Over the years I have tried to project what the club’s spending might be over the summer considering Profitability & Sustainability rules plus the cash that is available to Everton (generated by the business as against funding from Farhad Moshiri).
It’s an imprecise exercise given the last published accounts are effectively already 11 months out of date. Covid has complicated matters obviously and Farhad Moshiri’s willingness to provide funds goes beyond what any normal projections might usually consider.
Throw in what have been called “uncrystalised losses” based on a calculation or prediction of the difference between where we are financially and where we would have been had the pandemic never occured and the potential for any forecaster to have egg on his or her face grows exponentially.
However, there is enough data and a degree of certainty over income flow and cost projections to give an indication of where the club stands.
It’s worth remembering the last six years under Moshiri.
What is clear is that Farhad Moshiri’s financial commitment initially was based on the belief that a “Hollywood” manager and the recruitment of numerous players would generate rewards in terms of a higher position in the League, thereby generating higher merit payments and the cash cow that is now European football, particularly the Champion’s League.
The growth in direct costs relating to player acquisitions and player wages can be seen in these two lines from the accounts:
*projected figures for 2021/22
From these figures you will note the huge increase in the earlier years, a flattening off before Covid and the start of a reduction projected for this current financial year as the early purchases fall of the books with contracts expiring and not renewed. Additionally the amortisation figure reduces sharply partially as a result of the aggressive writing down the value of some players in the last two years.
Everton’s major problem of course, is that poor purchasing decisions have had several major impacts (i) a lack of performance on the pitch reducing merit payments (ii) the repeated failure to qualify for Europe (Koeman’s second season aside) (iii) the inability to sell players through the generous nature of contracts offered resulting in a bloated, unproductive squad carrying huge legacy costs and (iv) in the last few seasons a much diminished player trading account generating profits.
The next table shows how personnel costs have enormously outstripped increase in revenues
|% of turnover||87.5||82.9||112.3||135.9||142.0||136.6||129.3|
*projected figures for 2021/22
Add in operating costs, exceptional costs (including managerial compensation) depreciation, and interest costs on external debt then it is obvious why the club has recorded such huge losses in the profit and loss account.
It is fair to say that Covid has obviously contributed to Everton’s losses with crystalised losses relating to Covid standing at £82.1 million for the two years to 30 June 2021.
Equally it should be recognised that up to the year ending June 2021, the costs incurred with Bramley-Moore were expensed to the Profit & Loss account.
Regardless, the figures do not make good reading.
*projected figures for 2021/22
In an unregulated business these losses would not present any major problems as long as the losses were funded by the shareholder(s). This was precisely the model used by Manchester City and Chelsea before financial regulations introduced by UEFA and the Premier League put a limit on what was an acceptable loss over a rolling period of three years.
However given great regulation in football, and the scrutiny attached following both Leeds and Burnley’s letters, this is not the case for Everton or indeed the Premier League.
UEFA’s financial fair play regulations were more stringent than those of the Premier League, but given our failure to qualify have never been an issue for Everton.
Adjusted due to Covid essentially the Premier League permits clubs to lose £105 million over a rolling three year period (currently using 4 years of data by averaging the 2019/20 and 2020/21 financial years due to the impact of Covid). Certain conditions are attached to clubs making significant losses including having to prove that the shareholders can cover losses with permanent capital.
Furthermore, the figures are adjusted to reflect expenditure on women’s football, youth football and community expenditure.
Exceptionally for Covid the rules permit the deduction of crystalised losses – ie costs incurred or revenue lost as a direct result of Covid restrictions. For Everton, as published in the audited accounts, this resulted in Covid related losses of £82.1m for the two year period.
So are Everton compliant?
The club robustly defend their P&S compliance. It is well documented (and actually is part of the standard process for loss making clubs) that Everton have been in dialogue with Premier League particularly relating to the period post March 2020. All clubs must provide projected accounts in the March of each financial year. Loss making clubs also have to project forwards into at least the next year (sometimes two) plus giving the necessary proof and assurances that the funding to cover losses is “secure”.
Included in Everton’s submissions will be previous year’s accounts, details of the costs relating to youth, womens and community expenditure, details of crystalised Covid losses and as has been apparent since the publication of the accounts at the end of March a submission detailing “uncrystalised losses relating to Covid”
What are they?
They are projections of the difference between where the club is as shown in the accounts and where the club believe they would be had it not been for Covid. These projections although not part of the formal accounts have been overseen by auditors. They will include for example, the cost of player transfers not completed due to Covid related market conditions. This will include any assumed lost player trading profits, and the additional wages and continued amortisation costs incurred as a result of the failure to transfer the player.
They will also include provisions for player write downs and any onerous contracts (although these appear in Everton’s accounts). Onerous contracts are when the cost of the contract exceeds any potential economic benefit in continuing the contract. There are some very obvious candidates amongst the playing squad for this category!
So, as a result of these recalculations, some cystalised others not, Everton claim and have the acceptance of the Premier League for some £170 million (potentially as high as £250 million) of costs to be set aside from the statutory profit and loss figures. It is this setting aside that makes Everton compliant with profitability and sustainability rules.
Where does that leave us this summer?
You can see that the projected losses for this current year (2021/22) show losses falling from £121 million the previous year to £78 million. This reflects reduced income (as a result of finishing 16th), reduced wage and amortisation costs, and player trading profits including the sale of Digne and Rodriguez.
However as this loss is greater than the loss that drops out of the rolling cycle (assuming we keep the system of using the average for the 2 Covid years) our profit and sustainability position worsens. We will be reliant on using the crystalised and uncrystalised Covid related costs to maintain compliance.
An additional solution is to sell a player with a significant player trafing profit before the end June 2022. Of the current squad, Calvert-Lewin offers the greatest potential for profit with a negligible book value. Richarlison similarly with an estimated book value of around £14 million offers (however undesirable it may be), the potential for profit.
Additionally, Mina, Allen, Doucoure, Davies and Rondon, all with only 12 months left on their contracts, might offer useful trading opportunities, reducing wage costs and having low book values. However given the lack of strength of our squad any of these players leaving would need an immediate like for like positionally, replacement .
Not just compliance but affordability?
Of course, not only is compliance an issue but we have to consider affordability. Whilst Everton had a relatively healthy £66 million in the bank in June 2021, continued negative cash flow and the huge capital expenditure on Bramley-Moore, despite Moshiri’s commitment of a further £242 million this year, when considered against up to £130 million of external debt, there will not be huge sums available for player acquisitions. Especially when the lenders have restrictive covenants requiring Everton to keep a minimum bank balance at all times. Moshiri’s funds once used lavishly on player acquisitions now pay for the stadium and fund continued losses,
Whichever way you look at it, either from a compliance perspective or from an affordability point of view, the constraints of Covid but more importantly so many poor recruitment decisions in the past mean that for this summer, despite the obvious requirement to recruit new players, in practice it is going to be a difficult summer. A summer where just like in January incomings will have to be carefully balanced against outgoings.
The narrative that costs are falling, that next year players like Tosun and Sigurdsson are no longer on the books give us space to operate doesn’t carry much weight by my assessment. We will contine to carry the costs of our errors into the next financial year, both from a compliance and an affordability perspective, in my opinion.
The “collegiate” approach to recruitment suggested by Moshiri will require far more from Thelwell and Lampard than Moshiri himself.
Categories: Everton finances