Forest are still riding a wave of elation as two parts of the three-part plan are complete:
1) get promoted
2) stay up
3) consolidate
This off-season Forest do not need to sign another nearly 30 players as they have the core of their Premiership side. It is now about stability and improving what they have. But the activity last summer and in January did hit the bank account hard. But how hard?
With the lack of frenetic transfer activity, many Forest fans on social media have been focussing on the vultures circling around Brennan Johnson. FFP compliance has been touted as the primary reason why Forest might sell him.
At the end of this article, I will explain why that is not a good idea right now, FFP danger or not. But for now, the aim is to understand the financial position Forest are in, as this will help inform what business they can do in this window and in January 2024.
FFP is based on being permitted a maximum level of cumulative losses over a rolling 3-year assessment period. Forest's accounting period is 12 months to 30th June each year. As we are in July, the die is cast for FFP calculations in the 3 years ending 30th June 2023, we need to trust in top management they have steered the financial ship without penalty thus far. If there was an issue, I think we would have seen player sales (like at Chelsea) being pushed hard in May and June 2023. We did not.
Forest have filed their publically available accounts for the period ending 30th June 2022 (the 'get promoted' year). The accounts for the period ending 30th June 2023 (the 'stay up' just finished year) will likely be filed on public record around 31st March 2024. So we will need to try and guess what is in those 'stay up' accounts roughly to pair with what we know for sure from the promotion year. That will allow us to estimate how much Forest have to play with in this 'consolidate' financial year.
What are the FFP rules:
There are a number of rules under FFP under UEFA, but for English clubs there are these rules on how much loss a club can incur year-on-year. It allows (increased due to the COVID impact on ticket sales) a loss of £105m cumulatively over 3 years from Premiership clubs (£35m per year). The issue Forest have is that by June 2024, they will have had 2 years, not 3, in the Premiership. So year 1 in the allowable loss calculation is what is allowed for Championship clubs, which is only £13m per year.
So Forest will be allowed £13 + £35m + £35m = £83m loss over 3 years.
What is very key for Forest is that bonuses relating to being promoted are excluded, as are costs associated with Forest's youth Academy.
Summary of the article below (in case you just want the answer and not how I got there):
With a LOT of assumptions about revenue and expenses last year and coming this year, this is my estimation of the financial position:
Year 2021/22 - relevant loss of £18.7m (£20.9m of promotion bonuses and estimated £6m of Academy costs are allowably excluded)
Year 2022/23 - estimated relevant loss of £30m* (estimated £6m of Academy costs are allowably excluded)
Year 2023/24 - currently on course to make a relevant estimated loss of £8m* (this includes the purchases of Wood, Elanga and Aine, assuming a shirt sponsor for £7m, the exclusion of an estimated £6m for allowable Academy costs and excluding any projected player sales or purchases)
Against FFP limits there currently is a projected £26m* surplus of permitted losses for the 3 years to June 2024 that can still be used to fund further player purchases in this financial year, as well as be boosted through player sales.
Further player purchases can be made now even in excess of the surplus budget above, these can be covered by selling in June 2024, as this is all the same accounting period from 1st July 2023 to 30th June 2024.
(Remember that this budget is for accounting costs, not cash spent, so please see below or here on how to figure out how far this budget actually goes.)
*Note: the biggest assumption that I was shooting in the dark with was non-senior team wages. I based it only on historical published accounts, but with a limited drill down of expenses. They cover non-senior squad wages for the circa 150 non-playing staff and I think all add-ons, performance payments etc for the senior team. This has been kept at the same level as from the accounts in 2021/22, which was £33m, which seems very high to me (promotion bonuses were not in this amount). It could be the above financial position is healthier.
Also please see the silver lining about the future if you skip right to the bottom paragraph!
But for those that like the detail, please read on!
What happened in the promotion year (2021/22)?
The headline figure in the accounts that counts is that Forest made a loss of £45.6m. On the face of this, it is not good as this takes up over half of the allowed losses over 3 years alone.
There are a few things that we need to note though, some of which are already alluded to above, about this loss to make it seem less terminal:
- Forest got promoted this year!
