Hello

Intro

Thought a thread like this could be useful on how transfers work and their ramifications on the dreaded "FINANCIALS". I'll start by saying that, obviously, the mentality is that cash rules everything and that you need to absorb information from a "cash" standpoint.

In the real business world, that just is not true. Companies and large businesses work on non-cash basis as well, for example, you need to take on debt to survive, invest and grow. Any organization that doesn't have debt (cash you don't have) is an organization failing to materialize proper investments and failing to grow. These investments push you forward.

So how does this work for Chelsea? Our investments come in the form of improving the Bridge, improving facilities, purchasing players etc. One part of this is obviously the player purchasing that has a direct correlation to improvement in sporting results (growth; monetary and non-monetary). You pay $x amount for a player with commissions (to agents/player) and a weekly wage. At this level of monetary exchange, there is almost always a commission as those agents work together to bring the two parties together and take a portion as commissions. Normal stuff so far.

So how about measurement in a financial sense?

I've noticed that, recently, there is a lot of misinformation on how to properly analyze purchase information as well as sale information. One of the worst metrics out there is net spend. Net spend measures you ins and outs in a sort of cash-measurement. For example, you sold 5 players for 1M each and bought 1 player for 10M. Your net spend is -$5M. Hoorah.

However, that's just not how that works because those players, originally, had a value. If you buy a car for $10K and sell for $9K, you did not just make $9K. Plus, your car probably lost value during those years. This is the same for players. You buy a player for $500K on a 5 year contract, it means that every year, your player loses 100K of his contractual value (as that's the price of the contract -- not the player and the business is buying contractual rights to use the player not the player himself really). That loss of value is a cost to you and you need to expense it on a yearly basis. You need to recognize -100K per annum in your financials.

If you sold this player for $1M after 3 years, your total gain would be $800K from the sale; 500K-300K=$200K remaining on the books as contract value, sale price of $1M - $200K (remainder of contract) = $800K gain for the financial year. This is the best way to analyze gains/losses and measure for FFP purposes as well as investments purposes. Net spend tells you ins and outs, but it's a metric devoid of the reality that businesses don't just operate like that and you need to account for original costs and loss of value.

Here's a view of this. The wages are made up but part of expenses. You need to expense 256K a year whilst the -100K affects player contractual value as well as it can be offset eventually at the sale date.

Player X - Example of purchase, wages and eventual sale

Best way to compare and analyze?

During those 3 years, you paid the player wages and those wages are an expense to the club. It's a sunk cost but it costs you. So if you were to analyze/compare two players for how much they cost you need to account for that loss of value. You also need to use a similar analysis to see what a player costs you in general. Your original paid price commissions is the total contract value and it is depreciated (loss of value) over the length of the contract. On top of that you have weekly wages that turn into your yearly wages. For comparative purposes, you need to put everyone on the same basis. It's like fractions, right? You cannot compare a 1/2 to a 4/3 unless you put them on the same denominator. For example, Kepa's contract length is 7 years, so that cost is less per annum. Here is a clear cut example of how to measure per annum costs:

How to properly analyze per annum cost of players for comparative purposes

In reading this table, you will see how each player has a different cost and perhaps, this will surprise many of you in terms of what those costs are and how they are accounted for.