Andy's Accounts Blog (Patreon)

Big Sexy Andy McGowan got up early and went through the accounts before work because, let's face it, this is Christmas Day for him. Here are his thoughts.

The much anticipated 2022 accounts are here and here is my tuppence worth. Accounts are factual but don’t always answer every question we may want answered - this is my interpretation of what they mean to our club. I am not accountant and welcome challenge to anything I state, and if you disagree with my interpretation, then that’s fine, I welcome alternative informed views and that is healthy.

The last accounts in 2021 were “covid accounts” so they were an anomaly that we could not look too deep into when trying to establish how our club was progressing – covid was a challenge that could have sent us back years or much worse, but we came through it. We should never take that for granted.

So to this year’s accounts. These cover our finances up to 30th June 2022, they include the Europa League run, and Nathan Patterson sale, but not Bassey and Aribo or the Champions League money. The headline is that they are very strong.

Let’s start with the big numbers…

Revenue was £86.8m, our biggest ever. This is 47% bigger than our last pre-covid revenue of £59m. It does not include the circa £4.5m compensation from Aston Villa for Gerrard &co as this is classed as other income rather than revenue. From our revenue we had an operating profit (profit before tax etc) of £5.9m which is fantastic news and a major milestone achieved. To give context our operating losses in the 3 years previous were £27.6m, £15.9m, £11.6m (£55.1m) so this is big news. The accounts predict a net profit next year too.

Why the increase in revenue?  The Europa League run was worth £30.5m from prize money and match day revenue and effectively offset the Malmo debacle. Our commercial revenue was a huge £28.4m which is 87% above our previous high and has seen our sponsorship income jump over 125% since pre-covid 2020 to £7.3m and our retail/commercial income jump 156% since 2020 to £9.9m (I think the Castore contribution to that is £5.5m) James Bisgrove and his assembled department must take huge satisfaction from these numbers. If we complain about a perceived cheapening of the brand, the quality and number of partners, crypto and NFTs etc my opinion is that is harsh and slightly naïve to the market we operate in. My opinion is we need quantity of partners first to deliver the revenue we demand. Progress and more regular Champions League exposure in the future might see the market be more kind to us in that regard where we need less partners but with bigger sponsorship amounts.

What about costs?

Our expenditure was over £97m and this is a 26% increase since pre-covid 2020. The part we are all interested in is the first playing squad costs and these are £37.8m which is an increase of 13% from last year’s £33.5m and could be attributed to increase euro bonuses, but a big jump from 2020’s £29.7m, and 2019’s £23m. What do I take from this? When there is criticism of squad investment, I have often pointed towards the wage bill and that in my opinion it is too high for the normal turnover we should be budgeting for in a normal year (I think circa £70 m to £75m per year) and I stand by this. An argument against this is that we can see the wage bill is 44% to turnover and it appears we have loads of headroom for more, and that for the UEFA Financial Sustainability Regulations this is only part of the 70% ceiling to turnover we will soon face – this is a fair challenge. But for the sustainability rules we must also take in to account amortisation of transfer fees and agents fees amongst other things – the key point here is that yes we have some headroom in these accounts for more spend if we had the money free to do so, but a wage bill is not necessarily something you can dial up and down each year to suit your needs and if we get caught out on that then we are in a world of pain. The long and short is we look in decent shape to accommodate the new UEFA sustainability rules and we are not as tight as I previously assumed. But it will most definitely be a factor going forward and how we handle it will dictate our success in future years.

The other non-first team staff at Rangers account for another £17m in costs (Incidentally our playing staff is up 30% since 2019, and our non-playing staff is up 25% since 2019 – signs of progress) and “other operating charges” took a hefty jump to £28m from a norm of £22 or £23m again presumably due in part to increased number of match day expenses and European travel logistics etc.

There continues to be investment in the physical infrastructure with over £10m spent on the stadium, training centre and Edmiston House over the last 2 years. The club continues to reverse the extremely damaging years of literal neglect and lack of investment from 2012 to 2016 and this is only one aspect of legacy issues that to this day still impact us.

