The following article originally appeared in The Whiff Issue 67 Feb 2011
WHERE’S THE MONEY GONE?
Fan’s love to argue and one area that spilled over in recent times involved the financial position of the club – can we afford to bring in higher priced players or not? And if not, what’s happened to the profits we make on player dealings? All opinions in this article are my own.
I have copies of the last two years accounts, all on public record, with details of earlier years.The latest is hot off the press for up to 30 June 2010. I have no connection with the club, other than as a season ticket holder, no knowledge nor connection with our chairman, SJM, other than his public utterances but do have some experience of reading company accounts so thought a stroll through the actual position might inform the debate a little more. Those who believe all company accounts are simply lies to deflect the Inland Revenue can stop reading here. But bear in mind that most company accounts, if they are fiddled (and this is illegal), are done so to give a better view of life and profits, not a worse one. Especially if you want to sell it. Where numbers do not add up they are due to my rounding errors.
First we must understand how the club is set up as a financial entity. It calls itself Reading Football Club (Holdings) plc and this is what the shares of the club (the vast majority owned by SJM) are in. This in turn is the parent company of The Reading Football Club Limited which itself has two wholly owned subsidiaries, the Madejski Stadium Hotel Ltd and the Reading FC Community Trust. The Trust is a charity in English law and concentrates on providing healthy recreation for all in the community including the disabled. It sounds complicated but a lot of companies set themselves up this way.
Next we must understand that a company has to allow for all past performance not just the last couple of years. If it has a series of losses then these losses are rolled forward, not written off. If you want to write off losses then you can declare bankruptcy or go into administration or get someone to pay them all off for you for no return.
Finally, what is most important is to realise that you cannot understand a company’s financial position just by looking at the one year’s trading position or the profit and loss (P+L) account, ie income minus expenditure. You need to look at the balance sheet, cash flow and historical position, which is why auditors spend so much time and money going through the accounts to ensure they are correct.
So let’s start with the historical P+L.
http://www.footballeconomy gives historical profit data taken from the accounts. They are as follows in millions with losses in brackets:
97/98 (4.1) 98/99 not available 99/00(2.6) 00/01 (4.6) 01/02 (2.
02/03 (1.6) 03/ 04 (1.
04/05 (4.6) 05/06 (6.5) 06/07 6.6 07/08 6.7 08/09 3.1.
99/00 is the first year that the club was set up as Reading Holdings. So, the cumulative losses from that period was around £10M. The latest accounts show the actual accumulated losses for all times in the balance sheet as £6.6M so you can see how this figure has arisen. You can use these accumulative losses as a legal reason for not paying corporation tax and the club pays not a penny, even when making a profit in that year.
Now to the statement that everyone looks at, the P+L(figures in £M with rounding to nearest £0.1M ):
Operating statement
2010 2009
Turnover 32.6 31.0
Operating expenses 35 43.8
Other operating income 0.4 0.3
Operating loss (2.0) (12.5)
Profit on disposal of players registrations 4.0 16.3
Profit before interest and taxation 2 3.8
Interest payable 0.6 0.7
Profit for the financial year 1.4 3.1
Note that the 2010 accounts include for the last time the premier parachute payments of around £11M and you can see the problem for this year. You can also see why it is naïve to believe that over £20M profit on players means over £20M available for the club to lash out on new players. And if you cannot always equate the sum players sold to the sum shown in accounts it is because many of these high transfer fees are payable over a long period, not just the financial year it occurs in.
The biggest costs are salaries and they were as follows: 2010 £20.1 2009 £27.7
So they are being reduced and will, presumably, show further reductions in next year’s accounts. Why are they so high? – that’s the Premiership for you. If you don’t offer competitive contracts (high salaries, multi year) then you lose all your best players as agents go into overdrive. I understand why SJM is so frustrated at the Premiership salaries and agents’ activities but until all the clubs decide to take a stand one club cannot do it alone.
Debt
So does the club have debts? Well, yes. You cannot have long term losses, build a state of the art stadium and have good training facilities on air. And bear in mind when the stadium was being built we were making a loss each year. Now you do not have a very large capital spend and show its cost in one financial year. You borrow money to pay for it and the cost is shown in the accounts as interest payments that are made each year. The asset is shown as its original value minus depreciation which for the MadStad is 2% per year – a 50 year depreciation period.
