Now that the managerial hiring process has, seemingly, come to a conclusion with the all-but-official David Ornstein-confirmed hire of Unai Emery, transfer silly season can well and truly take over the Arsenal twitter discourse.

Wait, who am I kidding? We just hired a guy that was not on anyone’s radar, other than Kike Marin’s, dammit, before yesterday. This one might take awhile to get past. That said, I’m no Emery Expert, so I’ll stick to discussing Arsenal’s financials, if for no other reason than for the sake of counterprogramming.

The reported £50m transfer budget for the Gunners this summer has been questioned since it first leaked a few weeks ago. The piece which prompted this post is the solid write-up over at She Wore by @KeenosAFC breaking down the £50m transfer budget story. It gets a lot of things right, and subsequent comments from the Ornacle appear to suggest he read it and/or that is a position the club are comfortable with being presented, but there are a few items I wanted to clarify.

Amortization is a bookkeeping fiction more than a financial reality. Yes, the club amortizes transfer fees over the life of the deal, but that does not equate to the club’s actual outlay on fees in any given year. Further, the bookkeeping practice does not determine actual business decisions for a club that is in no danger of violating UEFA Financial Fair Play rules. For an example of how Chelsea, a club that have had to consider such restrictions, have played this amortization game with buying and selling players, check out Swiss Ramble’s most recent blog post from when he had the time to actually maintain a blog. By spreading out the cost of the transfer fee of a player over the length of the initial contract then booking the profits from a sale all in the year of the sale, Chelsea can continually reinvest in fresh talent. Arsenal could certainly be better on the resale front but they have not had the imperative to operate in that manner.

An informative recent example for Arsenal would be the Santi Cazorla purchase. Arsenal, reportedly, got a great deal on the Spaniard because they paid cash-strapped Málaga most, if not all, of the fee up front. While the amortization was still done over the course of Cazorla’s contract, that did not equal the economic reality of the money being drawn out of Arsenal’s supple cash deposits. As the various leaks of football-related contracts have shown, Anthony Martial’s contract with Manchester United being a good example, transfer fees can be structured in a number of different ways. Arsenal will surely be looking to do some creative deals, but the actual payments will likely be driving the way, not an amortization schedule. Because Arsenal doesn’t have to play the complicated buy/sell amortization game to get under UEFA FFP rules, it does not drive the business deals of the club.

Wages definitely are a consideration, but likely aren’t included in the £50m figure being bandied about. The stories the club leaks to the press typically don’t factor into the complicated issues of agent fees, sign-on bonuses, and player contracts, most of which we never truly know until we get a general sense from the release of financial info. The “war chest” stories are also generally not in line with how our summers go, other than maybe the summer of 2016/17. Last summer was supposed to be the summer of the £100-200m transfer kitty, depending on what source you prefer, but for all our expensive bids on Monegasque youngsters, we ended up with a roughly £0 net spend (with minimal difference in the wage bill either, for that matter) when considering both the summer and winter transfer windows. As with the first distinction, the Premier League wage bill restrictions are another bookkeeping fiction which makes tying wages and transfer fees together rather complicated. Considering Stan Kroenke is not in it for yearly profits but asset appreciation, even if some might suggest otherwise, the yearly accounting doesn’t mean much to the owner.

It’s also important to consider that wages are continuing expenses for the club and thus more connected to the club’s yearly projected turnover. A transfer fee is a typically done in just a couple of installments and its easier to justify dipping into savings to pay those amounts. Linking transfer fees and yearly salaries as a total amount for a transfer budget is not the best way to gauge what the club can spend in any given summer.

A rough estimate of net transfer fees is in all likelihood what the club is trying to convey. The leak’s purpose is two-fold. First, the war chest stories are notorious for attempting to appease the Arsenal fan base after a disappointing conclusion to the season. Historically, this has seemingly been the primary goal of the leaks. This season, it may have been done to depress fan expectations after the jumbled mess of a transfer strategy in 2017/18.

Another potential purpose would be to lower expectations to come off less desperate to potential sellers. In this instance, it feels more like a negotiating ploy than anything else. Coming off a terrible season and operating in a market that hasn’t hit peak transfer fee inflation yet (as far as we know), it would behoove Arsenal to act like it has less money to spend than it actually does. Regardless of what the purpose is for the leaks in this instance, it does not make sense for there to be a a complex algebraic formula as the basis of a PR leak.

Instead of following the PR release to figure out what Arsenal might spend this summer, I think it’s useful to look at the actual financial figures, both in terms of available money to pay transfer fees and in terms of what Arsenal can pay players under Premier League wage bill restrictions, to see what might be in store for the Gunners.

Transfer Fees

Before I get into the figures, Swiss Ramble’s tweet threads (not blog posts because 2018 continues to be the worst) are indispensable to any analysis of Arsenal’s finances. Anyways writing in this area is overshadowed by and owes a debt of gratitude to Mr. Ramble for his work. His latest thread, which dealt with the half-year club financials, begins here. The previous full year financials, released this past October, are located here. Also, it’s always good to cite to the source material, which can be found here on Arsenal’s website.

Simply put, there’s no logical reason for Arsenal’s transfer budget to be limited to a £50m net spend figure. My best guess for the seemingly random figure? Arsenal had a pre-tax profit of roughly £25m in the first half of the season. Double that and you’ve got £50m!

