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Financial fantasies in football

Murray Steele, Senior Teaching Fellow

Faculty Blog

Why is it that Football clubs think that they are immune to the effects of continuing operating losses? In every other private sector business, it is understood that losses cannot be sustained indefinitely. Continuing financial losses lead inevitably to job losses, cuts in salary costs and sometimes complete closure, but not in football apparently?

Demanding directors and loyal supporters sometimes seem to lose contact with the financial realities of life as they seek their own moments of glory on the pitch.

The accounting rules are quite simple. When losses mount, liabilities soon exceed assets, producing serious cash flow problems and survival threats. The simple fact is that, when football clubs move beyond the point where their liabilities exceed their assets, then they are also facing the ultimate in (financial) relegation.

Whilst there have been a number of high profile English clubs that have suffered over the past 10 years (names like Leeds United, Portsmouth and Coventry City spring readily to mind), the biggest financial melt-down in the football world has been that of Glasgow Rangers FC in Scotland.

In its quest for dominance in Scotland, Glasgow Rangers, or rather The Rangers Football Club plc, had been operating with losses for several years, recruiting and paying for high profile stars at wages way beyond the club’s ability to pay and to generate revenue.

Its financial performance had fluctuated widely from year to year with large losses followed by small profits. The company’s audited accounts for the year to 30 June 2010 showed that the company had accumulated losses of £136m and external debt of £27m. The Balance Sheet shows that the losses had been largely funded by investments from shareholder fans who expected a return in winning trophies  – rather than any dividends or increases in share values. Although the business had made a £5m operating profit in 2010, the Cash Flow Statement reveals also that it had paid out £4.5m in reducing its loans and a further £6.5m in capital expenditure (mainly on players).

This period clashed with the aftermath of the 2008 world financial blizzard – which resulted in Bank of Scotland (Rangers’ banker) being taken over by Lloyds-TSB. Having had relatively benign banking support for many years, the new owners of Bank of Scotland sought to reduce its exposure to football clubs in Scotland – and Rangers in particular. Although the business had been reducing its indebtedness, there were pressures to do even more.

This set of circumstances compelled the company’s majority shareholder – Sir David Murray, an eminent Scottish businessman - to accelerate the sale of the business (for £1) in May 2011 to Craig White, an international financier based in Monaco.

Behind the scenes, even under new ownership, losses were continuing with liabilities mounting - with even loyal suppliers having to resort to legal action to receive payments for goods and services.

Eventually, the UK tax authorities lost patience with their catalogue of payroll and sales tax arrears, forcing Craig Whyte to place the once mighty ‘Rangers’ into administration in February 2012. Failure to agree a compromise settlement with the UK tax authorities and other creditors led to the liquidation of Glasgow Rangers FC plc in October 2012. The most recent liquidators report in May 2014 from BDO revealed that Rangers creditors amounted to a staggering £134m.

In June 2012, a new company (Sevco) purchased the company’s main assets (stadium and training ground) from the Administrators for £5.5m, allowing the football club to continue in a new form. However, it paid the penalty for the financial disasters of its predecessor as the Scottish Football Association compelled it to start life again in the lowest tier of Scottish Football – in the semi-professional 4th division.

What’s happened since then? Well, Sevco changed its name to Rangers International Football Club plc and was floated on the Alternative Investment Market in December 2012, raising a net £22m of cash from the issue of new shares. Surely, that cash would from the basis for a successful recovery to its former glories?

Its first Accounts covered the 13 month period to 30 June 2013. Ignoring the lessons from the very immediate past, the company managed to generate an operating loss of £14.3m in this period, leaving it with a cash balance of £11.2m to carry forward into the future.

Whilst the football side of the operation has been successful in restoring the club to the current second tier of Scottish football, the financial position continues to deteriorate. The company’s interim results for the six months to 31 December 2013 show a further, but reduced, operating loss of £3.5m and a cash balance depleted to just £3.5m.

During 2014, the public announcements to AIM have also included the resignations of the CEO (third in two years) and CFO (second this year). Interim funding has been raised through additional loans from shareholders and a further share issue of £3.2m in September 2014. The future and the length of that future remains highly uncertain.

When will football clubs ever learn? Operating within a financial strait-jacket can have painful consequences. Operating without any financial strait-jacket  at all can have absolutely fatal consequences. Football may be described as the ‘Glory Game’ (Hunter Davies), but there can be no glory at all if financial death hovers around every corner!!