Debts are as follows and are shown under creditors due within one year:
2010
2009
Bank loan and overdraft 0.7 7.5
Chairman’s loan 25.8 25.8
Trade creditors 2.3 2.7
Other creditors 0.3 0.2
Other taxes and social security 1.3 2.2
Other loan 2.2 3.1
Accruals 2.8 3.9
Deferred income 3.4 4.1
Total 38.9 49.6
Now against that you have to set stock held, what people owe you (debtors) and cash on hand and this reduces the debt to:
30.2
36.3
but now you have to add in creditors due after one year and this raises it to
50.8 56.9
The statement “creditors due within one year” is an accountancy term and does not mean,for example, that the chairman will demand his £25M in a year, it means he could do (as happened at Watford FC last year with the Russo brothers).
So the debt is falling, the majority of the fall due to the payback of a £7M bank overdraft called in which the club told us about at the time of Kevin Doyle’s sale. Is this level of debt bad? It all depends on whether you can service the debt (we can) and what your assets are.
Assets
The position on tangible fixed assets on 30 June 2010 was as follows after depreciation
Freehand land and buildings Long term leasehold property Fixtures and fittings Total
31.6 23.1 0.7 55.5
That leaves intangible fixed assets (mainly the players) and they are notoriously difficult to value. How do you take into account injury, loss of form or large offers from top clubs? Was Gylfi valued at £7M last season in the accounts? – certainly not and nor should he have been since noone last season saw that coming. The current valuation of intangible assets is 4.3 making our total assets 59.8 or around £9M greater than our debts. Furthermore, the club tends to value conservatively and actually says so in the accounts so we may be a bit better off than this especially if another Gylfi style bid comes in.
What’s happened since.
The company has acknowledged the Gylfi sales post balance in the accounts stating that since published we have sold at £5.3M and bought at £0.1M meaning another £5.2M can be added to the pot.
Can we spend big?
The big problem is losing the parachute payments. Clearly this year we were heading for a major deficit even with the expected further reduction in salaries and the Gylfi sales closed the gap and has probably given us a surplus of around £1m or so since the club told us the gap was £4M. No, we cannot spend big without increasing debt especially since we have to consider what will happen next year. Promotion and it’s boom again, Championship and that hole could arise again. Should we gamble? – try and imagine yourself owning this club and deciding what to do. Some will decide to gamble, others won’t. At time of writing, the club won’t.
What about the hotel?
The hotel was shown as losing £275K last year. No help there.
And what about SJM?
SJM has stated clearly that he is not going to pour millions of his own money into this but if someone comes along who is prepared to do so then he will stand aside. Hard to argue with that. But neither is he pulling money out of the club. His £25M loan is on terms we would not get anywhere else, two thirds interest free and one third at 1% below the HSBC bank rate. For comparison, the Watford directors regularly lend the club money at 3.5% above the Barclays bank rate and their biggest shareholder, Lord Ashcroft, loans it for 4.5% above. Furthermore there is £2.3M of interest on his loan accrued in the accounts showing that he has not actually removed it, it is still sitting there. And last year he didn’t actually charge us a penny interest. The total director emoluments were zero and so were dividends. In comparison the Watford directors remove money by the hundred thousand.
What SJM brings is a strong sense of business at a very low cost to us. He has never interfered with the managers on a footballing basis – the curse of a number of other managers – but he expects them to be financially disciplined. In today’s world of football, thank God for that.
So when you ask “where’s the money gone?”, don’t expect the club to give a short, accurate and clear answer.
Dave Hunt
Authors note:
I have no links to the club nor to Star (other than a lowly member who knows none of the officers). I am just an East Stand season ticket holder. I am not an accountant. However, before publishing in The Whiff I did send the article to the club to check through for any mistakes since I read a lot of source material (not just 30 pages of accounts) and needed to know whether there were any howlers. They told me it was accurate – but gave me no other comments, no sign of approval or disapproval and no attempt to change anything. The article appeared in The Whiff exactly as I had written it originally. Everything written is already in the public domain, you just need to know where to look.