- In this year, Forest paid out promotion bonuses of £20.9m to the team and management which do not count towards FFP rules (this is nearly half the loss, although there may be some 'staying up' bonuses this past year that would not be excluded)
- 'tv' money was £10.1m, but this will be more like £100m when in the Premiership
- Forest acquired youth Academy Category 1 status in May 2021. It takes about £4m each year to run (The Athletic report) but also investment has been made to keep improving these facilities (as unveiled 18 months ago) as well as the youth wages. There is £1.7m in improvements that were made and some are likely to be heavily linked to the Academy (or shared facilities) and also youth team wages that we can estimate all together to be £2m of allowable costs.
So for FFP we are actually looking at a relevant loss of £18.7m.
How do we estimate the profit/loss in the staying-up year (2022/23)?
I need to state this will be best guesswork with the information we have and making a wide number of assumptions, as I am not in the 'trust tree' of Forest's financial inner sanctum.
To do this, we need to break down the key areas of the accounts and try and guess what they will be for last year, the 'staying-up' year.
The best way is to look how things moved from the promotion year, and then adjust the promotion year loss of £45.6m accordingly, and also adjust for any FFP allowable costs again.
Money in
Ticket Sales
COVID restrictions were fully lifted for football stadiums in time for the start of the promotion season, so the revenue figures for ticket sales are a full year. Forest booked £8.2m in ticket sales in the promotion year. When up, the Forest hierarchy kept ticket prices pretty stable.
The average Forest attendance at home games in the promotion year was 25,778, which given away supporters make up about 2,000 seats, there is only a max of 2,000 seats that can be extra revenue each game (note some of these don't have good viewing as they were just added to get the required capacity to be a Euro 96 host stadium!). Games last season were pretty much sold out each week. So the max extra revenue we are looking at is about £1.5m that could have been eeked out over and above the promotion year.
Commercial / Retail
In the promotion year, commercial revenue was £1.9m and retail was £3.5m. This £4.4m you would hope increased being back in the Premiership and a finger in the air would be this increased 50% off the back of the promotion, so adding in another £2.2m.
Sponsorship / Advertising
This is a current hot topic as Forest are currently the only Premiership club without a front-of-shirt sponsor. But looking back, BOXT were the primary sponsor during the promotion year. Revenues totalled from all sponsorship and advertising £2.7m that year.
We know that last year there was no shirt sponsor for the first half of the season, and then the charitable showing of The United Nations High Commissioner for Refugees for the second half of the season. As such, no primary shirt sponsor income was received. But as there is still advertising in the stadium etc, the drop of £1m for BOXT will have just about netted off with the other sponsorship and advertising becoming more valuable for being in the Premiership (although I hope this improves over time).
So no material revenue change.
Grants & Royalties / TV and Radio
Grant & Royalties are what people refer to as the 'tv money' that clubs receive from the Premier League / EFL. This is the single-handed game changer for Forest and their transfer ambitions, as evidenced by the gargantuan set of transfer purchases last season.
As mentioned above, the change from the promotion year to the staying-up year moves the revenue from about £10m to about £100m, so a revenue increase of £90m over last year. I have used £100m as this is a prudent estimate of the varying amounts reported online.
TV & radio is the other type of platform output other than the rights managed by the Premier League e.g. Sky, BT Sports and Amazon. This was £2m in the promotion year and should have at least doubled for being in the Premiership, so another £2m last year.
The total is around £92m extra revenue over last year.
Overall revenue increase: it is estimated last year there was £95.7m more revenue earned than in the promotion year.
Money out
Before we look at costs to the club, it is key to understand how the club accounts for player purchases and sales.
When a player is bought, they are treated as an intangible asset (intangibility is to do with the legal right to services, not actually physically owning a player as a tangible asset). So the amount paid for the player is equally divided up by the number of years of the contract and then the annual cost is applied to the account each year as amortisation.
When selling a player, the key figure to work out is how much 'value is left on the books', NOT what the player was bought for. So if a player was bought for £50m on a 5-year contract, the amortisation cost will be £10m per year for 5 years. If the player is sold for £30m 3 years later, the accounts actually book a £10m profit. This is because the 'book value' after 3 years is £50m - (3x£10m) = £20m.
Amortisation
I have used a variety of online sources for information on the actual purchase price for players (some variability) and the length of their contracts (less variability in information) for the whole Forest team. Taking into consideration as well those that joined in Jan 2022, it looks like the amortisation cost for last year was about £43.7m (up from £7.3m in the promotion year).
