Paying dividends — Column

QPR’s recent set of Covid-19-afflicted accounts showed a small loss of just £4.5m, down from £16m the year before and the best results the club has lodged for many years. Obviously the sale of Ebere Eze was largely to thank for this so, as ever, our resident accountant Simon Dorset cast his eye over the results and what they mean.

Queens Park Rangers’ latest set of accounts are undeniably good. To report a loss of only £4.5million in a season decimated by Covid-19 given all of the known constraints that the club operate within is outstanding. Obviously, things would have looked very different without the sale of Ebere Eze to Crystal Palace but that didn’t happen by chance. It is a direct result of the business model the club adopted a number of years ago in their bid to become self-sufficient. While this objective is still way out of reach, the club’s progress towards it is most impressive. As has become almost traditional, I will try to reflect on the accounts from a Financial Fair Play (FFP) view point.

In their attempts to minimise the effects of Covid-19 on clubs, the English Football League (EFL) have introduced a couple of temporary changes to the Profitability and Sustainability rules (P&S). These have not only added another layer of complexity to the P&S calculations but, sadly, have had the side effect of adding in additional uncertainty to any analysis based solely on any club’s accounts.

The first figure that generally leaps off the page, and the one that gets widely reported, is the operating profit. A loss of £21 million is a frightening amount of money, but it is important to understand what is included in it and what is not. Operating profit (or loss) is defined as the profit (or loss) a company makes from its principle trading activity. In the case of a professional football club this equates to the revenue from activities which take place on or around the pitch such as the sales of tickets, merchandise, sponsorship, advertising and broadcasting rights, less the costs associated with those items, wages, general business expenses and player amortisation.

While the operating profit is a useful figure when comparing the results of two or more clubs, it is far from the complete picture. The most notable absentee from those revenue streams are any profits made on player sales. Football clubs do not exist to sell players and so these are generally regarded as exceptional sales and, as such, are not included in the operating profit. The earnings before tax (EBT) is the calculation of all revenue less all related costs, general and administrative expenses, interest and depreciation. This is the club’s total earnings before suffering any taxation and is the figure that provides the starting point in P&S calculations.

One of the significant temporary changes to the P&S calculation is to the scope of the permitted adjustments to the EBT. In addition to the existing disallowable costs for items such as expenditure on youth development, community schemes and women’s football, for the 2019/20 and 2020/21 seasons costs directly attributable to Covid-19 can also be excluded. This not only covers costs such as making grounds and training facilities Covid secure and testing players and staff for Covid, but also lost revenue, such as ticket sales, sponsorship, advertising, hospitality and catering, from matches played behind closed doors. These additional costs are not easy to estimate from the published accounts, but losses of revenue can be when compared to the last unaffected season.

The exact mechanism that the EFL use to quantify the losses due to Covid-19 is not currently in the public domain, but I think it is safe to assume that these figures are understated as I’ve not included anything for any additional expenses such as making the Kiyan Prince Foundation Stadium and the Harlington training facility covid compliant. Predictably gate receipts were hit the hardest with the 2020/21 season almost completely played behind closed doors. The 2020/21 financial year also included the last four home matches of the 2019/20 season and, therefore, the revenue from season ticket sales for those matches. UEFA estimate that Covid has cost European football approximately €7 billion with gate receipts dropping to just 2% of those the previous season.

Broadcasting rights were not affected by Covid-19, but boosted by increased iFollow streaming service subscriptions. Both of the seasons in question are significantly less than the 2018/19 because that was the last one in which QPR received a parachute payment. One of the major contributors of other income for both the 2019/20 and 2020/21 seasons was the Government’s Job Retention Scheme, commonly referred to as furlough payments, which weighed in at £305k and £515k respectively.

The second temporary change that the EFL adopted for their P&S calculation was to postpone the assessment of the 2019/20 season and to assess that season in conjunction with the 2020/21 season using an average of the two seasons.

The exceptional item in the 2019/20 accounts was writing off the accrued costs associated with Warren Farm. Infrastructure projects are excluded from FFP so I have then deducted this from the adjusted EBT. The discounting adjustment is to do with the accounting treatment of the FFP fine we incurred. There isn’t a short, succinct explanation for this, please just accept it.

I’m sure that we all familiar with the basic formula for P&S, with Championship clubs permitted losses of up to £39 million over a three-year rolling period. Using the figures calculated above, along with the estimate by the excellent Swiss Ramble of £4 million for the normal disallowable costs and removing all transactions relating to our FFP fine, the following table shows where I believe we are.

Even if the estimated disallowable costs and/or the Covid-19 costs I’ve used are too high, QPR now have a significant amount of headroom beneath the P&S upper threshold. However, there is no room for complacency. QPR are scheduled to repay just over £3million of the loans totalling £7 million they secured from the EFL this season to help them through the depths of the pandemic. They also negotiated a payment holiday with regard to their FFP fine and so need to pay £3.4 million this season. While these are cash flow issues and have no direct bearing on profit, funds need to be made available to cover them which will clearly have a knock-on effect on other areas for a club whose day-to-day operations lose over £1 million every month.

Outside of the Premier League and the recently relegated clubs with significant parachute payments, the domestic transfer market has virtually collapsed and will remain in the doldrums for the immediate future as clubs focus on paying off the loans which helped them get through the lockdown and while they start to repair their devastated cash flows. Any club reliant on income from player sales is in a potentially precarious situation, a case that the Bristol City CEO has made recently following the release of their accounts.

QPR have a delicate balancing act coming up. Due to their improved position with regard to P&S, particularly considering that their last big loss (£18.5 million) is rolling out of the next P&S calculation, there will be no desperate need to sell any players in the short term, but the club will also want to keep their losses in check. Currently the prized assets are under good length contracts, but QPR will still be wary of losing another player to the Bright-Samuel scenario. Buying clubs know it is a depressed market and so their initial offers will not be generous, QPR need to judge how far can prospective purchasers be cajoled into increase their offers. Then again, promotion back to the Premier League would render all those considerations irrelevant. What is certain is that the overall direction the club is being driven in by Les Ferdinand and Lee Hoos is paying dividends.

Also by this author >>> Grounds for Concern >>> Gordon Jago: Leading From The Front >>> The Trust >>> Accounting for success >>> Gambling with FFP >>> The greater evil >>> Terry Venables: My first hero >>> QPR’s fairytale of New York

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