See the impact new Premier League financial rules would have on Chelsea and others
At Wednesday’s Premier League shareholders meeting agreement was reached over what financial controls in English football’s top tier will be moving forward.
From 2011 until now, the Premier League has operated with profit and sustainability rules (PSR), regulation which allows £105m of losses over a three-year period, with allowable deductions for such things as investment in infrastructure, the women’s team, the academy, and community work.
But that £105m figure has remained static despite the rising costs of running a football club, from wages, to transfer fees, to administrative expenses.
The past year has seen PSR come into sharp focus, with Everton landed with two separate charges for breaches of PSR, for 2021/22 and 2022/23, with both carrying a points deduction penalty. That deduction had been 10 points for the first charge, but that was reduced to six upon appeal, with two added for the second charge to make eight points deducted in total.
Nottingham Forest were deducted four points for a 2022/23 breach, while Leicester City, should they be successful in earning promotion back to the top flight next season, will begin the season with some kind of deduction after they were found to be in breach for the 2022/23 financial year, a year where they were members of the Premier League.
The chaos of recent months, and a season that has multiple teams with asterisks against their names, has not been a good look for the Premier League and reform has been at the top of the agenda at recent shareholder meetings.
This week’s monthly meeting saw headway made, however, with the Premier League set to adopt a model similar to UEFA’s squad cost ratio rules that are currently used.
The UEFA rules work on the basis of calculating wages, amortisation (how transfer fees are accounted for annually as a fee divided by the length of a player’s contract), severance payments to sacked staff, and intermediary costs, with those combined costs given as a percentage against operating revenue and player trading profit (the best performing year of the last three to account for transfer market volatility).
The new regulations will have to be ratified at the next Premier League AGM and are expected to be ushered in in time for the 2025/26 season, with the key difference being that clubs in European competition, the beneficiaries of greater revenue, will be held to a 70% squad cost ratio limit, while other will be allowed 85% in an attempt to try and avoid the so-called ‘big six’ sailing off into the sunset at an even faster rate than they already appear to be doing.
PSR remains in situ for now, and clubs in breach of PSR or the new regulations that may come in can be expected to be hit with a points deduction, with Premier League chiefs believing it to be the only deterrent.
Clubs have time to get their houses in order with regards to squad cost ratio ahead of 2025/26, but a look at the accounting periods for 2022/23, the most recently published financial year, give some clues to which London clubs have the most work to do.
With Arsenal pushing hard for success in the Premier League and Champions League, and back among European football’s elite regularly afters several years in the wilderness, greater revenues are coming down the tracks for the Gunners, but so, too, are increased costs associated with wages and transfer related activity.
It is important to note that UEFA’s squad cost ratio rule uses ‘relevant wages’, so wages of players and head coaches/managers, as opposed to the entire staff of the club.
For 2022/23, Arsenal posted record revenues of £464.6m, up £95.9m from the previous year. They did, however, still post a loss of £52.1m.
Wages rose to almost £235m, while amortisation stood at £139m. Player impairment charges were £18m, with those charges relating to the write-down of a player’s book value. In terms of relevant wages, those were pegged at around £200m.
Adding together the £200m, the £139m in amortisation charges, and the £18m impairment charge, gives a squad cost of £357m. To work out the squad cost ratio on the 2022/23 accounts, that £357m would be calculated as a percentage against the £464.6m of operating revenue, and the £16m player trading profit that the club achieved, giving a sum of £480.6m. That gives a squad cost ratio of 74.3%, which while a little over the 70% the Gunners would need to be at, is something that can be remedied by reducing amortised costs and wages, generating more revenue, or improving player trading, something they have been poor at in recent years. It is a fairly healthy position with plenty of time left to make it healthier.
From a Tottenham Hotspur perspective, the North London club posted revenues of £549.6m, well up from the £443.4m the previous year.
Wages increased to £251.1m from £209.2m, while amortisation was at £108.6m from £79.2m. There was a £10.9m player impairment charge. There were also severance payments of £5m detailed.
Relevant wages stood at around 85% of the whole payroll, around £213m according to football finance expert Swiss Ramble, with the squad cost coming in at around £338m.
Against revenue, and player trading profit of £18m, a total sum of £567m, the squad cost ratio percentage for Spurs was 60%, level top in the Premier League with the other stellar performer with regards to financial compliance, champions Manchester City.
For Spurs, it means they are in a very strong position to invest in the coming years into the product on the pitch and remain well within the constraints of the Premier League’s new financial controls, if they are to be adopted along the same lines as UEFA’s, as is expected.
For Chelsea the picture is somewhat different and they have the most leg work to do.
The heavy transfer spend of more than £1bn under the ownership of Todd Boehly and Clearlake Capital has been well documented, as was their initial practice of offering longer deals of seven, eight, and nine years to players to reduce the annual amortisation charges on the balance sheet. That practice has since been outlawed by both the Premier League and UEFA, who have capped the maximum period a contract can be amortised over at five years. There is no retrospective action taken against clubs with regard to this, however.
Chelsea’s revenue for 2022/23 stood at £512.5m, up from £481.3m the previous financial year. Losses stood at £90.1m, down from the £121.4m 12 months prior.
While Chelsea revealed their headline figures, the figures related to payroll, player impairment, and severance payments, of which there will be sums related to the sackings of Thomas Tuchel and Graham Potter, as well as Potter’s compensation to acquire his services from Brighton & Hove Albion, are not yet detailed. The club’s statements have been sent to Companies House but are not yet published on the portal.
To look at Chelsea’s position for 2021/22 might give some clues, as rises in wages, amortisation, and severance payments will impact things, so, too, will player trading profit for the year, which Chelsea detailed as £142.2m in its announcement of the 2022/23 figures.
Chelsea’s 2021/22 squad cost ratio was around 87%, and that figure will likely head north given the additional expenses, although the strong player trading figures, which for 2022 were also high at £123m, may aid matters.
But Chelsea are almost certain to have the most work to do out of the three clubs when it comes to any new financial regulation, and with the club wanting to be part of the European elite, which would require a 70% compliance, they will have to drive down some elements that are impacting them significantly, as well as find a way to continue to player trade at the consistently high levels they have been achieving in recent years thanks to the profit made on the sales of academy graduates out of Cobham.