So amortisation costs have increased by about £36.5m over last year.
Wages
Forest had 69 playing staff and 142 non-playing staff on the books in the promotion year (note that about 45 of these staff work with the Academy!). Although there are a large number of non-playing staff, and we hope they all got a bump in their pay on promotion, the main focus is the player wages in what will move the number from the promotion year, which had a total wages bill of £58.8m, which includes employer NIC tax and pension contributions.
When trawling the online sources, I also noted down the player salary information and estimated salaries last year for players totalling about £69m. Forest need to pay employer NICs on top of this, which will add £9.5m. Pension figures are negligible in the context of the wage figures (£0.15m in the promotion year).
But I must admit I am puzzled by the non-senior team wages when comparing the accounts to www.capology.com's year-on-year tracking of senior team wages. Forest were in the Championship in 2020/21 and 2021/22. The company accounts show total wages increased from £37.2m to £58.6m. But www.capology.com has the senior team wages actually dropping from £25.3m (£28.8m with NICs) to £22.5m (£25.6m with NICs). This puts all other wages (not including Directors) at roughly £8.5m (reasonable) rising to roughly £33m year-on-year.
It might be that there are a lot of signing-on bonuses, performance bonuses and other non-core salary aspects (not promotion bonuses, which are covered elsewhere in the accounts) hidden in these numbers that started kicking in to better link wages to performance but were also reflective of a promotion form season. If so, there must be a huge number of signing-on fees and greater sizes of bonuses for performance, but also the not immaterial costs of the staff running the Academy (roughly 45 of them, and probably most on very decent wages). So I think it is prudent to keep the £33m for these non-senior team wages.
But this is the area I am most having to guess about, as the accounts do not break down the wages any further.
So overall the wage bill last year looks like about £115m, which is an increase of about £52.7m from the promotion year.
Player sales
Using the accounting method above, in the promotion year, Forest managed to make a profit of £4m.
In the last year, there was one player that was sold (much to the dismay of Forest fans still) in July 2022: Samba. He was sold for £4.3m but was 3 years into his 4-year contract having been bought for about £1.8m. So Forest will be booking a profit of about £3.85m.
There is not really much material difference year on year.
Extra payments
There will be adjustments to costs for extra items, that include bonuses and loan fees. As such last season, there were the loan fees for Lodi and Wood, which totalled about £8.7m.
I am not sure about any bonuses for avoiding relegation, but last year the £20.9m paid out for being promoted will have been saved. If I were to guess, I would think there would be about 1/4 of the promotion bonuses paid for staying up, which would be a saving year on year of around £16m. Note though that these estimated £5m in 'staying-up' bonuses will not be FFP allowable costs, unlike the £20.9m in the promotion year would have been.
It should be noted there is some artistry here (but legally using fair 'arm's length' pricing) for the loan and sales deals that are done between Forest and Olympiakos that are not disclosed publically (but would be ratified by the FA/UEFA). As such loan payments may or may not have been received from Olympiakos for Hwang and Bowler (albeit somewhat briefly). But we can't guess these.
So there is probably a net accounting (not FFP) gain of about £7m last year from the promotion year.
Premier League upgrades
With Forest being promoted, and being promoted late in the day via the playoffs, there are new standards that need implementing to be a Premiership Club. The most costly are meeting the standards in the Premier League handbook’s section K on stadium criteria and broadcasters’ requirements. There are also improvements to governance within the club that are sensible. Although Forest have a decent stadium and broadcasting infrastructure, they have been out of the top flight for 23 years. So that would put them just under the best-equipped but dated Championship grounds I think. The range is about £2m to £5m to get to the required standard, so I would put Forest at around £4m in required improvements.
Overall cost increase: it is estimated last year there was an overall increase of £86m in costs from the promotion year.
Impact on the promotion year losses: It seems that the extra revenue from being up in the Premiership has about netted off the extra costs for staying up, with maybe Forest being £9-10m better off in accounting terms. When we take this off the promotion year loss of £45.6m, last year's 'staying-up' year can be estimated at a £36m loss.
