The following has been submitted by Southern Villa, cheers;
There is a lot of attention on the finances of Villa at the moment, driven by the story of the £90m share capital injection.
Rather than add directly to that debate I thought I would share some thoughts on the state of the club’s income statement. Because I think, ultimately, Villa are in a pretty poor situation in terms of expenses versus revenues. It will take quite a few years for this to stabilize into a sustainable level of costs for the revenue we can attract.
My sense is the ‘project’ might be getting a bit too much for the current owner to stick out, but of course we only get a little information from which to draw conclusions.
I have a background in accountancy, but of course this does not mean I can draw all the right conclusions from a look through the accounts from 2011/12. However, it does help navigate some of the more confusing terminology in the club’s accounts. In particular, I have sought to take out the short-term ‘noise’ you sometimes get in one year’s accounts, to focus on the income and expense that we can expect to crop up each year at Villa.
Apologies to those who have done this exercise before and who I simply end up repeating (or falling short of the quality of their analysis) – I have not researched similar work in detail as I wanted to prevent my views from being influenced by others. I am pretty new to following the news and debate on the various forums, and hope my contribution here is of some interest.
So here are two main conclusions from the income statement part of the 2011 to 2012 accounts (which cover the 12 months to 31 May 2012, and hence broadly cover the 2011/12 season). These accounts were filed in February 2013. We can therefore expect the 2012/13 accounts in a couple of months.
1. Villa are paying 90% of revenue back out in wages
In 2011/12 Villa took in £80m of revenue. £20m from match days, £47m from media (including TV), and £14m from commercial items (for example sponsorship). As an aside, this was down £12m from the previous season, mainly due to lower TV revenue and a worse Premier League placing (16th vs 9th the previous season). £80m is therefore a better view of revenue to use for the medium term as it reflects a more likely medium term league placing (not wishing to jinx anything!) and our reduced popularity with TV companies.
Of the £80m we got in revenue, we spent £70m upon wages (including pensions and national insurance etc.). This wage spend was down from £83m in 2010/11. Regardless, the harsh reality is that Villa pay out 90% of their revenue in wages to players. For what it’s worth, West Brom – generally considered a reasonably well-managed club – paid 74% in 2011/12, according to The Guardian.
The players are the key driver of Villa’s revenue, as they allow the club to stay in the Premier League. So it makes sense that they attract most of that revenue and therefore need to be paid well – this is business after all. But 90% is too high. Even in another industry where the staff drive almost all revenue such as banking, the big payers are not as generous as football clubs. For what it’s worth, Goldman Sachs paid out just 66% of its revenue in wages in 2012.
Overall then, in 2011/12, after paying £70m of its £80m of revenue out in wages, Villa had just £10m to cover the rest of the costs the club incurred in 2011/12.
Conclusion: The wage bill has to drop by at least another £10m per year to get down to 75% of revenue, freeing up more revenue to meet the club’s other costs. Some progress will have been made for 2012/13, and the recent permanent transfer of Stephen Ireland will also help. But there are large other costs to try to reduce too, so arguably the wage bill could do with dropping even further, see below…
2. In 2011/12 Villa had £10m left after paying wages, but incurred another £76m of costs – and a lot of this cost is probably here to stay
What is this £76m of other costs after wages? Going through each of these in turn:
– £26m for the 2011/12 season’s share of transfer fees paid (which will include big chunks for fees paid in the past). This should reduce, as our new transfer spend has been reducing in latter years. I am fairly sure this cost works as follows : Take the £7m spent on Benteke. He now has a 4 year deal until 2017. That £7m cost is therefore spread over the 5 years since we signed him, i.e. at £1.4m per year. So that, in 2017 when he can walk away for free, Villa will have expensed the cost of buying him, but this expense has been incurred in line with the revenue he has brought in by playing for Villa.
– £6m of depreciation: This will likely stay around for a while
– £7m in interest costs payable to Randy Lerner for the £137m of loans the club owes him (marked as ‘owed to parent’ in the balance sheet notes)
– £37m of other operating costs: We don’t get any detailed information on the £37m of other operating costs but can probably assume these include administrative, marketing, maintenance, electricity costs etc. Without visibility it’s hard to argue that these will reduce, but assuming wages can only fall another £10m or so, these other operating costs will have to reduce as well for long-term sustainability
Conclusion: Even taking a relatively positive view, if we assume that Villa can get ‘other operating costs’ down to £30m per year, and share of transfer spend to date down to £10m per year, there is still a total of £53m of costs likely to arise each year, in addition to wages. Even if wages come down, that’s a lot of owner’s capital going out of the door, as revenue is likely to just be around £80m.
Note that I have excluded profit on sale of players excluded from this view of recurring items as we cannot be sure this will continue. In 2012 we made £27m from sale of players (£19m profit the previous year).
Also, in 2011/12 Randy Lerner wrote off £20m of interest that the club owed to him for previous years. I have assumed that the club will continue to expense £6m of interest owed to him each year in the future.
Hope this is of some interest. In my opinion, getting the wage bill down is the right thing to do, even if right-sizing expenditure will take a long time. But the overall state of the income statement is going to make it hard for Villa to invest in new players in the next few years, unless serious capital is injected into the club.
Perhaps the £90m injection is the start of the story…
