative estimate of Chelsea's summer transfer budget is £130 million.
Sounds like a lot, right? Well, let us explain.
Financial fair play monitoring periods
Chelsea's spending power is completely dictated by financial fair play considerations, which limits clubs from spending (much) more than they earn.
The next monitoring period will cover the 2012/13, 2013/14, and 2014/15 financial accounts, and clubs are only permitted to have aggregate losses of €30 million (around £22 million) over those three seasons.
In 2012/13, Chelsea lost nearly £50m. In 2013/14, Chelsea netted an £18m profit. So, with £32m in losses over the first two years of the next monitoring period, it would seem reasonable to think Chelsea would have to ensure that it earns, at a minimum, £10m profit this season.
However, financial fair play accounting is different than the accounting we see on the annual reports clubs submit to Companies House.
A £50m loss on the Companies House books is not a £50m loss on the FFP books, as certain expenditures don't count towards FFP, most notably youth development activities, infrastructure costs, the depreciation of fixed tangible assets, taxes, and certain exceptional items.
Chelsea's FFP "write-offs" are, conservatively, £20m per year, and as such, Chelsea is very likely currently running at an FFP surplus.
Chelsea could actually lose £20m this season and be perfectly fine with regards to FFP.
How's that?
Well, any loss the club takes this season won't have a material affect on compliance for future monitoring periods either, as the club has already locked in considerable revenue increases in each of the next two years.
Next season, the Yokohama deal (£40m per year, a massive increase over the current £18m per year deal with Samsung) kicks in as do the new Champions League broadcasting deals.
In 2016/17, the new Premier League broadcasting deal kicks in, which will see revenues skyrocket once again.
Does Chelsea have to sell to buy?
Yes and no.
For Chelsea, FFP is not about compliance, but about the need to maximise resources. While Chelsea has more resources to work with than all but maybe five clubs in the world, those resources are still finite. As such, Chelsea needs to spend wisely, and fortunately, they have been extremely forward thinking in this respect, especially with regards to its innovative loan farm.
In a vacuum, Chelsea certainly didn't need to sell Andre Schurrle to pay for Juan Cuadrado, but it doesn't make any sense to leave a £24 million player buried on the bench when Chelsea could cash in and put that money towards future purchases that will improve the starting eleven.
That said, it's important to note that Chelsea earned £65m in profit from player sales last season and the club would have taken a £47m loss if not for those player sales.
The potential loss is nothing to worry about, as Chelsea earned around £50m in profit from player sales this year*, and commercial revenues should increase as well.
* profit from the sales of Romelu Lukaku, Andre Schurrle, Ryan Bertrand, Demba Ba, Thorgan Hazard, Patrick van Aanholt, and George Saville, none of whom were slated to play significant (or any) minutes for the first team, will all go on the 2014/15 books.
What do player costs look like?
As regular readers will know, we don't waste our time with things like "net spend," as it's completely irrelevant to financial fair play, which is the only thing that matters where Chelsea's spending is concerned.
Rather, player costs are most accurately calculated as (wages + player amortisation + agent fees) - (profit from player sales + loan fees + wages paid for by loaning club).
This season, Chelsea's net player costs total £151 million.
Next season, not including the loan farm, which should end up paying for itself and then some in the form of wages being paid by the other club, loan fees, and the inevitable sales of a few players (Victor Moses and Christian Atsu seem possible candidates), Chelsea has £158m in commitments.
Right now, you might have a few questions.
1. Why are 2015/16 player costs already more expensive than 2014/15, especially with Fernando Torres' £18.7m albatross coming off the books, Eden Hazard's reduced FFP costs, and Didier Drogba not under contract for next season?
Where is this £130m coming from?
Well, as mentioned, Chelsea will see an extra £22m per year from the new Yokohama deal. Further, Champions League revenues should increase considerably as well. The prize money will increase by around 50% and the English television market pool should increase considerably as well (the new deal with BT represents a 225% increase over the current deals with Sky and ITV).
Chelsea should see around €34m (£25.2m) from UEFA this season (prize money + TV money only, not including the extra matchday and commercial revenue).
Next season, if Chelsea has the exact same results in the Champions League (i.e. fairly weak, by Chelsea standards), Chelsea should earn around €60m (£44.5m).