But remember that we can exclude the Academy costs. With the £4m running costs, youth player wages and the start of some further improvements, we can estimate another £6m in allowable costs. Forest management will be doing everything they can (legally) to lump as many costs into being relevant to the Academy. Also with these costs not counting towards FFP, Marianakis having deep pockets and seeing youth as the future direction of the club, this annual investment seems very plausible.
So the adjusted FFP relevant loss for the 'staying-up' year is estimated at £30m.
Given the total allowable loss for the last 3 years come 30th June 2024 is £83m, that leaves for this coming financial year probably an allowable loss of roughly £34m.
Quick theory test vs FFP projection for the year just finished
So we opening up by saying we think that Forest did not breach FFP for the 3 years that just finished (to 30th June 2023). But given all the assumptions made above, and with last year being a huge transfer year, let's quickly check if the assumptions made above hold up with FFP.
Forest would be allowed £13m + £13m + £35m in losses for 2 seasons in the Championship and 1 in the Premiership. This means total cumulative losses of up to £61m over these last 3 years are allowed.
Assuming the same £6m in costs for the Academy to get it to Category 1 status in 2020/21, the adjusted loss from the public accounts is £12.5m. For 2021/22 we adjusted the loss to £18.7m. We have just estimated the FFP adjusted loss for 2022/23 to possibly be £30m. At a 3-year total loss of £61.2m, and acknowledging I have done some rounding in my calculations, it seems Forest management landed right up against the FFP limit of £61m.
So next let's look at what we know already about this year, and how much wiggle room the transfer team has for bringing players in.
What are Forest facing this financial year and how much do they have for transfers (2023/24)?
As Forest are staying in the Premiership this season, many of the account line items will not move that much, but we know some things already will be different from last year. These include ticket prices, players in, players out, loan fees etc.
So we can use the same process, see what moves (or in this case, projected to move) from the previous year and then adjust that prior year's loss. Given the 'staying-up' year was an estimated accounting loss of £36m and it is estimated that an estimated £34m loss can be permitted under FFP this coming year, £2m worth of extra costs can be allowed compared to the 'staying-up' year.
But working on the knowledge that the Academy is still up and running and improvements are being made, we can estimate like last year that about £6m of costs should be able to be excluded from FFP calculations.
That means that Forest can have £8m of extra costs this coming year compared to last year to just be inside of FFP loss limits.
Ticket Sales and Memberships
We know from the debate still raging about ticket price rises that more revenue will be received in this category this year. Also, the MyMembership tiers were changed up with a more general membership offering a much wider set of member revenue. From what we have seen, prices have gone up 20-30% in some categories, even more like 80%+ in others. But averaging all this, we can estimate ticket prices rising by maybe about £12 per ticket. For the home games, this gives £6.8m, but overall there is probably about £10m minimum coming in more than last year.
Commercial / Retail
I don't expect to see much growth in this area.
Sponsorship / Advertising
We know Marinakis is holding out for about £10m for a front-of-shot sponsor, and if this means the difference of being able to buy a key player, I expect they will do a deal. It follows the pattern of the commercial team playing hardball so far on player signings, which shows the team are getting more professional and cut-throat when it comes to finances.
I would say that it is likely that there should be a boost of about £7m when the dust settles.
Grants & Royalties / TV and Radio
Given that Forest are staying in the Premiership this season, I don't expect much growth in this area. There are no large renegotiations of TV rights this year that I am aware of.
So revenue-wise it looks like Forest will be about £17m better off this year than last.
Extra payments, Player sales and Released players
Last year there were £8.7m in loan fees and so far there are no such loans being made this year yet. As the Henderson loan last year did not have a fee, it is not expected there will be one this year if the deal is completed as hoped (as a loan with obligation to buy is reported as currently being negotiated). So that is £8.7m back compared to last year.
Surridge has been sold for £5m and he was 1.5 years into his 2.5-year contract. With a purchase price of £2.5m originally, his 'book value' was £1m when sold, so a £4m profit will be booked this financial period. This matches the last two years so keeps things level. But this also removes £0.8m in wages and £1m in amortisation that was taken last year that will not be this year. So the overall accounting impact from last year is £1.8m better off.
I don't expect there to be the same bonuses this year for staying up, so I expect the theoretic £5m of bonuses from last year to be saved this coming year (the message at the club should be that Forest are aiming higher than relegation avoidance).