Our relationship with our investors remains a key function, with circa £5.8m of investor loans converted to equity by John Bennet, George Letham, George Taylor, Janet McAlpine, Stuart Gray, Alistair Johnston, Julian Wolhardt, and John Halstead via Perron investments. Interestingly circa £5m was repaid to Dave King’s Laird Investments in October 2021. The new equity further strengthens our balance sheet and was in addition to the £4.3m from the fans share issue bringing the total to £10.1m of new equity raised in the period.

During the period £6.55m was loaned and repaid from John Bennett – this points to a temporary working capital bandage to the cash flow, and then leads us to the John Bennett also loaning a £10.32m along with Julian Wolhardt with £1.8m, both of which were secured against the building site that was Edmiston House at the time. Given that EH is being funded from various tiers of supporter packages, the sale of the Albion and presumably cash flow, this combined loan is probably a mixture of some affordable long term debt and short term credit that will help cash flow during our summer months and helps avoid a need to “have a whip round” from the investors during fallow cash flow periods The interest rate for the Bennett/Wolhardt credit is 6% which is reasonable in today’s terms by comparison to current football lenders such as MSD Partners and MacQuarie who would be double digit and more, with less friendly repayment term. For comparison Celtic have a 5.19% facility with Co-op Bank secured during more favourable times years ago but that also has a 1.24% non-usage fee. Our agreement with Bennett/Wolhardt will also help in the future when the club goes to lenders for traditional credit – think of it as repairing our credit score in some regards. Cash flow squeezes are fairly normal for football clubs especially during the summer before Season Ticket money lands, and this should raise no major alarm bells and this facility will allow the club to navigate the ebbs and flows of football income. In future we may see us have this facility with normal providers rather than shareholders.

Incidentally, there is a £5m arm’s length commercial deal with Parks of Hamilton worth £5m which will show in future accounts, there are no other details but it is intriguing.

So why didn’t we spend the £6m profit on players I hear you cry! Ultimately there was a net loss of £0.9m after deduction of exceptional costs which I’ll come to in a minute. Is this net loss a bad thing? Well in my opinion our club should be straddling a small net profit or net loss as this will point to our resources being used to the max. If we had a massive surplus then we would obviously ask why it was not being used!! The exceptional costs should become less frequent in future as we remedy legacy issues like litigation.

So what was the exceptional costs?! In the accounts it states “During the year the club entered into a settlement arrangement resolving litigation relating to a previous retail arrangement” – this will be cloaked in legal non-disclosure handcuffs but we have to presume this is connected to the Sports Direct settlement. We also have to presume this is the end of the matter and we can look to the superb retail and merchandise figures we have grown and mentioned earlier as being ours and now completely unshackled. A huge positive and for me, something that had to be done no matter the price. Think of it of releasing £60 to £100m of revenue over the next decade. I also suspect that these exceptional costs included other litigation we have had to deal with as legacy issues (not in my opinion anything to do with Sydney btw) and I also suspect massive legal costs that were weighing heavy and are now gone.

The club has clearly stated in past years we have four pillars of revenue; ticket income, commercial income, European football, and player trading. The last pillar, player trading was the one which we had effectively mothballed in pursuit of 55, and there is no question we held on to players for footballing reasons that under normal circumstances could (should?) have been sold for financial reasons and this had a direct impact on the bottom lines of the previous accounts year after year and contributed to the losses incurred that were shored up by our investors. Again, not something I take for granted and whilst we can argue on the footballing consequences we feel today, it was the right thing to do to secure 55 and gave a base for the lucrative double whammy of the Europa League run and qualification for the Champions League.

It is now clear we have cracked the player trading pillar with a bang with the sales of Patterson, Bassey and even Aribo and this signals a progression to what smells like full sustainability. This hasn’t happened by accident and despite or current perceptions on squad investment there was £7.5m spent in this accounts period, £16.8m the year previous, and £15m after the accounts year end. So close to £40m in total. How wisely or effectively that has been spent is for another day entirely but if a Martian lands and looks at it, it will see that it delivered a league title, Scottish Cup, Europa League Cup final, and Champions League qualification, along with development of players to sell on for massive profit. That’s not me spinning propaganda, that is a cold hard fact based assessment that may jar against what we are thinking and feeling right now as fans given current performances and results. The Martian could also say that Van Bronckhorst dug the club (and the investors who would have been picking up the tab) out of a massive Malmo sized hole and did it again by beating USG and PSV for Champions League qualification. That’s not me giving that perspective and context, it’s the Martian’s!  It may also be an insight in to some context the board and Ross Wilson have in their current thinking.

