Mike, where’s the Money?

With less than 4 weeks left until the Transfer window closes, the question on every member of the Toon Army’s mind is “Where’s the money Mike?”

West Ham, a club who tried to convince Rafa Benitez to leave Newcastle for London, have just spent nearly £40m on a player. Cardiff, who just were recently promoted have spent almost £28m on transfers. Fulham, another promoted side, have spent £30m on transfers with Nice alone. Meanwhile, Newcastle have sold merino for £10m and bought Dubravka for £4m and signed Ki on a free. The question of where the money has gone is a fair one, especially considering so many “smaller clubs” are outspending us by so much.

The answer to that question is complicated to say the least, and to help answer this I relied heavily on the financial analysis provided by Financial Football News. As the name suggests, the site focuses heavily on the financial side of Football, and is probably the best for financial analysis on any Premier League team.

I am not a financial expert by any means, but as someone who wanted answers I took a deep dive into the report they have on Newcastle in order to try to piece together how a club in the Premier League could not have any money to spend on transfers. I also reached out to them on Twitter with some additional questions relating to Newcastle’s finances. The important takeaway here, is that I am NOT a financial expert, nor do I completely understand how finance works in the UK, as I am an American. I have never owned a business (not even a lemonade stand), never applied for a loan, and I just got my first credit card last year ( I’m only 21, give me a break). I basically am not at all qualified to write this article, so I apologize in advance for any mistakes in calculations, any wild conclusions, or flat out wrong analysis that may appear in this piece.

Now that I have saved myself from anyone seriously criticizing this article, we should probably begin answering this question by looking at the facts on Newcastle’s financials going into the 2018/19 Premier League season. This article is going to rely heavily on assumptions based on the previous financial record of the club, but in order for us to even get to the fun bit of figuring out where the money has gone, we have to start by looking at what we actually know.

The first thing that we do know, via a conversation with the folks at Financial Football News, is that Newcastle are slated to receive roughly £123m in TV/commercial money that should have arrived already or will be arriving within the next month or so. This sounds like a lot of money, but it is important to note that a lot of this money is going to go to expenses such as loans, or the current wage bill. That being said, in theory Rafa should still have a decent sized transfer kitty considering that this is only one of many revenue streams for the club.

The second, thing we know is that the club receives loans from Mike Ashley. This is not new information for most fans, as we have heard Mike brag about this before. What is important to note is that some clubs take out loans that are paid off with the next year’s TV money. This is something that allows clubs like West Ham, Southampton, Fulham, and Cardiff City to have large transfer kitties. Newcastle should be doing this, and for some reason, are not. Essentially a lot of clubs start the year off in debt, with the guarantee that it will get paid off before the next season with the TV money earned by being in the premier league. The exceptions to this are clubs with incredibly valuable owners such as Manchester United , or clubs literally owned by a country such as Manchester City. Other top 6 clubs, such as Chelsea, Liverpool and Tottenham not only generate more revenue because they play more TV, games finish higher and have a valuable brand, but are also run relatively well on the business side. Chelsea for example are a club that actually rarely finishes the season in debt despite having relatively busy transfer windows, and one of the larger wage bills in the Premier League.

Newcastle are in a tricky situation because they are not spending the money of a bank, but instead spending money from their owner. This means that Mike is eating the up-front cost of all the transfer moves, wage bill, etc. and not a bank. Effectively, spending Mike Ashley’s money means , right off the bat, we are already going to have a smaller transfer budget than the rest of the league for a couple of reasons. First, Newcastle are his secondary business, so he has no reason to spend a lot of money on the club. Secondly, Mike Ashley is not a part of any ownership group and is not valuable enough to financially back the club by himself in the modern football era, so the amount of funds towards things such as transfers and the wage budget was not ever going to be a lot of money.

The final thing we do know is that the club have profited £6m off of transfers so far this summer. This comes from the sale of Mikel Merino for £10m and the purchase of Martin Dubraka for £4m. Due to the fact that the only signing we have made this summer has been a free transfer for Ki, a lot of fans believe that we are on a sell to buy transfer policy. While, this is not confirmed officially, we do know that Rafa has always been very open about the fact that in order to make the moves he wants the club must sell players.

Photo by Nathan Stirk/Getty Images

So, what we do know about the financial state of the club for a fact is that we are slated to receive £123m and are likely still in some sort of debt to Mike Ashley. The money generated from slated outgoing transfers is supposedly going into the transfer budget, but with there being no new news on the sales of Mitrovic, Mbemba and Colback we likely are not going to be able to make any significant purchases any time soon.

