Thread by @SwissRamble

Earlier this year it was widely reported that Arsenal would only have a £45m transfer budget this summer, after failing to qualify for the Champions League, but the club has actually splashed out well over £100m. This thread explains how this was possible #AFC

In fairness to the club, they never agreed with the low budget figure. #AFC managing director Vinai Venkatesham explained, “The number never came from us. We never ever, ever talk about how much money we have to spend, because that’s the least helpful thing you can do.”

First, let’s take a look at #AFC player purchases of £143m (including £8m add-ons). This comprises club record acquisition Nicolas Pépé £72m plus William Saliba £27m, Kieran Tierney £25m, David Luiz £8m, Gabriel Martinelli £6m and Dani Ceballos (loan fee) £5m.

Similarly, #AFC had player sales of £64m (including £7m add-ons), mainly Alex Iwobi £34m, Krystian Bielik £10m, Laurent Koscielny £5m and David Ospina £3m. Also picked up useful money for selling some Academy products plus a £4m sell-on for Bennacer’s move from Empoli to Milan.

Note: the figures used should only be considered as indicative, because various different numbers have been reported in the press for transfer fees and wages (partly due to exchange rates used), but they should be sufficiently accurate to help illustrate the argument.

The question I am most often asked is how much a club can spend, but this is almost impossible to answer, given the numerous different definitions of a “transfer budget”. Here, we shall look at 10 (ten) possible definitions for #AFC to show that there is rarely a single figure.

The definition that most fans would intuitively use is the total transfer fee amount, regardless of when cash payments are made. Even here, there are actually two possibilities, i.e. excluding or including add-ons based on future achievements with #AFC spending £135m or £143m.

Then we have the infamous net spend, i.e. the cost of player purchases less proceeds from player sales. On this basis, #AFC spent £78-79m, depending on whether add-ons are included or excluded.

However, what has become increasingly familiar to supporters this summer is the use of stage payments instead of paying the whole transfer fee upfront. Based on media reports and a few assumptions, we can estimate that #AFC cash outlay this summer was only £46m.

On the other hand, #AFC would also not have received the entire £64m due from player sales this summer. Again, we can estimate the cash receipts at £23.5m.

So, from a cash payment perspective, #AFC have spent £46m gross and £22.5m net this summer. It will not have gone unnoticed that the gross cash outlay is very much in line with the alleged £45m budget. More importantly, spreading payments allowed the club to buy Pépé.

To be clear, paying transfers in instalments is nothing new at football clubs. Indeed, as at the end of the 2017/18 season, Premier League clubs had around £1.5 bln of transfer debt, including £100m at #AFC (though #MUFC led the way with £258m).

Often the selling club will still get (most of) its cash immediately, as they sell the debt to a third party financing company for an agreed fee. Obviously, this commission then leaves “the game”, but the arrangement still works well for all parties.

Clearly, a player’s cost is not limited to his transfer fee, but also includes his wages, so another way of looking at the budget is to combine these two factors. As Josh Kroenke said, “#AFC have a Champions League wage bill on a Europa League budget.”

My estimate is that #AFC’s player purchases this summer have added around £500k a week to the wage bill, which would work out to £26m a year. Based on reported contracts (all 5 years except 2 years for Luiz and 1 year for Ceballos), the total commitment would be £93m.

However, I reckon that around £700k has also been taken off the weekly wage bill, i.e. £38m a year. Even though no fees were received for Ramsey, Welbeck, Cech and Lichtsteiner, their departures cut wages by around £400k a week, i.e. £21m a year.

So combining transfer fees and wages, #AFC will spend £71.7m in the first year (transfers £46m + wages £25.7m) gross, but only £10.5m net of player sales (£22.5m transfers offset by £12m wage reduction).

If we look at transfer fees and wages in terms of total commitment (i.e. over the length of the players’ contracts), #AFC will pay a cool £236m (transfers £143m plus £93m wages), though this would be offset by player sales (including wages coming off the payroll).

Just to make things more complicated, the player trading accounting impact is again different. The key point here is that when a player is purchased costs are spread over a few years, but any profit made from selling players is immediately booked to the accounts.

Basically, football clubs consider players to be assets, so do not fully expense transfer fees in the year a player is purchased, but instead write-off the cost evenly over the length of the player’s contract via player amortisation (note: this is not the same as stage payments).

Pépé was purchased for £72m on a 5-year contract, so the annual amortisation in the accounts would be £14.4m, i.e. £72m divided by 5 years. This means that his book value reduces by £14.4m a year, so after three years his value in the accounts will be reduced by £43m to £29m.

If Pépé were to be sold at this point for £100m, the profit on player sales from an accounting perspective would be a hefty £71m (i.e. sales proceeds of £100m less remaining book value of £29m).

Another way of looking at this is that the cash profit is £28m (sales proceeds of £100m less £72m purchase price), but we then add back £43m of player amortisation already booked to the accounts to give the £71m accounting profit.

So the net result of #AFC transfer activity this summer in the accounts is a relatively small cost increase of £9m, with player purchases growing the cost base by £54m, largely offset by £45m reduction from sales. This will be more than offset by £57m profit on player sales.

That gives us our 10th definition of “transfer budget”, namely the impact on the club’s accounts. For #AFC player purchases this would be £54m (player amortisation £28m plus wages £26m).

So, there we have it, 10 possible definitions of a club’s transfer budget (and there are even more). The point here is that they are all valid and relevant in the appropriate circumstances, but this does underline that caution should be expressed whenever a figure is quoted.

Which one is the most meaningful? Well, the one that is closest to #AFC reported £45m transfer budget is the £46m cash payment, though that could be just a coincidence.

Josh Kroenke had suggested that fans “be excited” about this transfer window and the club has delivered with some astute signings, effectively making the funds available go a lot further than anticipated.

Part of the fancy financial footwork has simply been a willingness from the #AFC board to be bolder with its cash balances. In the past, it looked like the club wanted to hold enough cash to cover all future obligations, but that always looked to be overly prudent.

In any case, this has indeed been the most exciting transfer window at #AFC for many years, partly due to the vagaries of player trading accounting. As the late, great Sid Waddell once memorably said: “There’s only one word for that: magic darts!”