We then come to the gamechanger for Forest this off-season...
Simply removing Lingard, Navas, Lodi, Ayew, Colback, Cafu, Smith, Lyle Taylor and Bade (back in Jan23) from the wage bill has likely saved Forest £17.25m plus another £2.4m in employer NIC tax payments. This is roughly £19.5m saving just from players who had contracts expiring or returned home after a loan.
Note as they were all free transfers originally, there is no saving on amortisation this year from removing them off the books. Also, per above, it seems odds on that Henderson is returning back to Forest on loan, so I am assuming no change with his wages.
But we do though need to adjust for the players that were bought in January 2023 as they only booked half their annual wages last year, but will be booking their full wages this year. The extra wages from Wood, Filipe, Shelvey, Danilo and Scarpa this year will be £7.7m.
So from the revenue boosts and players leaving, Forest have already found an accounting improvement on last year's £36m loss and moved to a possible projected profit of about £8m (which gives headroom of about £48m in this financial year to meet FFP).
Although this all sounds brilliant and super positive, we know that two players have already been bought, and we cannot forget (a now seemly poor decision) Wood's contract turning into a mandatory purchase from having played just 3 games to allegedly trigger the clause!
Player purchases to date
So far this financial period Elanga and Aine have been signed, along with the 'signing' of Wood. Elanga and Wood cost £15m each, whereas Aine was a free transfer. Wood will be the painful one in the accounts as he is only on a 1-year contract, so he needs his full £15m cost amortised this year, whereas Elanga's 5-year contract means only £3m will be charged to the accounts as a cost this year.
The overall cost increase vs last year is £18m for amortisation charges and increased wages of £3.4m plus NIC tax of 0.5m.
So the position at this point in time with what we know is an estimated annual loss of £14m (£8m loss with Academy adjustments) and the headroom for FFP is down to £26m. This is still a good position, although we do know that Forest probably need a second Premiership-quality goalkeeper and a creative DCM.
Now looking forward and guessing........
Forest need to adjust and trim their squad to make the Premiership registration limits, which can further bolster the war chest. They also need to bring in a couple of new players to fill important skill gaps to be competitive in the Premiership.
Moving players out and squad adjustments
Worrall is likely to get a new contract, which may bring him in line with Yates, which would be an annual wage increase of £0.5m per year.
Ojeda, Mbe Soh, Panzo, Laryea, Bowler, Hwang, Mighten and Aguilera have returned from their respective loans (Mighten in Jan23) so need to be loaned out again or sold. If they are not, they have an impact year-on-year with wage increases on Forest's books. We assume that loans will be made where they are required, so no extra wages are being added on year-on-year.
As much as it seems unanimous that fans want to move Shelvey on, does cutting him loose for free make sense? This year Forest will pay £4.4m in wages plus employer NICs. Having been here for only 6 months of the 2.5 years of his contract, it will draw a loss of his current book value of £4.4m if no money is received from shipping him on. But he also hits the accounts with £2.2m in amortisation costs each year, so Forest will be £2.2m better off this year just biting the bullet and shipping him off, even for free.
But the key here is someone needs to take him for free or he agrees (unlike Arter) to mutually terminate his contract. If not, there is £7.8m in contracted wages to be paid, which makes this a no-go from an FFP accounting perspective.
I would assume that it will take shipping him out for free to get him off the books, but it will get done, so an accounting £2.2m improvement can be taken.
We mentioned above that the squad has to be cut down to 25 players for Premiership registration (plus U21 players that do not need to be registered). Based on my Tweets, I believe the following are the two XI's at the moment:
1st XI
2nd XI
That gives 21 registered players (as Elanga is U21 and on the B list for registration) and 4 spots left to register. Hennessey (or Horvath) is needed as the 3rd goalkeeper. Biancone has a role to play this year and can cover DC and RB.
Toffolo is likely to be banned for a substantial amount of time if found guilty and given other similar cases, this seems odds on and probably to start pre-January, so will likely not be registered and I don't think Forest will need to pay his wages if/when banned. He might just be released by mutual consent in January as he only has 1 year left on his contract. This should save £0.4m in wages (the book loss will net off against the amortisation saved when we compare the year-to-year movement of profit/loss).
