Topic: LFC - Are our wages too high?

[RedHopper]

So how does it work with players who extend their contract? Let's say we paid £8m for Coates on a 5 year deal, so that's a charge of £1.6m a season. After 3 seasons we extend his contract for 3 more seasons, at which stage he's got a remaining book value of £3.2m. So the amortisation charge each season will now be 3.2/5 = £640k ?

that's it. But usually you would extend a contract after two seasons. But the point is that say coates turns into the player we hope he can be, and makes the sweeper centre half position his own. By the time he is 25 and entering his peak, the amortization charge will be essentially gone, and We will have a 25 year seasoned player, and the only charge will be his wages. If you have a squad made up of players like this, on suitable and competitive wages, and almost no amortization charge, you can stretch your income a lot further.

I think you've certainly shown that the premise of the original post - that we should spend more money on wages and (presumably) transfer fees to sign those players is flawed. It might be the case that wages are going to enter a period of heavy inflation, and I can see why it'd be nice to be 'ahead of the curve' by signing up players on pre-inflation contracts but we just don't have any wiggle-room in terms of spending if we're serious about meeting our FFP targets.

I think that the likelihood of inflation has to be discounted a little bit. There is a very different mood abroad in the premiership at the moment. There are a lot of clubs that are focussed on turning a profit. Clubs that lose money, increasingly have a horrible tendency to be relegated, and if they don't have a sugar daddy, they don''t come back for a very long time.  If you look at the last year for which results are available 2010-11, man utd, arsenal, spurs, newcastle, west brom, wolves, fulham and blackpool all made a profit. Sunderland, everton, wigan and stoke all made smallish losses that they are trying to erase. Blackpool were relegated, but they were replaced by swansea and norwich who will have made substantial profits. Southampton and reading both look set to make fairly substantial profits. Aston villa have been cutting huge swathes out of their wage bill, by moving on highly paid old players signed by O Neill, and now they are looking to rebuild on more sustainable lines.

The thing is that clubs are looking to all break even. Basically you're looking at  every team in the league bar man city, chelsea and qpr, and er us, will all be profitable or about to break even. This increase in tv income is as likely to lead to teams clearing debts, and expanding stadia. Swansea are looking using their large profits from last season to put 8,000 seats on the liberty stadium. Norwich have nearly cleared their debts, then they're going to expand Carrow road to 35,000 for £20 million. Wolves and west brom are looking at adding a couple of thousand seats. Spurs plan to be in their new stadium by 2015-6, and up to 56,000 by 2016-7. Southampton have a 35,000 seater stadium that they filled the last time they were in the premiership. Actually southampton were all set to establish themselves as a stable, midtable team, in a fine new stadium, when harry redknapp squandered a huge amount of money, crashed them into the wall, and walked out leaving them a flaming financial wreck. Because these stadia are going to be largely funded from profits, they will pose less of a long term risk to clubs unlike say what happened to coventry or ipswich. 

These clubs are all preparing to be debt free clubs, that have decent stadia, who can comfortably afford to survive in the premiership, and if they are relegated, they will be in a very strong position to be promoted back again. West Brom are the real ground breakers here. They came up, made a profit, went down, wrote off a lot of their costs, were promoted making a profit, and then were able to stabilize in the premiership, and are now finish comfortably mid table, and are a very well run club off the pitch. If you notice that not only were a lot of these clubs profitable, but they were also able to take a lot of points off us last season. They're not going to be really driving inflation, but one or two of the more adventurous ones might take joe cole, or andy carroll, or stewart downing or charlie adam off our hands.

We shouldn't worry about what is going to happen with inflation. The world is a very big place, and filled with a lot of players, and we just keep looking for the right ones. We're not going to be competing with man city or chelsea for players, and even they're going to have to change their approach. We just need to get our own house in order, and cut our unnecessary player costs, so we can give brendan rodgers enough resources to do his job properly. Because ultimately that's what it is all supposed to be about.

[RedHopper]

No, I'm not. You might be right, you could be wrong. Unless you negotiated the deal, you have no more idea than I do. It is not unheard of for a player to take a pay cut if it means he gets to play more. These aren't accountants were talking about here, they are football players, they've trained long and hard and played long and hard to get to the top of the game because they want to play.

You don't get it, this situation happens at big clubs all the time. This is how they treat it in the accounts. The footballers are concerned about maximising their wages. Look at it this way, paul konchesky expected to earn 50k last season. He wound up playing for leicester on loan. If he wasn't getting the same amount of money, he could just have gone on loan. he would still be playing football, just like joe cole or alberto aquilani. I don't understand why you would expect these players to have behaved any differently.

