Different Kinds of Losses
With the hoo-ha at Aston Villa just now the words “losses” and “losing” are being bandied about willy-nilly by journalists and fans alike, with little understanding of what they mean.
Many people are confusing FFP losses with the losses being talked about at Aston Villa and others are still confused why FFP losses are different to losses published each year in the Club Accounts.
This tries to explain the difference.
Simple Club Accounts
Let me imagine a simple Club. It has the following incomes and expenditures per year:
(tickets, shirt sales etc) — £10
Running costs — £5
Academy Costs — £2
Bank Balance — £nil
Now buy a player
Lets now add a player to the Club. We agree a transfer fee of £20 and agree to pay half of the fee in Cash immediately. We give the player a 4 year contract.
We need to add the cost of the player to our Club Accounts. Since we have agreed fees of £20 that is a cost to be taken off income to find profit or loss.
However, this £20 buys us the player for 4 years and so the average cost per year is only £5.
This is called Amortisation cost and is added each year for the next 4 years.
Our Bank Balance started at Nil and then we had a Turnover Income of £10, which increased the balance, and also spent money on both running costs and Academy costs, which are taken out of the Bank Balance.
Also, in the first year we took £10 from the Bank Balance to pay the 1st instalment of the transfer fee.
This chart shows the three different losses.
The loss shown on the Club Accounts includes ALL costs and is a LOSS of £2.
For FFP the Football League want to encourage clubs to spend on youth and so the costs of running the Academy are NOT included.
Therefore, this example had a break-even FFP result.
Since the amortisation used for the player purchase is over 4 years BUT the actual payments of CASH were over just 2 years there is a different CASH Loss.
The CASH loss for this example is a much larger LOSS of £7.
Watch out for people just using the word “loss” and make sure you both understand which loss you are talking about.
Confusing, I know, but if people use the wrong type of loss then conversations are meaningless.
Remember clubs only go bust when they run out of CASH so these CASH Losses are what we should be using when talking about Aston Villa just now.
Mike Thornton 6th June 2018