In recent years, second half profits have outstripped first half profits, but this year might be anomalous due to the large amount of player sales. That said, we did make significant player sales in the second half of the season as well so it would not be surprising if Arsenal ended the year with a pre-tax profit in excess of £50m.

Certainly, in many cases, a club would be roughly limited to spending an amount equal to the amount of club profits or an amount that could be paid back quickly. Though, as mentioned in the next section, Arsenal are in for a massive cash infusion next season, this line of thinking should not apply to a club with over £160m in cash on hand. The whole Emirates project was done to provide a cash infusion when needed but we have by and large not made full use of the funds. As Swiss Ramble states, £23m of this is completely off limits to service the club’s debt. As he also mentions in the tweet, Arsenal probably have more than £160m in cash on hand right now, at season’s end. I’m not suggesting Arsenal dip into £100m or more of their cash reserves this summer, but they could. It is patently obvious, the club should not be allowed to just throw out a £50m figure willy nilly and be allowed to pass it out as fact. The primary restriction this summer on our transfer dealings is not transfer fees, but player wages.

Wages

Wages are notoriously hard to nail down, particularly for Arsenal players. However, we don’t have to do as much guesswork as in times past to determine what Arsenal might be able to spend in the summer in terms of additional wages. The transfer deals from January of this year, based on all the reported salary figures for all parties involved, had basically no effect on our wage bill. However, Mesut Özil did receive a hefty extension that reportedly increased his yearly wage by £11m a year. There’s no reason to believe that the extensions Mohamed Elneny and Rob Holding received included significant pay raises. If the club were operating shrewdly, as I have suggested in the past, they could have bumped up payments to those three this season to artificially inflate the salary Arsenal can pay next season. Considering the current regime tends to like positive publicity, the fact that such maneuvers have not been reported is strong circumstantial evidence that they did not occur. As the figures from the half-year financials state, our wage bill increased £13.2m from the half-year results in the fall of 2016. Assuming that increase ran roughly the same throughout the season plus the three extensions and signing on bonuses for Pierre-Emerick Aubameyang and Henrikh Mkhitaryan, it would appear Arsenal will end the full year with a wage bill of roughly £230m-240m.

As I laid out a couple of years ago, that £230m-240m figure is the starting point for next season. Next up in the calculation is the built-in £7m increase buffer. Then, you must look to the amount of salary freed up by players leaving the club. Coming off the books in the summer are Per Mertesacker (£70k/week/roughly £4m/year) and Santi Cazorla (£90k/£5m), minimally. It’s important to note that loanees which most assume will be sold this summer, such as Lucas Pérez or Joel Campbell, did not count towards the wage bill (assuming their wages were paid by the loanee club) and only impact the salary cap analysis to the extent they garner a transfer fee. Others who have been suggested as potential sale options, without any comment on the merit of potential sales, are Petr Čech (£100k/£5m), David Ospina (£40k/£2m), Shkodran Mustafi (£90k/£5m), Héctor Bellerín (£100k/£5m), Aaron Ramsey (£110k/£6m), Danny Welbeck (£70k/£4m), and Alexandre Lacazette (£120k/£6m [UPDATE: others have pointed out sites have claimed Lacazette makes anywhere from £180k-200k/week, which makes more sense to me than £120k/week.]). Feel free to build your own wage bill budget with these figures.

Finally, you must look to see whether Arsenal can improve upon its profits, sans Premier League payouts. One area of those profits are player sales. Due to the high profile sales of Alex Oxlade-Chamberlain, Theo Walcott, Olivier Giroud, and others this past year, and the hefty fees they garnered, it will be difficult for Arsenal to have any revenue uplift on the player sales front. Commercials would appear the one area for potential improvement but none of the big commercial deal increases will hit until the 2019/20 season. We will have a shirt sleeve sponsor next season, if reports are to be believed, but that increase is only £10m/year and not significant enough to recoup other revenue gains from this past season, such as the above-mentioned transfer fees and property development sales. Because the club are mired in the Europa League yet again, there is no hope that the Gunners can significantly increase their broadcast revenue or matchday receipts. Because of that, it seems unlikely that Arsenal will have much flexibility with their wage bill above and beyond the £7m increase afforded them.

While the £7m cushion plus the departures of two senior squad members opens up roughly £300k/week in wages. Leaving room for extensions, particularly to young players who will get a significant bump in their next deals, that’s probably only space for one top level signing or two smaller deals. After that point, it may be a one-in, one-out situation as was the case by the end of the summer last year.

Further buttressing the reality of our inflexibility is the fact that £240m-260m is quite a bit to spend on player wages! That is a significant increase from recent years and would put our wages to turnover ratio closer to overspenders Chelsea than other top 4 competitors like Manchester United, Manchester City, Liverpool, and Tottenham.

However, there is hope for the future. With significant increases in commercial revenue coming into play in 2019/20, Arsenal will have no excuses next summer. Reentry into the Champions League next season would further boost the club’s financial bona fides and make any wage bill increase a non-issue. That said, the 2018/19 season comes first. The first season in the post-Wenger era is a crucial one. It is certainly not the summer to sit on the sidelines of big transfer deals after finishing significantly off the pace in the Premier League this season. Arsenal have the money to be very active in the transfer market this summer. They should be.