Poulsen has had a very lucrative career, he played for Juventus as well as Liverpool, the guy is set for life whatever he does now. Given the choice between ending his career as a failure seeing out a contract and moving on to a new challenge, it is entirely possible that the latter appealled more.

Getting a tiny french club into midtable and the chance to play alongside sidney govou? He knows that whatever money he made in the past, the opportunity to make more is limited. He can't afford to take a pay cut, that's his retirement we're talking about. he has to set himself up for life. 

Even if it didn't, none of this means Liverpool are still paying his full wages. That would be a loan deal. It wasn't a loan deal, he signed a one year agreement with Evian. There's no reason on earth why they wouldn't pay him a decent wage for his services, they were getting him for free, and even if they got relegated, he's out of contract at the end of the season.

no-one is suggesting that liverpool are paying his full wages, just making sure that he gets his 50k a week over two years. and that's the point. If evian are paying him £20k, we're paying him £30K it's what he is entitled to, and if liverpool weren't going to give him his money, he would have had no difficulty in finding clubs who would take him on loan. It's a perfectly normal thing in football.

So almost always 20-25 percent except in the cases where it isn't. As I say, different clubs, different situations. I'm glad we agree, even if you don't seem to realise it.

You don't get me. The clubs that liverpool are aiming to be like are man utd, spurs, arsenal, newcastle. These are profitable clubs, and are all in the 20-25% range. if liverpool set up professional basketball, volley ball and other teams, then we will be comparable to the 30% clubs.  I only included them to show you that  as the size of clubs turnover rises, the proportion of costs often rises quite sharply.

I give up. You just want to twist everything I say so that you can disagree with me for the sheer sake of it.

Ah now, The point of examining other clubs isn't just seeing how they work, but to see what is the best way and to learn from it. FSG are saying that we are going to follow a self-sustaining model, so we can ignore some examples as irrelevant to us.  we can see that man city have expenses of around 31%, but man city are not remotely relevant to what we are interested in. We aren't going to be doing things their way so we can ignore their model.  That's the point. If a club is doing things differently, either they are a large multidisciplinary sports club, or a sugar daddy club. So it's clear that we should only consider the other examples because they don't work for us.

No he is on a 5 year deal
If he gets a two year extension transfer there are no transfer fees involved

you're thinking of a slightly different thing. In nearly every other respect, it is better to think of spending on transfers in terms of net spending. It is clearer, it helps you see how much money is being invested in the team. However in a situation like the clubs Accounts, or for the purposes of Financial fair play, you have to use amortization, and in this instance, swordfishtrombone is correct. Giving him a new contract means that no transfer fee has changed hands, but because of the rules governing how clubs account for the signing of players, it has an impact on our accounts. In this instance positive in that it reduces the amortization charge associated with the player in the annual accounts. It's negative in that his wages will go up, but hopefully we will have an excellent young defender, who a) will have soared in value b) will be about to enter the peak years of his career and c) will represent a very small overall "FFP cost," wages and as such will represent very good value for money indeed.

[No Appreciation of Liverpool Opposition]

Sorry my apologies
I thought since it'd be another contract there would be no additional fees

[No Appreciation of Liverpool Opposition]

This all means that the Borini deal will cost us negative money the next two years due to Kuyt and maxi doesn't it?

[Nessy76]

You don't get it, this situation happens at big clubs all the time. This is how they treat it in the accounts. The footballers are concerned about maximising their wages. Look at it this way, paul konchesky expected to earn 50k last season. He wound up playing for leicester on loan. If he wasn't getting the same amount of money, he could just have gone on loan. he would still be playing football, just like joe cole or alberto aquilani. I don't understand why you would expect these players to have behaved any differently.

No, I don't think you do. Which is tragic, frankly.

no-one is suggesting that liverpool are paying his full wages, just making sure that he gets his 50k a week over two years.

Actually you did. And I asked you, quite explicitly, several times, just to be sure. But I'm glad you've come round at last.

and that's the point. If evian are paying him £20k, we're paying him £30K it's what he is entitled to, and if liverpool weren't going to give him his money, he would have had no difficulty in finding clubs who would take him on loan. It's a perfectly normal thing in football.

So is players taking a pay cut to get first team football. But you don't understand that so it can't possibly happen. I know...
When a player signs a new contract, the old club's obligations to him are at an end. He signed for Evian, so he's not entitled to anything from Liverpool, except what might have been agreed between him and the club before he signed the new deal. But given that his contract with Evian has now ended, you presumably now think that Liverpool's obligations have raised back up to the previous level, don't you?

Does that really make sense? Would you really have agreed to a stupid arrangement like that? Where the less the player does to get himself a new club, the more we'd end up paying him?

