Championship: Aston Villa’s big spending could lead to financial disaster

When Tony Xia purchased Aston Villa for £76 million in June he vowed to turn the club into one of the “top three in the world – even the best well known in the world – in less than ten years”.

This almost child-like optimism, reflected in his remarkably frank Twitter account, has reinvigorated some sections of the Villa faithful but caused anxiety in others. Having so recently seen an enthusiastic owner misdirect funds before losing interest in the project, Villa fans are understandably wary of a man displaying apparent naivety in his first few months in charge.

Alarm bells are already ringing. Xia has invested £51 million in new recruits over the summer, outspending Real Madrid and eleven Premier League clubs in a bid to bounce straight back up.

But what happens if Roberto di Matteo fails to win promotion this season? There is no doubt that any losses Villa make in 2016/17 will be immediately wiped out should they return to the Premier League – where a new £8 billion TV deal has catapulted all 20 of its members into the top 30 richest clubs in the world – but does Xia’s spending represent a reckless gamble?

In the short-term, Villa’s reduced wage bill means their summer spending was not as lavish as it seemed. But when calculating their finances on the assumption that Villa will spend two or more years outside the top flight, the picture becomes a lot more worrying.

Villa’s current financial situation

Estimating Aston Villa’s finances is extremely difficult for two reasons. Firstly, the most recent financial data available only covers the 2014/15 season (which means changes to transfers, wages, and commercial revenue for 2015/16 can only be very roughly estimated). And secondly, something called player amortisation affects the finances of a club in ways that are tricky to calculate.

Amortisation is a universal accountancy method used to spread the cost of a transfer fee over the length of a player’s contract. For example, if a player is signed for £15 million on a three year contract this is recorded in the books as a £5 million cost in each of the next three seasons. Crucially, any incoming transfer fees are recorded as single payments – meaning that, in theory, a team could spend three or four times the amount it recoups in a single summer and still balance the books. This process is extremely important when calculating Villa’s messy financial state.

Villa made a £28 million loss in 2014/15, largely thanks to their £84 million wage bill. A detailed account can be found here. Villa are believed to have cut as much as £5-10 million off their wage bill over the course of last season, and made a net profit of £28 million in transfers - having accrued £45 million in player sales (although they spent £52.5 million in the summer of 2015, divide this by three - remember amortisation – and this figure comes down to £17.5 million per year). In both 2014/15 and 2015/16 around £20 million would have been spent on player fees from previous years, meaning that we can exclude these figures from our estimation of the 2015/16 accounts.

Assuming Villa’s incomings and outgoings in all other departments remained relatively consistent between 2014/15 and 2015/16 it is likely that Aston Villa broke even last season (the £28 million loss being reduced to roughly zero thanks to the £28 million profit in player sales).

Villa’s estimated finances by the end of 2016/17

Assuming Villa broke even in 15/16 (and thus would break even again in 16/17 if no transfers were made and the club had not been relegated), we can use this as a good starting point to guess what their status will be one year from now.

Tony Xia has made sweeping personnel changes over the summer, coming good on his promise to clear out the over-paid dead wood. This, coupled with our amortisation figure tweaking, means that Villa’s £51 million summer spending spree is not as damaging as one might expect – in the short-term at least.

The 14 players that have left the club this summer were earning an estimated £450,000 per week between them. When the estimated weekly wage of the eight new recruits is subtracted from this figure, it equals a £16 million per season saving.

Now for the complicated bit. The £51 million spent this summer will be split over the length of the new players’ respective contracts; leaving £14 million recorded transfer expenditure for 2016/17, all of which has been immediately recouped by £15 million of player sales. However, a further £26 million comes out of this year’s accounts due to amortisation estimates (based on a quarter of the total transfer expenditure for each of the last four years), leaving a £25 million transfer loss for the season. Subtract the £16 million wage savings from this number and Villa’s total expected losses for 2016/17 only amount to £9 million (assuming we came from a starting point of breaking even in 2015/16, as noted above).

But the loss of TV money is where Villa are really hit hard. The club will receive a parachute payment of £40 million from the Premier League this season and around £3 million from the Football League – some £28 million less than the £71 million received in 2015/16.

£28 million plus £8 million equals a £36 million deficit – not bad for the first year of a project that aims to dramatically improve the club’s commercial revenue and bring Premier League football back next season. The £8 billion TV deal means that promotion would instantly relieve this debt, making Villa fall well within FFP guidelines for the three year timeframe.

What happens if Villa don’t go up?

However, this all changes should Villa fail to win promotion. The 2017/18 season will see Villa spend £33 million on amortisation fees for the past four years of spending, and the club will lose another £7 million in TV revenue should they remain a Championship club (second year parachute payments are reduced from £40 million to £33 million).

So, Villa would be £37 million worse off than in 2014/15 (in terms of TV revenue) and would be recording a net loss of £33 million on transfers before the summer’s activity has even begun. If Villa fail to win promotion in 2016/17, they could be staring at a £70 million black hole before they can even think about player recruitment. If you take this into a third year in the Championship – when parachute payments fall dramatically to £14 million and the first three year cycle of the new Football League FFP rules ends – Villa would be facing extraordinary debts and a transfer embargo (clubs are only allowed to lose £39 million over a rolling three year timeframe).

A reckless gamble?

It must be stressed that these figures are speculative - based on amortisation figures that have been estimated and the assumption that Villa’s overall financial activity in 2014/15 is largely repeated across the next three years (with the exception of transfer, wages, and TV money). How the club’s accountants cleverly counter-balance their outgoings could alleviate some of these issues. Furthermore, large scale redundancies will have cut operating costs, whilst relegation pay drop clauses may have cut millions from their annual expenditure.

However, even an extremely conservative estimation suggests that Villa would be in a very difficult situation should they fail to immediately bounce back to the Premier League. Only 35% of teams relegated after finishing bottom of the Premier League bounce back the following season; by spending £51 million this season after the club spent £52 million the summer before, Tony Xia has certainly taken a big risk.