Costs of a football club

It is often argued that the football players salaries are the highest cost that a club has to fece. Indeed it is a big amount, but there's many other factors to add up to that sum.

The costs of a football club can be divided in four different chapters:

1.- Materials
2.- Staff
3.- Asset Depreciation
4.- Other Costs

Materials is not a big deal: it is just basic expenses that the club needs to face in order to keep on going. It's main activity is not to produce goods, so we cannot really speak of raw materials in this field. Balls, T-Shirts, gym machines, office stationary, etc are included in this concept.

Staff is indeed a big contributor to the costs of the club. We are not speaking of the cost of hiring new players here, since this is a concept that is often described as "other income/loss". This is mainly their salaries and social charges. In many cases players agree to sign contracts where their income is to be calculated free of taxes (net), which means that the club needs to pay for the expenses derived from the IRS willingness to cash a big part of the wealth of this market. In most countries the tax charge ranges between 40%-55%, so that means that a player who makes i.e. 10 million per season costs his club about 25 million, when social security charges are added on top.

Asset depreciation has a lot to do with the money that clubs spend in order to buy the rights of a player to play for them. Those licences are to be considered assets which depreciate over time, in most of the occasions in about four or five years, since the working life of a star football player is definitely shirt and subject to multiple risks due the nature of its use. Take the case where a player like Ibrahimovic left Inter to play for FC Barcelona for 75 million Euro. That involved a year depreciation of ap. 15 Million per season, which pops up in the club accounts not only in the balance sheet but also in the P&L account. If that player is to be sold after one year, the book value of the asset would be around 60 million, but if you only cash 25 million for the operation, that means that you also lost 35 more millions: 15 million (depreciation) + 35 million (sale of asset) makes a total cost for the Ibrahimovic operation of 50 millions in one season only, plus his salary, IRS and social security charges. Since he scored 22 goals in the season, each goal had a cost to FC Barcelona of ca. 3 million €. You need to sell many tickets, T-shirts and TV rights in order to make up for that.

Other costs is a big box where all the remains reside: stadium management cots, travel, social involvement, football academies, foundations, other sports linked to the club.

Why do football players cost so much?

It is often claimed -moreover in times of crisis- that football players make way too much money; some even say that their salaries are immoral. The business-savvy replies that players are nothing but investments which generate more cash than what they cost, and therefore, their salaries are ruled by the invisible hand governing the laws of demand and supply.

Another point into the equation is the payment for transfer rights between clubs. Extraordinary players are scarce, and clubs' fighting takes place not just on the pitch but also in the backstage: it's a fight for resources which are vriso (Valuable, Rare, inImitable, hard to Substitute, easy to fit in the Organisation). In a fast growing industry (about 10% p.a. as an average in the UEFA space) it is somehow frequent to find brave club managers who do not hesitate to anticipate future growth and sign salaries which pay the money of today with the hopes of tomorrow. It is a risky practice which not always yields the expected results: i.e. Ibrahimovic was bougth by FC Barcelona just to be sold out again only one year later losing about 50 million Euros in just one season. Barça is still paying for this loss, which draggs their Profit and Losses accounts to red figures even in the most flourishing of the seasons. Indeed managers are brave, one cannot but wonder how easy it is to be brave with other people's money, mainly when clubs are not usually governed as listed companies and when lots of fan passion and political pressure are exercised to enjoy today what we may not be able to pay for tomorrow.

According to UEFA European Clubs spent about 20% of their budgets in buying new players in 2010. Not only that, another 15% was already standing as payables in their balance sheets derived from similar operations in the previous season. Furthermore, UEFA clubs reported a cummulate loss of ap. 1 Billion € in transfer operations: that is, money received for a transfer related to what they had paid for it before. Who thinks this is a good business? Indeed it is always reported as "income/loss derived from not usual activities" in the Profit and Loss account and little detail is often provided. As if "non-usual activities" had little impact on the bottom line!

It appears as well that players are not regular employees (no wonder at these costs): they cannot really choose the club they want to play for, since they do not normally own their own license, which is the asset which clubs deal with. It is often read about on newspapers that this or that player is not happy in their club, and that they would be happy about a change. The owner of their license may not however be equally happy, since releasing a player means destroying the future cash flows he would normally yield along the life of his contract. The selling club and the acquiring club need therefore to agree in a certain amount of money which bridges the gap between the dreams and the hopes of both parties, even further, their speculative approach to how much the market will grow in the seasons to come, and pray that the bubble does not finally burst.

As we mentioned in previous postings the strongest link in this negotiation is always the player. The acquiring club often appears to forget that they could buy that asset much cheaper, should the player agree that he would change his attitude towards his current employer: not scoring, not talking to the press, not smiling to sell T-shirts and merchandise: an underused asset with no value at all. Whether this is gentle or not is another subject, but if clubs were run under the predating principles of business and the invisible hand of economy, that would be the way to take. However players know that their careers are short and that any unpopular deed would be hard to repay for, so do clubs, and therefore they all prefer to feed the bubble, anticipate the future returns, and pay for the dreams of tomorrow with the debts of today.

What if players owned their licenses? The first conclusion is that they would be as free as any worker in Europe is to choose for which club to play and to negotiate a fair salary for their services to render. The second conclusion would be that there would be no three-side negotations. Trading of transfers would cease to exist, those assets would not be accounted for in the balance sheets and club value accounted for today would be destroyed. Thirdly. there would be constant changes in club membership, and a player scoring goals for Manchester United in the Champions League may play for Bayern München one month later, and end up playing the finals with Real Madrid.

My question is "why not?": is it players who take clubs to the final rounds of competitions or is it the club itself who makes it happen? There's some windows nowadays when players may be transfered, being the process banned thereafter. I do not know of many industries where such constraints exist. I think we should be posing ourselves the "What if" question more often, why not, when we think of football.