You don't get me. The clubs that liverpool are aiming to be like are man utd, spurs, arsenal, newcastle. These are profitable clubs, and are all in the 20-25% range. if liverpool set up professional basketball, volley ball and other teams, then we will be comparable to the 30% clubs.  I only included them to show you that  as the size of clubs turnover rises, the proportion of costs often rises quite sharply.

And therefore is not a constant percentage, as you insisted earlier. You are now (again) trying to convince me of exactly what I said to you in the first place. It is irritating. Stop.

Ah now, The point of examining other clubs isn't just seeing how they work, but to see what is the best way and to learn from it. FSG are saying that we are going to follow a self-sustaining model, so we can ignore some examples as irrelevant to us.  we can see that man city have expenses of around 31%, but man city are not remotely relevant to what we are interested in. We aren't going to be doing things their way so we can ignore their model.  That's the point. If a club is doing things differently, either they are a large multidisciplinary sports club, or a sugar daddy club. So it's clear that we should only consider the other examples because they don't work for us.

Good for you. When you work out some way to make this relevant to anything I've written, keep it to yourself, I'm tired of you.

[Abrak]

I generally dont like discussing the 'accounting' of football clubs because it actually 'distorts' the underlying 'profitability' of clubs in my view. I actually think it presents a fundamental problem as regards 'FFP' which 'Redhopper' is 'missing' because he is only looking at one side of the equation.

Anyone can begin to see this problem if you look at this simple example. Lets for simplicity assume that this summer:

1) We sold Carroll for 15m (bought January '11, 35m)
2) We sold Suarez for 35m (bought January '11 23m)

Now I think that we can all agree that we made a 20m loss on Carroll (35m - 15m) and a 12m profit on Suarez (35m - 23m) which is a 'total of an 8m loss'. Right? (BTW before the accountants say NO, I am simply pointing out the difference between sale and purchase price.)

But what would our accounts show. Well with both players we would have charged amortisation on their price (35m and 23m) over the life of their contracts (5 years) since acquisition (1.5 years ago).

So Carroll is in the accounts at 35 - (35x(1.5/5)) = 35 - 10.5 = 24.5
And Suarez is in the accounts at 23 - (23 x (1.5(1.5/5)) = 23 - 6.9 = 16.1

So when we report our accounts, the sale of Carroll and Suarez our results will show a....

Net Profit of 9.4m....

...from the sale of Suarez (35 - 16.1) and Carroll (15 - 24.5)

At first this might sound a bit strange. We all know we have made an '8m loss' on Carroll and Suarez, yet we report a '9m profit'. In reality, what the accounts have done is place 'too much cost' in the form of 'amortization' (10.5+6.9=17.4) into the cost line, so that we must declare a surplus or 'profit' of 9.4 to balance it out. Hence (-17.4+9.4=-8). (Which is why when looking at amortization you need also to look at profit on players sales.)

As you can see it all eventually comes out in the wash. It really shouldnt have anything to do with football. We should let the accountants create whatever accounts they wish I guess. But there is a problem which is these are the accounts which qualify for FFP. In fact there are two things to consider.

1) If the name of the game is simply making our accounts look good to qualify for FFP this year, then I would hazard a guess that we might well be giving careful consideration to selling a player like Johnson. Afterall his acquisition cost has been largely amortized and the bulk of his sale value would be profit - which would make our accounts look that much rosier. My point being under FFP, the decision to sell players might be driven by how it affects our accounts rather than how much money the sale would actually bring in - which is a nonsense. (And if you need say '10m' 'profit' it is far easier to generate it with a sale of a player (and buying back a replacement) than cutting the wage bill 10m.)

2) The second problem is more serious for LFC in terms of competitiveness. You see the example I gave in the beginning shows that even when you sell players at a loss, you end up generating profits in your accounts (because you have 'over-depreciated' them in previous years.) Now City have taken advantage of this dubious accounting methodology to create a 'profits model' to drive them towards FFP.

By investing so heavily in players over the past 3 years and amortizing them through their accounts (with extremely heavy losses), they are now left with a large pool of players (that even if they sell at a sizable loss) will generate sizable profits at City. And they can use this profit to offset their horrendous wage bill. Now if City declaring profits on players (that they may well have sold for less than they paid for) to balance out the cost of their enormous wages sounds like how FFP is supposed to work, it sounds pretty dumb to me.

[keyo]

I generally dont like discussing the 'accounting' of football clubs because it actually 'distorts' the underlying 'profitability' of clubs in my view. I actually think it presents a fundamental problem as regards 'FFP' which 'Redhopper' is 'missing' because he is only looking at one side of the equation.