So, with just the extra Yokohama (£22m increase from 2014/15) and Champions League money (£19m increase from 2014/15), that's an extra £41m PER YEAR for Chelsea to work with.
Note that this £41m doesn't even take into account any increased commercial revenue the club will see next season beyond the new shirt sponsor or player sales beyond a few of the loanees.
"£41m sounds nice and all, but that's nowhere close to £130m"
Fair point.
The way FFP accounting works, however, is that transfer fees are amortised over the life of the player's contract. This is a uniform accounting practise employed by every single club in Europe's top six leagues, and it is fundamental to understanding player costs in the era of financial fair play.
So, if a club spends £100m on transfers and signs its players to five-year contracts across the board, that £100m is recorded as £20m per year over the next five years, rather than £100m on the 2015/16 books.
What does £130m get you these days?
Quite a bit.
Let's throw out some hypotheticals.
1. Gareth Bale - £70m fee and a five-year deal at £300k per week - £29.6m per year in FFP costs
2. Koke - £40m fee and a five-year deal at £100k per week - £13.2m per year in FFP costs
TOTAL: £110m in transfer fees and £19.2m in annual wages (£129.2m spent) - ~£42.8m per year in FFP costs
Or, what about this?
1. Paul Pogba - £75m fee and a five-year deal at £200k per week - £25.4m per year in FFP costs
2. Raphael Varane - £30m fee and a five-year deal at £100k per week - £11.2m per year in FFP costs
3. Aleksandar Mitrovic - £8m fee and a five-year deal at £30k per week - £3.16m per year in FFP costs
TOTAL: £113m in transfer fees and £17.2m in annual wages (£130m spent) or ~£39.8m per year in FFP costs
Maybe this?
1. Paul Pogba - £75m fee and a five-year deal at £200k per week - £25.4m per year in FFP costs
2. Young Player A to buy, send on loan, and sell for profit later (YPA) - £7.5m fee and a five-year deal at £35k per week, which loaning club will pay (LCP) - £1.5m per year in FFP costs.
3. YPB - £7.5m fee and a five-year deal at £35k per week (LCP) - £1.5m per year in FFP costs
4. YPC - £7.5m fee and a five-year deal at £35k per week (LCP) - £1.5m per year in FFP costs
5. YPD - £7.5m fee and a five-year deal at £35k per week (LCP) - £1.5m per year in FFP costs
6. YPE - £7.5m fee and a five-year deal at £35k per week (LCP) - £1.5m per year in FFP costs
.
.
.
11. YPJ - £7.5m fee and a five-year deal at £35k per week (LCP) - £1.5m per year in FFP costs
TOTAL: £150m in transfer fees and £10.4m in annual wages (£160m spent) or £40.4m per year in FFP costs
Full disclosure, just because Chelsea can afford to spend £130m this summer doesn't mean they will (the club might want to keep its options open for January), but I do expect the club to spend very heavily. We ran a similar article around this time last year and pegged Chelsea's summer budget at £150m. Chelsea ended up "only" spending ~£116m on the likes of Diego Costa, Cesc Fabregas, Filipe Luis, Loic Remy, and Didier Drogba based on transfer fees plus 2014/15 wages (the calculation we used to come up with the £150m figure last year and the £130m figure this year).
Lastly, this breakdown should underscore the importance of a general understanding of club finances and how player costs are calculated with regards to financial fair play.
Clubs can only spend as much as they earn and it has been proven several times over that increased spending leads to increased chances of success (and in fact, UEFA readily admits this, as they should, because it's obvious). In a nutshell, increased revenues leads to increased spending, which leads to better players, which leads to a stronger squad, which leads to better chances of winning trophies.
So, when Chelsea lands an extra £22m per year from a shirt sponsor, this essentially means Chelsea is now permitted to spend an extra £22m per year improving the squad. So, while the news of switching shirt sponsors isn't very exciting, the prospect of having an extra £22m per year to work with certainly should be!
The reality is that building a winning squad starts in the boardroom, and Marina Granovskaia is just as important to the club as Jose Mourinho, and now, more than ever, a club's financial success off the pitch will dictate a club's football success on the pitch.