Still, the question remains how do we still not have enough funds to make purchases, and other Premier League clubs are spending more than they ever have been before on players? To help piece this together I used the 2018 Financial Report for Newcastle that was done by Financial Football News.

The report tracks the finances of the club for the 2016/2017 Championship season, as that is the data that Newcastle have recently made public. Off the bat, it is easy to see why the PCP group was so hesitant to up their bid for the club. The club entered last season £144m in debt to Mike Ashley. In addition to that the club generated less than £100m in revenue for the first time in a long time, while the wage bill went up from the previous season despite selling some of the highest earners in the club.

Photo by Shaun Botterill/Getty Images

The total revenue drop off was expected, as it is common knowledge that not many leagues generate as much money as the Premier League, especially the Championship. Breaking that down further you can see that all categories of revenue were affected differently with game day revenue falling the least, going from £24.7m to £23.4m. Broadcasting revenue fell a little bit more falling from 72.7m to £47.4m. Finally, commercial revenue fell by over 50% going from £25.1m to £12.1m. This steep drop off on the commercial side was due to a number of activated break clauses in their sponsorship deals as well as the club also missing out on revenue from Premier League central sponsors such as Tag Heuer, EA Sports, and Barclays.

A deeper dive into the report shows some of the issues with how the club operates. One such example is the wage bill conundrum. The Newcastle wage bill was significantly higher despite being relegated, which is something that is pretty rare among relegated teams. The wage bill went from £74.7m to £112.2m. FFN thinks that this could be because Newcastle failed to prepare for the Championship with players not having relegation wage drop clauses. This is a huge failure on Lee Charnely’s part as he has already seen a relegation at Newcastle and should have negotiated wage drops, or should have sold players without wage drops before the season started. In addition to that it is believed that the 10 players brought in to bolster the squad all likely negotiated large salaries. Again, Charnley is at fault for poor negotiating. He could have gone a number of routes in preventing this from happening such as negotiating wage increases if the team makes it back to the Premier League.

A positive that comes from this report is that we can use this to piece together how much revenue the club generated this past season. This of course is a prediction, and it is important to note that these numbers are made up based on previous financial numbers. Don’t get mad if these numbers turn out to be completely different than the actual financial numbers that Newcastle will make public next year.

The first thing we do know is how much money the club made from the Premier League TV deal, £123m. We also can assume that Newcastle’s commercial revenue would have jumped back to what it was before. The club would be getting the Premier League sponsorship money back as well as some of the sponsors they lost due to relegation back. That number was £25.1m, and for the sake of math lets round that down to £25m. On commercial/TV revenue alone, I project Newcastle to have generated £148m, which is already more money than they have generated any year in the past 5 years. I expect game day revenue to have climbed back up to that £25m mark, which brings the club revenue up to £173m. The category of “other” is likely going to be around the £3m mark again bringing our total expected revenue entering this season to £176m dollars. Chris Waugh of The Chronicle also said Newcastle are due to receive £21.2m dollars for finishing 10th, but I honestly am not sure whether or not that figure is included in the TV money numbers that we already have. If not that pushes our total expected revenue entering this season to £197.2m dollars.

This amount sounds like a lot of money, until you realize the club still have a ton of expenses that likely have not changed including the large wage bill of £112m, and entered the season £144m pounds in debt. While every Premier League Club except Chelsea is actively carrying debt, Newcastle are the only club who went into last season with no cash whatsoever.

Waugh, in his article, states that Ashley loaned the club £15m to help cover the wage bill, and that the club likely would have not been able to pay the wage bill without that loan. Furthermore, Waugh talks about how much risk the club took spending all of that money in the Championship. We would have had the 8th highest wage bill in the PL if we were in the PL during the 16/17 campaign and as you know we did spend the most out of any Championship team that season. At the end of the day, Newcastle gambled a lot of money that they may not have had in order to secure promotion. The hope was that the increased TV revenue would get the club afloat and financially competitive again. As fans, we must recognize that the club was essentially trying to live a rich man’s lifestyle on a poor man’s budget. The spending was out of desperation, but there are repercussions to spending cash that you don’t have, especially when Mike Ashley has his own plans for the team

FFN provides a telling revelation that repeatedly gets swept under the rug, and that is that Mike Ashley claims he wants the club to be self sufficient. This means that the fact that the club entered last season with literally no cash and in debt, is going to make the owner hesitant to spend money. Looking at that Championship season, the club had to employ a £8.3m overdraft facility to meet short term cash needs, and it was the first time Mike Ashley had to give a loan to the club in 3 years.