Anyone can begin to see this problem if you look at this simple example. Lets for simplicity assume that this summer:

1) We sold Carroll for 15m (bought January '11, 35m)
2) We sold Suarez for 35m (bought January '11 23m)

Now I think that we can all agree that we made a 20m loss on Carroll (35m - 15m) and a 12m profit on Suarez (35m - 23m) which is a 'total of an 8m loss'. Right? (BTW before the accountants say NO, I am simply pointing out the difference between sale and purchase price.)

But what would our accounts show. Well with both players we would have charged amortisation on their price (35m and 23m) over the life of their contracts (5 years) since acquisition (1.5 years ago).

So Carroll is in the accounts at 35 - (35x(1.5/5)) = 35 - 10.5 = 24.5
And Suarez is in the accounts at 23 - (23 x (1.5(1.5/5)) = 23 - 6.9 = 16.1

So when we report our accounts, the sale of Carroll and Suarez our results will show a....

Net Profit of 9.4m....

...from the sale of Suarez (35 - 16.1) and Carroll (15 - 24.5)

At first this might sound a bit strange. We all know we have made an '8m loss' on Carroll and Suarez, yet we report a '9m profit'. In reality, what the accounts have done is place 'too much cost' in the form of 'amortization' (10.5+6.9=17.4) into the cost line, so that we must declare a surplus or 'profit' of 9.4 to balance it out. Hence (-17.4+9.4=-8). (Which is why when looking at amortization you need also to look at profit on players sales.)

As you can see it all eventually comes out in the wash. It really shouldnt have anything to do with football. We should let the accountants create whatever accounts they wish I guess. But there is a problem which is these are the accounts which qualify for FFP. In fact there are two things to consider.

1) If the name of the game is simply making our accounts look good to qualify for FFP this year, then I would hazard a guess that we might well be giving careful consideration to selling a player like Johnson. Afterall his acquisition cost has been largely amortized and the bulk of his sale value would be profit - which would make our accounts look that much rosier. My point being under FFP, the decision to sell players might be driven by how it affects our accounts rather than how much money the sale would actually bring in - which is a nonsense.

2) The second problem is more serious for LFC in terms of competitiveness. You see the example I gave in the beginning shows that even when you sell players at a loss, you end up generating profits in your accounts (because you have 'over-depreciated' them in previous years.) Now City have taken advantage of this dubious accounting methodology to create a 'profits model' to drive them towards FFP.

By investing so heavily in players over the past 3 years and amortizing them through their accounts (with extremely heavy losses), they are now left with a large pool of players (that even if they sell at a sizable loss) will generate sizable profits at City. And they can use this profit to offset their horrendous wage bill. Now if City declaring profits on players (that they may well have sold for less than they paid for) to balance out the cost of their enormous wages sounds like how FFP is supposed to work, it sounds pretty dumb to me.

although the split up is different before and after amortization, ultimately the same costs have gone through the accounts, and you are right the presentation may appear confusing.....35 million of cost will still go through the accounts, so ultimately we will lose 20million......FFP looks at profitability over a period of time, and therefore such losses are relevant even with amortization.....city's advantage would be in the ability to generate more significant transfer fees in to offset such losses and carry on buying n players at lower fees.....in terms of assessing the performance of the club as a financial enterprise, cash flow is a better indicator as it is this which will determine our success and ability to reinvest

[swordfishtrombone]

Snip

Interesting post. Presumably though, the idea of selling players who's acquisition cost has been amortised away to nothing is suicidal in the long term because, while you'll show a profit in one specific season, you'll haemorrhage cash over the longer term? We're only looking at accounting profit here, not cash flow, so there clubs could find themselves in a situation where their balance sheet is healthy but, in cash terms, they're skint.

Part of the issue you raise seems to be that, because FFP has only just kicked in, all the horrors before the 3 year accounting period started are ignored. City, by investing heavily in players a few years ago and having seen their book value decline, again mostly before the first FFP period, have managed to find another wee loophole which will help them meet their FFP obligations but only by throwing away cash in previous seasons. Is this is a problem unique to the early years of FFP?

If we assume that FFP has teeth and is here to stay, will these quirks of accounting be eliminated? A club which spends £20m on a player on a 5 year contract and sells him for £8m after 4 years might show a £4m profit at the time they sell him, but they'll have 'lost' the other £16m (at a rate of £4m a season) in the previous 4 seasons' accounts - and they'll only have £8m to reinvest in a new player. If you do that over ad over again then your club is quickly going to go into decline, both on the pitch and in the accountant's office.

[Zeb]

1) If the name of the game is simply making our accounts look good to qualify for FFP this year

Have a look at how close we are to FFP over the initial two year reporting period (and the second reporting period of three years) - can kind of guesstimate it within a reasonable ballpark figure. I think we'll be asking for an exemption. In fact, there's an argument to run up a large (but smaller than last year's) accounting loss to minimise the advantage some clubs will take of it too. £35m acceptable deviation over last year and this seems unlikely so why not take advantage of the clauses as other clubs will be doing?