There are 2 registration spots left, and these are likely to be saved for further signings. If no other players are signed other than the 2nd GK and the DCM, then 2 of Freuler, Dennis, McKenna or Hwang (on preseason showing) might be kept.
So this is the roster of players that the recruitment team need to work their magic and move on via sales (removing players like Aguilera that I think should be loaned out):
- Freuler (has a book value of £5m to offset on a sale and wages of £2.1m annually)
- Dennis (book value £11.25m, wages £2.1m)
- Cook (no book value as was free, wages £1.6m)
- McKenna (book value £1m, wages £1m)
- Horvath (no book value as was free, wages £0.9m)
- Mbe Soh (book value £1.2m, wages £0.5m)
- Panzo (book value £0.85m, wages £0.5m)
- Laryea (book value £0.45m, wages £0.4m)
- Mighten (Academy product so no book value, wages £0.2m)
- Bowler (book value £1m, wages £0.2m)
- Drager (as from Olympiakos probably very low book value, wages £0.15m)
- Ojeda (when back in Jan24, book value £0.75m, wages £0.55)
It is only mainly the top 4 players that will have an impact on saving wages from the prior year, as the others were nearly all out on loan. That will save about £7m this year.
Selling all bar the top 2 above for even modest fees (Freuler and Dennis need larger fees to register an accounting profit) could create an accounting profit of £10-15m.
It seems Freuler might be going on loan to Juventus with an option to buy (and if not, should be sellable to the Italian market after the loan). The Italians are not full of cash, but I think an accounting profit of £5m should be found in the end, and the wages to be covered.
Dennis I hope can be sold for an accounting profit, but I think he will be offloaded at the current cost. But I think Cooper has had enough and will ask for him to be sold.
So overall, shipping out via sales, or loans and then sales in January or June 2024, should generate an accounting improvement from last year of between £22-30m. This is highly subjective though, but the drive to trim the squad will focus the need to sell some of these players.
As such, after all these squad adjustments, it brings the war chest allowable under the FFP limit to 30th June 2024 to hopefully be between £50-60m.
Further players in
The good news is that Henderson coming in hopefully on a loan with a requirement to buy at the end of the season (you can see why the Forest team have played hardball to try to get this type of deal) will not add anything to the status quo from last year and is baked into these required profit numbers. If the deal ends up being a straight purchase, say for £20m on a 4-year contract, then roughly £5m will be taken off the FFP budget for this year.
The key player that all fans are hoping for is Sangare, or another key statement signing that will be top quality in that DCM position. If the release clause of £32m is paid and he is put on a 5-year contract and on £120,000 per week, the FFP accounting budget takes a £12.6m hit.
Given that the FFP max budget is £26m (assuming a £7m shirt sponsor is put in place), there is still room for Sangare, and then a good 2nd goalkeeper and another good LB. The necessary clearing out of the squad will provide enough accounting room for another forward. That fills up all the available 25-person squad for Premiership registration.
With the above, I implore all Forest fans to stop any chatter about Johnson being sold. As you can see he does not need to be sold now or at any time in this accounting period to meet FFP.
If Forest decide to buy more marquee-level signings that breach the healthy extra FFP budgetary room set out above, there is still no reason to sell Johnson now. Holding onto Johnson will likely increase his value by another £15m if he gets another decent season under his belt in the Premiership. Remember Gordon being sold by Everton was not actually playing much or well at the end of his time at Everton as still went for large money. The one risk of this strategy is that Johnson may get injured.
There is another silver lining if you read this last part.
Beyond this year:
Forest have actually trimmed the senior squad wage bill from £76m to £51.5m (ignoring the young loan players) which is in a very good place for the Premiership (10th most).
Annual amortisation charges are about £61m but are skewed by Wood this year (£15m charge alone for his 1-year contract) and will settle back to around £45m, which is about what it was last year.
When Wood is gone next year, taking off £19m in costs from the accounts this year, on a currently projected £14m loss (£8m loss after Academy allowable deductions), the club will be in a good FFP position going forward, even with Henderson and Sangare coming in (hopefully). Forest will be edging closer to breaking even. The new stadium, with increased capacity and other streams of revenue, should put Forest into profitability and no longer will it need to be a selling club to sustain itself.
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I would love to hear your comments, which you can leave below, on the assumptions I have made in this article and how they can be refined. Thank you!