This also puts a new spend on Ashley telling rafa “he can have every penny the club makes”, as the club effectively is not making money. Going into this season you can expect the club to have more cash, but it is very likely that the club will still be in some sort of debt. Based on the fact that the club entered last season £144m in debt, and the fact that the wage bill is likely the same, that number could climb up another £20-£30m.

Although the mantra in the Premier League now is to take on debt to fund transfers, I personally would not expect Ashley to follow this route give that there are a few teams who have been successful without taking on a large amount of debt. Chelsea is one example of this, but a more realistic example of this was Burnley, who finished 16/17 season £0.2m in debt, but had £20.1m in cash.

Another example would be Leicester who are the prime example of a self sustaining football club. They finished that 16/17 campaign only £0.2m in debt having generated £52m. FFN calls them the model club for mid table teams.

The club also has minimal debt of £0.2m and are an example to many mid table Premier League clubs on the sustainable running of a football club, with relegation less of a worry financially than their rivals.

If Mike Ashley wants the club to be self sustaining it makes sense as to why the club has been trying to generate player sales, and has employed this “sell to buy” transfer policy. It does make sense to not want to put the club further in debt by spending money on transfers that you don’t have. It seems as if Ashley is completely content with finishing mid table until the club begins to actually make money on its own. Being a mid table side means that the club can employ this sell to buy policy and not be worried about possible relegation again. You aren’t trying to improve your squad drastically with £30-40m moves when you are mid table so in the eye of Ashley, you can settle for the occasional £9-10m purchases that are funded by the sales of your players. This only works, when you have a skilled manager like Rafa. When you have anyone else, you end up relegated. Ashley realized this after 3 years of trying to force the club to be self sustaining, but doing so with McClaren and Pardew. It additionally only works when teams that are on equal footing with you, like West Ham, don’t spend almost £84m on transfers with still a month left in the window.

The other thing of note when looking at clubs like Burnley and Leicester, is that they have been able to buy foreign players for cheap and flip them for a large amount of profit. The most recent example of this is Leicester’s sale of Mahrez, who they got for free and just sold for £60m. This policy is something that Mike Ashley has been employing for years, but is seemingly not panning out for him as of recent. The only signing in which he is going to receive a large profit for is likely Mitrovic, who could get sold for upwards of £20m. Other signings such as Merino, Hayden and Mbemba are only going to net the club a few million each. Some players such as Mbemba just did not impress, some players haven’t developed yet to the point in which they could be sold for a large sum like Hayden, and some were just screw ups on behalf of Lee Charnley who put a small release clause on a potential future Spain International.

Photo by Ian MacNicol/Getty Images

In addition to that, the club brokered disappointing deals for Sissoko and Wijnaldum that called for the money to paid in installments of over 2 years instead of up front. While this has resulted in Newcastle not really making as much money each year, it does beg the question “Why don’t Newcastle do this?”

Newcastle should be trying to negotiate similar deals for players such as Kenedy or Plea who were both rumored to cost around £25-30m, like Sissoko and Wijnaldum, that way you spread the cost of these large deals over 2 or 3 years. This means that you are getting the high quality players that Rafa needs, but at the same price as your transfer bargains you force Rafa to search for.

Even though that idea sounds great, the club repeatedly make it clear that they are searching for bargains turning into future stars. The logic makes sense in their eyes as a player that you buy for £10m and sell for £60m nets you more profit than a player bought for 25m pounds and is sold for £60m. The club have revamped the youth academy in hopes of producing decent talent, and as The Chronicle have just reported, invested in more scouts. The model here is maximizing profit through transfers, and honestly banking on Rafa being a great manager.

If the goal is to make the club self sufficient, Mike Ashley has to look in the mirror and realize that he is part of the problem. The club are missing out on valuable inventory to sell to corporations by having so much Sports Direct signage up that is effectively serving as free advertising. The club are missing out on the opportunity to make more money in the Premier League by not being ambitious enough to finish in the top 8, or make a cup run. Ashley is a businessman at heart and has been pretty successful, but sometimes it feels like he is a novice when it comes to generating revenue due to his own greed. His greed has allowed him to miss out revenue streams because he wants free Premier League advertising. It is incredibly toxic, but it has worked out well for him so far, so it is hard to see him change his ways.

Stubbornness has caused the club to be in a not so ideal business situation. The club are in a situation in which they must cut back on spending to be competitive again. Mike Ashley wants the club to be another business entity for him; one that does not lose him money. As long as he is in charge, fans should not expect any investment because in the eyes of Mike Ashley that is a bad business decision.