[No Appreciation of Liverpool Opposition]

Have a look at how close we are to FFP over the initial two year reporting period (and the second reporting period of three years) - can kind of guesstimate it within a reasonable ballpark figure. I think we'll be asking for an exemption. In fact, there's an argument to run up a large (but smaller than last year's) accounting loss to minimise the advantage some clubs will take of it too. £35m acceptable deviation over last year and this seems unlikely so why not take advantage of the clauses as other clubs will be doing?

I think we aren't actually over due to the contracts of players we signed before June 2010'whos wages don't count.

[Zeb]

I think we aren't actually over due to the contracts of players we signed before June 2010'whos wages don't count.

We're not over it from 2011/12 as far as I can tell, but we either tighten hard this year to get close to break even or we need the exemption. Why try to meet it that hard if we can show a good trend instead, as many other clubs will be doing? Those same two years also apply to the 2011 through 2013 period, which makes it an even tighter squeeze. Why bother?

[No Appreciation of Liverpool Opposition]

We're not over it from 2011/12 as far as I can tell, but we either tighten hard this year to get close to break even or we need the exemption. Why try to meet it that hard if we can show a good trend instead, as many other clubs will be doing?

That's an issue for management
Idk our exact figures but that contract before 2010 thing will sure as hell help.

[Abrak]

If we assume that FFP has teeth and is here to stay, will these quirks of accounting be eliminated? A club which spends £20m on a player on a 5 year contract and sells him for £8m after 4 years might show a £4m profit at the time they sell him, but they'll have 'lost' the other £16m (at a rate of £4m a season) in the previous 4 seasons' accounts - and they'll only have £8m to reinvest in a new player. If you do that over ad over again then your club is quickly going to go into decline, both on the pitch and in the accountant's office.

Yes, ultimately it all comes out in the wash. It is just that City have generated massive losses historically (when FFP was not in place) and put themselves in a position where they have 'hidden paper profits' which will help cover 'operating losses' in the early days of FFP. Presumably they are gambling that during that period their success on the pitch will lead to revenue growth to help sustain their higher cost base (which, incidentally is artificially high).

The quirks of accounting (rather unfortunately) are likely to become a feature of FFP though. For instance, if we look at LFC and are reasonably optimistic, we could take a view that we face a future whereby we are in CL one year and out of CL the next. Now the difference is 35m in revenues but under FFP we must breakeven under both scenarios. It really doesnt make a whole lot of sense constantly changing our variable cost base (i.e. mostly wages) so given that we have a degree of flexibility over the timing of when we take our profits from player sales, we may well choose to keep our wage base relatively stable and meet our profit targets through timing our player sales.

I would however, stress that 'profit from player sales' is a integral factor in all clubs profit models due to the way they account for players. If you look at the 'top 6' clubs the 'average annual profit from player sales' over the past 5 years has been:

Arsenal 31.5m
Chelsea 15.5m
Spurs 23.1m
Liverpool 18.0m
City 5.0m
Utd 26.4m

What is striking is how low the figure at Chelsea is considering how much they have spent on transfers over the past 10 years. This is because they choose to allow their players like - Lampard, Cole, Drogba etc - to stay at the club until they retire worthless.

[Zeb]

That's an issue for management
Idk our exact figures but that contract before 2010 thing will sure as hell help.

Sure, it helps for 2010/11 2011/12 and then there's no exemption for it.

[swordfishtrombone]

I think we aren't actually over due to the contracts of players we signed before June 2010'whos wages don't count.

I'm not sure we've got any high wage earners left at the club who signed their contract before June 2010. Maxi was the only one I think and he's gone now. Carra and Gerrard's contract extensions will (I think) mean their contracts need to be counted, and I also think Reina and Johnson have extended since June 2010z

[Acaustiq]

I think we aren't actually over due to the contracts of players we signed before June 2010'whos wages don't count.

Only under certain circumstances.

For the purpose of the first two monitoring periods, i.e. monitoring periods assessed in the seasons 2013/14 and 2014/15, the following additional transitional factor is to be considered by the UEFA Club Financial Control Body:

Players under contract before 1 June 2010

If a licensee reports an aggregate break-even deficit that exceeds the acceptable deviation and it fulfils both conditions described below then this would be taken into account in a favourable way.

i) It reports a positive trend in the annual break-even results (proving it has implemented a concrete strategy for future compliance); and

ii) It proves that the aggregate break-even deficit is only due to the annual break-even deficit of the reporting period ending in 2012 which in turn is due to contracts with players undertaken prior to 1 June 2010 (for the avoidance of doubt, all renegotiations on contracts undertaken after such date would not be taken into account).