Why didn’t we spend more money? This is the question everyone will ask. The honest answer is I think that 3 years ago we had something like £23m player payables pending with zero player receivables due (don’t quote me on that) and that was the board committing to the playing squad with 10iar/55 in mind – that kind of model couldn’t continue and at some point the sensible head has to be put on. We have effectively covered our spending since with sales of players, but we are still behind Celtic for both transfers and wages. Catching up in this regard is the big challenge. So could we have spent more? Probably, but it would have been something that may have been on the investor’s tab rather than self-covered. Next year’s account will include Bassey/Aribo and CL income so they should be positive again, it will be interesting to see how our player trading activity takes shape between now and then. I make no predictions!

One thing I have kept to the end which may go under the radar which is significant – the audit is entirely clean and the “material uncertainties” mentioned in previous years is no more. I have spoken about sustainability being a must going forward and this is a huge indication that we now have it.

If you are “too long didn’t read” type of fan then first of all shame on you, but secondly here are my key takeaways –

· The accounts are strong and positive, in many ways they are the financial Holy Grail we have been working towards since Dave King & co were on the pitch with the photographers in 2016. A huge collective effort from every single person and fan who has contributed a penny since that day.

· I still view where we were only 10 years ago and where we are now as a minor miracle – this recovery didn’t just happen by accident and between our investors and the fanbase we have financed a year on year recovery and survived Covid whilst achieving some remarkable things on the pitch (last 3 months withstanding!)

· I am constantly told “forget about 2012” and that we are clear of it – in my opinion we most certainly are not and the legacy issues, whilst getting better without question, are still materially handicapping us – the multiple litigations such as Sports Direct, the strangulation of aspects of our commercials up until this year, the infrastructure repair and improvement across the real estate has needed to be significant, and even the UEFA coefficient – before a ball is kicked in the CL this season Celtic made £6m more than us due to the 10yr coefficient payment, Ajax would be about £15m more – so another 4yrs minimum for us to repair this. This is stuff we have had to deal with as repercussions of 2012, it affects everything when we are dealing in fine margins.

· We are investing in Edmiston House and Blue Sky Lounge without too severe a drain on the business as far as I can see. These will become revenue generators in the near future and are absolutely the kind of forward thinking we need to be applying to move our finances and resources for the first team forward.

· We still have risks – we need to be in Europa League group stages as a minimum and the coefficient gives us some stability of planning in this regard. We need to compete with Celtic but have a dogfight for Champions League money as the coefficient recedes. Our investors are still here and have again contributed greatly, and the future shape of our shareholding is a big consideration in our relative stability and I am very much “better the devil you know” in this regard which is usually misconstrued as blind support for our board and investors – it’s not.

· As we are currently somewhat stalling on the park, the option and desire for more “risk based” investment to build the squad etc is often mooted - If we were to have shareholders sell out eg to the American party mentioned in the media recently – then I personally would have all sorts of alarm bells ringing – this would in my opinion simply mean leveraged buyout, and leveraged investment to ultimately raise value and sell on again (to who?!) – in short: debt funded investment where the club would carry the debt burden, and the club would be passed around owners to which we have no say. Be careful what we wish for here. If we want change we need to be sure of what/who comes next.

· Financially, the future is as bright as it has ever been, but if I am being pessimistic I suspect that these accounts and next year’s could be outliers and we should be operating on presumption of turnover of £70m to £75m especially with UEFA sustainability rules in mind. I could be wrong and would be glad to be so.

· Overall very positive, but as we are all too aware, we need to get the football aspect right sided and make our resources big enough to support our demanding expectations. These demands are why we are the club we are, and this is the never ending challenge.