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Interpreting Newcastle United Financial Report for 2012/2013

The club has made public selected numbers from the club's financial performance over the 2012/13 fiscal year. What does it all mean?

Do you see what I see?
Do you see what I see?
Stu Forster

The latest installment of the Newcastle United Club Fans' Forum has come and gone and the approved minutes are here for your consumption if you're into the controlled narrative kind of thing.  There were many things discussed but by far the big topic of the night was the annual report on the the club's finances.  The bottom line – that is to say the accountant's approved version of the bottom line after nifty accountancy tricks – is that the club are nearer to turning a net operating profit, which is good.  Number-wise, the club have gone from a £5.1 million operating loss in 11/12 to a loss of only £616,000 in the 12/13 season.  It's easy to dismiss this performance based on Europa League gate takes and media payments made in exchange for giving us #tiredbodies, but we also have to consider that poor league performance led to a dropping of £8.4 million... one step forward and a bigger step back.

We know that "The Plan" as Mike Ashley envisions it involves the club becoming self-sustaining, and as such the operating profit/loss is perhaps THE key figure.  Getting close to profit in that respect is big.  Improved league standing for the 13/14 season is set (at the time of writing or to use one of my most reviled turns-of-phrase in sports "if the season ended today") to bring £6 million back into the club.  Also, as this report deals only with the 2012/13 season, the "tremendously lucrative" Wonga sponsorship is not reflected either.  Even in this limited view, it seems an easy expectation to see the club turn an operating profit for the 13/14 season.  Whether this translates into any sort of tangible benefit on the field remains to be seen but seems unlikely given that the base number of p/l is likely to not be of an amount appreciable enough to set us on our way just yet.

Player Contract Amortization

There is still the little matter of player movement in and out and the fancy term "amortization" with which we all need to become fast friends.  Remember that we're talking specifically about the 12/13 season only (June to June), so fun things such as the sale of Yohan Cabaye will be set aside for now.  We'll get back to him later. The following table shows the players whose transfer into the club are reflected in the financial performance for season 2012/13 and reflects exactly how much of the transfer fees are actually reflected on the books for the same season.  Premier League clubs are allowed to split the transfer fee paid for a player over the life of the contract signed – a fancy accounting trick called amortizing – which changes the way the books end up looking for terms of financial reporting.  All told, the players brought in below cost a sum total of £27,000,000 (if the 1 million fee for Kevin Mbabu is accurate) while players departing the club (most notably Demba Ba) accounted for £12,500,000 coming back into the club.  On the surface that sets up a net loss of £14,500,000.  But wait!  It's fun to sail the Accountancy!  The table below shows each player purchased by the club in season 2012/13, the reported fee, the contract length and the "amortized value" that counts against the club's financials each year that the player remains with the team under their original contract:

Gael Bigirimana £1,000,000 5 years £200,000 /yr
Vurnon Anita £6,700,000 5 years £1,340,000 /yr
Curtis Good £400,000 6 years £66,667 /yr
Mathieu Debuchy £5,500,000 5.5 years £1,000,000 /yr
Mapou Yanga-Mbiwa £6,700,000 5.5. years £1,218,182 /yr
Massadio Haidara £2,000,000 5.5 years £363,636 /yr
Moussa Sissoko £2,500,000 6.5 years £384,615 /yr
Yoan Gouffran £1,200,000 4.5 years £266,667 /yr
Kevin Mbabu £1,000,000 (reported) 3.5 years £285,714 /yr

Using this amortization, the club goes from a net negative spend of £14,500,000 on players' rights (it's important to view it that way, apparently... players are not commodities to be bought and sold) to a net profit of roughly £7,375,000.  We are told that Newcastle pay cash only no installments for players, so even though this money has ostensibly been sent to other places, it isn't reflected that way under the way things are figured through Financial Fair Play.  In addition to the transfer fees, the club reported a net savings of £3,000,000 in players wages, largely through the purging of players on high wages (such as Alan Smith and Demba Ba) and replacing them with younger players on less money.  This number is also helped by the fact that the January signings only see 6 months of wages in season 2012/13.

The (Reportable) Bottom Line

At the end of it all, taking into account operating p/l, amortization, savings on wages and all the fun accounting practices that make up FFP, Newcastle United are allowed to publicize a net overall profit of £9.9 million.  A lot of that is through the amortization of transfer fees.  The real story of diving into this year's numbers is projecting the numbers for season 13/14.  With 0 players coming in permanently (as it stands at this point, at least), the £2,000,000 loan fee for Loic Remy and whatever loan fee was agreed with Borussia Monchengladbach for Luuk de Jong standing as our only transfer outlay. We will still have the same £5,125,481 to claim for the purchases of the players in season 12/13 (as well as amortized costs of players such as Davide Santon, Cheik Tiote and Papiss Cisse for example - though these costs are static and have already been reflected in season 12/13)... but we will have the reported £20,000,000 fee garnered for Yohan Cabaye which beyond being £15.7 of pure profit on the player, it also clears off his amortized £415,000 for season 13/14 and the £830,000 for duration of his 5-year contract signed when he joined the club in 2011.

If we assume that there will be a relative net wash between the paltry Europa League payouts and the added revenue for an improved league finish, add improved sponsorship revenue in the form of the Wonga deal and add in the transfer profit and dropping of Yohan Cabaye off of the amortization schedule... you can see where this is heading.  The financials for season 13/14 could be spectacular.

The Elephant In The Room (and/or The Fly In The Ointment)

Calling the £129 million in interest-free debt that Newcastle United still owe Mike Ashley an elephant in the room would be a little bit unfair as it was addressed more than once during the Fans Forum meeting.  Saying that it was addressed effectively is another matter.

The Club suggested that while it is always proactively looking to attract new commercial partners and to sell that advertising space, in the current climate it could not command a sum for that space anywhere close to the £129m invested into the club interest free by the owner.

When asked about the free advertising that Sports Direct are apparently receiving in and around St. James' Park, this is the way the club answer.  The difficulty with this answer is that, well... it doesn't answer the question.  While I can concede without doing any amount of research that there is not a single entity in existence that is willing to pay £129 million for advertising in and around St. James' Park, I also know that the "BUT LOOK AT THIS MONEY HE GAVE YOU" is a classic misdirection.  The club said that the debt owed to Mike Ashley is "static at £129 million" - yet Sports Direct have received free advertising for multiple years at this point.  It wouldn't make sense to expect the owner's company to pay the going rate for advertising in and around his own club, but if we're going to treat this entire process like a business as the Ashley regime has insisted on doing it would only be logical that money he would have paid (perhaps at, say, the 15% employee discount that he gives his Sports Direct employees) would be applied towards satisfying this £129 million weight hanging over our head.