This means that a licensee that reports an aggregate break-even deficit that exceeds the acceptable deviation but that satisfies both conditions described under i) and ii) above should in principle not be sanctioned.

FWIW, this clause didn't exist in the original rules, I wouldn't be surprised to see this come up in any criminal or civil fraud case.

[RedHopper]

Actually you did. And I asked you, quite explicitly, several times, just to be sure. But I'm glad you've come round at last.

No that's not correct. We have to make sure he gets paid the amount we promised him, and in a best case scenario (which I said way back in the beginning) that involves us paying him the full £5 million minus whatever evian are paying him. And that's the best case scenario.

So is players taking a pay cut to get first team football. But you don't understand that so it can't possibly happen. I know...
When a player signs a new contract, the old club's obligations to him are at an end. He signed for Evian, so he's not entitled to anything from Liverpool, except what might have been agreed between him and the club before he signed the new deal. But given that his contract with Evian has now ended, you presumably now think that Liverpool's obligations have raised back up to the previous level, don't you?

Players will rarely swap the best contract of their lives to play a bit more football. Particularly when it is the last big one they will get. And in order to get poulsen to sign a new contract, we would have had to seriously sweeten the deal for him.

Does that really make sense? Would you really have agreed to a stupid arrangement like that? Where the less the player does to get himself a new club, the more we'd end up paying him?

I'm afraid that's how the transfer system works. and if you look at our record in this area over the last 20 years, you are about as likely to find a string of disasterous mistakes as making a series of right moves.

And therefore is not a constant percentage, as you insisted earlier. You are now (again) trying to convince me of exactly what I said to you in the first place. It is irritating. Stop.

look, all of this is predicated on the idea that we are aiming to be a self sustaining club, financing player purchases out of our own income. If you are going to do that, you need to divide up the money available to you in a particular way. and profitable english clubs generally all look the same. around 55-60% on wages, 20-25% on expenses and 15-20% on amortization. That man city might do something different is irrelevant to us. Ultimately, you are saying that you have much more latitude with these numbers, but that isn't really true for a club in our position.

[RedHopper]

At first this might sound a bit strange. We all know we have made an '8m loss' on Carroll and Suarez, yet we report a '9m profit'. In reality, what the accounts have done is place 'too much cost' in the form of 'amortization' (10.5+6.9=17.4) into the cost line, so that we must declare a surplus or 'profit' of 9.4 to balance it out. Hence (-17.4+9.4=-8). (Which is why when looking at amortization you need also to look at profit on players sales.)

oh I took that into account. I was just trying to establish what enables you to break even without having to sell players. We made a substantial profit on player sales in 2010-11, and that would have seen us break even, apart from the exceptionals. However, that involved selling mascherano and torres. I think we'd rather not do that to be honest. let a sale be a bonus, and something you do on you own terms, for your own reasons, rather than something you have to do to break even.

but again that is only from the point of view of the accounts and breaking even. there is always going to be a certain amount of player trading, involved in managing a squad, and for virtually every other purpose it's better to think of the difference between your income and your running expenses as going to fund net transfer spending. 

As you can see it all eventually comes out in the wash. It really shouldnt have anything to do with football. We should let the accountants create whatever accounts they wish I guess. But there is a problem which is these are the accounts which qualify for FFP. In fact there are two things to consider.

1) If the name of the game is simply making our accounts look good to qualify for FFP this year, then I would hazard a guess that we might well be giving careful consideration to selling a player like Johnson. Afterall his acquisition cost has been largely amortized and the bulk of his sale value would be profit - which would make our accounts look that much rosier. My point being under FFP, the decision to sell players might be driven by how it affects our accounts rather than how much money the sale would actually bring in - which is a nonsense. (And if you need say '10m' 'profit' it is far easier to generate it with a sale of a player (and buying back a replacement) than cutting the wage bill 10m.)

Actually, the first players you'd look at are the ones on high wages that you don't use. And the players with a high amortization charge associated with them (Carroll, Downing aquilani between them account for about a third of the amortization charge). If you sold johnson, you'd get a higher once off profit, but next year your amortization charge would still be high. Who would you sell to paper over the cracks then? I appreciate you'd probably take a big once off hit selling those three players, but it would make the 2013-14 accounts and the ones to follow, look £26 million better. 

2) The second problem is more serious for LFC in terms of competitiveness. You see the example I gave in the beginning shows that even when you sell players at a loss, you end up generating profits in your accounts (because you have 'over-depreciated' them in previous years.) Now City have taken advantage of this dubious accounting methodology to create a 'profits model' to drive them towards FFP.

By investing so heavily in players over the past 3 years and amortizing them through their accounts (with extremely heavy losses), they are now left with a large pool of players (that even if they sell at a sizable loss) will generate sizable profits at City. And they can use this profit to offset their horrendous wage bill. Now if City declaring profits on players (that they may well have sold for less than they paid for) to balance out the cost of their enormous wages sounds like how FFP is supposed to work, it sounds pretty dumb to me.

ah, i'm not sure it quite works in that way. firstly the money that the players are on makes them incredibly difficult to shift (wayne bridge, roque santa cruz?) So if they do manage to get interest in a player (adebayor) they're so desperate to get his £9 million a year off the wage bill, they have to be prepared to accept a tiny fee (£6 million) so the club can give the player a £8 million signing on fee to make up the difference in wages. You're right that they can use the sales of players to make their accounts look better, but it''s not as big a factor as you might think. They'd have to sell a lot of players to make a dent in a wage bill that was 115% of turnover in 2010-11, and an amortization charge that was 56% of turnover. Man city's loss was £195 million. You're going to have to sell a lot of players to make a dent in that. They are so far beyond meeting FFP that they can't be seen through a telescope.

[RedHopper]

Have a look at how close we are to FFP over the initial two year reporting period (and the second reporting period of three years) - can kind of guesstimate it within a reasonable ballpark figure. I think we'll be asking for an exemption. In fact, there's an argument to run up a large (but smaller than last year's) accounting loss to minimise the advantage some clubs will take of it too. £35m acceptable deviation over last year and this seems unlikely so why not take advantage of the clauses as other clubs will be doing?

Even though we reported a large loss last year for 2010-11, we would have come very close to breaking even because Uefa don't count something like the charge incurred when tearing up the plans for a particular new stadium.  But that was because we made a large profit on selling players. But we didn't sell that many players last season, so my best estimate would be that we're looking at a loss of £40-45 million, which would count for FFP.

However if we make progress in the area of cutting the wage bill this summer, we will be able to go to UEFA and say that the new owners inherited a terrible financial situation, that the owners have tried to turn into a sustainable club, and the losses incurred were a legacy of H&G, rather than the club trying to gain an advantage. our loss is a different kind of thing to the losses run up by abramovich and man city, who have continued to spend at an increasingly unsustainable rate. I mean it's not like we gained an advantage on the pitch did we?

[Abrak]

oh I took that into account. I was just trying to establish what enables you to break even without having to sell players. We made a substantial profit on player sales in 2010-11, and that would have seen us break even, apart from the exceptionals. However, that involved selling mascherano and torres. I think we'd rather not do that to be honest. let a sale be a bonus, and something you do on you own terms, for your own reasons, rather than something you have to do to break even.

but again that is only from the point of view of the accounts and breaking even. there is always going to be a certain amount of player trading, involved in managing a squad, and for virtually every other purpose it's better to think of the difference between your income and your running expenses as going to fund net transfer spending. 

Redhopper, I dont know if you know it but you are hopelessly confusing yourself. 'Amortisation' is not a 'cost' of anything it is an 'accounting item'. And the 'profit' on sale isnt actually a 'profit' it is another 'accounting item' often created when 'realizing a loss'.

If you look at Arsenal you will see that over the last past 5 years average annual...

Amortization = 33.6m
Profit from player sales = 31.5

Why are they almost exactly equal? Because over the long run.

Net transfer spend = amortization - profit from player sales

What else are you actually accounting? So as Arsenal's net transfer spend is zero, so amortization = profit from player sales.

Now actually for a profit model we are trying to find out what level of 'net transfer spend' as a % of sales is sustainable for breakeven. I can derive that straight from EBITDA. But you want to derive a clubs profitability from its amortization charge while I know the amortization is irrelevent to Arsenal as its net transfer spending is zero.

[RedHopper]

Redhopper, I dont know if you know it but you are hopelessly confusing yourself. 'Amortisation' is not a 'cost' of anything it is an 'accounting item'. And the 'profit' on sale isnt actually a 'profit' it is another 'accounting item' often created when 'realizing a loss'.

ah now, I'm talking exclusively in terms of the clubs annual accounts. Not anywhere else, and even those are only relevant really because of FFP. Because amortization is the method used to deal with spending on transfers in the context of FFP, it's relevant here. everywhere else, net spending. 

The world of FFP is tied up in accounting, and the rules are a bit different, but it basically works out the same. From the point of view of breaking even, the amortization charge may as well be a cost, because you have to generate enough cash to cover it. If you were using the expensing method of accounting, that figure would actually represent a cost, so I think it's fair to draw an equivalence between the two in this context.

Think of it like this. andy Carroll gets about £80k a week, or £4.2 million a year. The amortization charge associated with holding his contract, is £6.3 million a year. Now since carroll is apparently being paid for directly out of installments from chelsea. having andy carroll only costs us £4.2 million a year. However from the point of view of FFP, we have to generate £10.5 million of income in order to break even, because of andy carroll. It's not a cost, but it is a level of income we have to achieve in order to break even. And it is indirectly associated with flows of money in and out of the club.

If you look at Arsenal you will see that over the last past 5 years average annual...

Amortization = 33.6m
Profit from player sales = 31.5

Why are they almost exactly equal? Because over the long run.

Net transfer spend = amortization - profit from player sales

What else are you actually accounting? So as Arsenal's net transfer spend is zero, so amortization = profit from player sales.

This is fair enough, and I agree that it roughly all works out the same in the end,  but arsenal are a seriously extreme model of doing things, and I really don't recommend it. It's basically built on selling off family jewels, and gradually replacing them with over priced mediocre tat. while building up an enormous cash mountain. It's kind of weird. We did that for a while and it hasn't worked so well for us. and we don't have the cash mountain either.

But I can't help feeling that you are better off setting your budgets in such a way that you are continually able to invest in your team. In a situation like that, you don't want to have to be relying on selling players in order to help cover your amortization charge. if you set your levels of spending right, you only  have to sell when you want to, and there is money left over to buy new players.

Now actually for a profit model we are trying to find out what level of 'net transfer spend' as a % of sales is sustainable for breakeven. I can derive that straight from EBITDA. But you want to derive a clubs profitability from its amortization charge while I know the amortization is irrelevent to Arsenal as its net transfer spending is zero.

again I agree with you in this instance. But again arsenal are such an extreme case, and one that we should avoid. They're too focussed on making money. And you are correct that amortization (at a stretch) can be thought of as a kind of average transfer spend over the last little while. And I only really raised the issue because Breaking even is relevant to FFP. I would say that at the moment we are likely to struggle to meet the requirements of FFP, and there are a couple of particular steps they could take to address that. (and personally, there are other reasons for wanting to sell carroll, downing and aquilani)

But the most important thing is whether we are generating enough cash after expenses to give us an adequate level of net spending, and I'm afraid that we aren't.  whether you look at it from the point of view of net spending, or from the FFP point of view, or more importantly, the league table, we have to take an axe to the squad. fabio aurelio, dirk, and maxi are gone. If we can't sell them, the contracts of jones, doni, carragher, bellamy all expire at the end of next season. We seem to be open to selling carroll, and would snap the arm off anyone who had a sniff around cole, aquilani and downing.

If we were able to get rid of all of those players over the next 12 months, our financial situation would be radically improved. Both from a FFP point of view, and from the point of view of generating enough money to keep investing in players. and we wouldn't be missing out on the pitch either. It would radically reduce the age of the squad, and If we replaced the fringe players, with players from the academy, we could focus our resources on signing a better class of player to add to the squad. 

Given the increase in commercial income last season, and the cup games compensating for lack of european football, I'd say we managed a turnover of about £200 million last season. 55% of that for wages is £110 million, 15% of that for net spending is £30 million. At those levels of spending, we break even. At those levels of spending, I could see brendan rodgers making us very competitive, very quickly. Improved perfomances on the field would lead to much increased income. and if we were to get back to the CL over the next couple of years, along with the huge TV deal, you're looking at a turnover over of nearly £300 million if we can get back to the CL, and that's without a new stadium. 55% of that is £165 million, and 15% of a net transfer budget is £45 million.  That's about what chelsea spend. The quicker we can move to that kind of model, the better.

A future based around FFP is very advantageous to liverpool. The premiership deal is enormous for a big club. We have a huge global fanbase, and substantial commercial income. We could comfortably fill a 60,000 seater renovated stadium. Even without champions league football, Liverpool will be able to support a substantial wage bill and annual net spend. But the key to unlocking that is getting rid of all of the dead wood and rebuilding the team.

[Abrak]

I dont actually think that any English clubs will be subject to sanctions under FFP as all the top clubs should be at or around break even by 2013/14 including City which will probably be seen as meeting the 'spirit' of the rules.

However one club that is driving a super tanker through FFP (and also has a stated aim of winning the CL within 3 years) is PSG. The blog just published by the excellent Swiss Ramble on their finances is well worth a read.

http://swissramble.blogspot.com/

Of course, they are a french club and Platini's son works for the club's owners, QSI, as their lawyer, so whether anything comes of it is debatable.

[LiamG]

What would our total wage bill be roughly now then?

[swordfishtrombone]

In and around £100m I suppose.

[LiamG]

More than that surely?

[rocco]

More than that surely?

£129m 70% ratio