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I received this PM and he seems to agree with qprdads assessment, its so in depth and makes a good read. I would imagine poster doesn't want to be answering tens of questions and thats why it was Pm'd, but it is here for anyone interested.
I wanted to send you a PM because I thought you might appreciate my thoughts on the accounts. I’ve been reading all the comments across the various boards and the conclusions being drawn are so far off the mark it’s embarrassing! I would post this myself but I would rather not have to deal with the barrage of questions from people who simply cherry pick information to feed their own obsessions (GP!). Report would refer to this condition as Cognitive Dissonance and, if you look it up, he’s not wrong!
For what it’s worth, I am an accountant. In fact I’m a Fellow of two accountancy institutes as well as being a Partner in an accountancy practice. In addition I have an MBA from a top UK business school and I have various interests in a number of small businesses. You can probably see now why I do not want to post this on the board myself…it will only attract the ‘flies’!
There is a lot of information in the accounts and you can over complicate things by trying to explain too many things in too much detail. You also need to steer clear of agendas or simply trying to get numbers to fulfil a predetermined answer! For the sake of this PM I’ll give you my simplified ‘helicopter view’ description of what’s happening in the accounts (sorry if that sounds patronising…it’s not supposed to as I use the same phrase when discussing my own clients’ accounts with them as they don’t understand them either!)
1. This whole idea of the Club making a profit and Holdings making a loss is a total red herring. The club accounts clearly state (page 8 under the heading ‘Turnover’) that Turnover represents management fees receivable from the parent company. This simply means that they wanted to keep the club’s affairs as simple as possible and keep and profits/losses in Holdings where all the funding is. They would have decided what figure sounded like a reasonable breakeven number, e.g. c£500k, added it to the costs in the company (c.£19.5m) and then sent an invoice from the club to Holdings for the balance (i.e. £20m) in the form of ‘Management Fees’. It really is that simple! There’s nothing ‘dodgy’ there at all. It would appear that all of the group’s income, including match day and sponsorship, etc. goes directly into Holdings so the Club has no external turnover of its own. By effectively transferring all of the costs from the Club to Holdings via the management fee they are simply putting everything into one ‘pot’ (Holdings) once all the separate activities have been accounted for throughout the year. We do this all the time!
2. Why have we made a £20m loss (I like to work in round numbers when I’m simplifying things!)? Obviously I’m working from the same limited information that you are so I can only talk in generalisations. The way I look at these things is to assume the market is relatively stable and thus the same things happen this year that happened last year and thus the results should be pretty much the same (this is more of an art than a science!). You then look for the major differences and try to offer an explanation for them. If we start with the Club we see that the individual component parts of the Balance Sheet really haven’t changed that much (relatively speaking) year on year but the Profit and Loss tells a different story. I’m going to ignore turnover for the reasons explained above. The major change here is cost of sales which has increased by about £8m. That means we spent the same amount as last year PLUS a FURTHER £8m. On what? Again we have limited information but a gander in the notes is quite revealing. From this I’m quite sure that the increase is all due to us getting new and more expensive (from a salaries perspective) players. We know from page 8 that new player registrations are amortised over the life of their contracts. That means that if we buy someone for £4m and put them on a four year contract we ‘chop up’ that fee into four and put £1m of it as a cost in the Profit and Loss account each year (even if we have to pay for it all up front – now you can see why often the amount of profit or loss a company makes and the amount of funding it requires can be dramatically different and therefore some of the conclusions Ingham has been drawing with regard to £50m debt levels are a little misguided). Anyway…I’m digressing! You can see from page 9 that the amount of amortisation has increased by about £1.5m from the previous year and as there is no change in accounting policy (which would have to be disclosed) we can conclude that we must have bought more players (there’s rocket science telling us what we already knew!). Continued…
Part 2 - However new players cost the club in wages and we can see from page 10 that the upshot is an INCREASE in wages over the previous year of c£6.5m. The two points that I’ve raised total (c£1.5m + c£6.5m) = c£8m, which is the total increase in Club’s cost of sales cost that was then transferred to Holdings by way of a management charge.
3. So, what can we gather in Holdings? Everyone is saying that there is something dodgy going on because Holdings hasn’t produced its own P&L under CA06! There’s nothing dodgy at all as they’ve produced a group one. If you want to know what Holdings has done simply deduct the P&L for the Club away from the one for Holdings and ignore any transactions that would be between the two entities as these are excluded. That sounds even more complicated than it is! Let me give you an example. The turnover in Holdings (representing the Group) is shown as c£15m (round numbers!). In Club it’s £20m but we know that the entire turnover in Club was to Holdings so it would be excluded when the two entities are added together. Therefore all of the turnover shown in the Group accounts must be Holdings’. See…easy! Because of peoples’ obsession with trying to find headline numbers to ‘Paladini Bash’ no one has mentioned that the group’s turnover (match day, sponsorship, etc.) has increase by 60% which is bloody good in my opinion!
4. Using my same approach mentioned above (last year happens again…what’s changed) we can see that cost of sales has increased by c£11.5m. We know that c£8m of that was in Club to do with new players’ costs so a further c£3.5m increase is in Holdings and it’s impossible to say what this is made up of with the information available. Add to this an increase in admin expenses of c£1m (a large chunk of which is made up of increased depreciation due to the stadium improvements(i.e. chopped up and spread over a number of years)); lower profit on player sales (c.£2m) and a slightly better position on interest (c£0.5m) and we’ve explained the entire movement from last year except £3.5m of costs in Holdings! For the sake of simplicity I’m ignoring Calliendo’s one of loan write off last year. Without that the loss in the previous year would have been c.£10.2m. The loss this year is c.£18.8m. A difference of £8.6m. Turnover better £5.5m. Cost of sales worse £11.5m (of which we can explain c£8m). Expenses worse £1m (mostly stadium improvement depreciation). Player disposals worse £2m and interest better £0.5m. All in all that totals (if you’ll excuse the rounding!) the £8.6m we were looking for.
5. Lastly we need to consider that this overall loss of (lets say) £20m needs to be funded and this is causing a few people to pop veins in the foreheads as they’re assuming that we are riddled with debt and that administration is looming. I may have missed something here but I haven’t come across one post that mentions the fact that the share capital of the company has increased substantially. If anyone wants to look at how the loss was funded they only need to study the cashflow that is included in the accounts, however this statement needs to be read along with a number of the notes in the accounts and it’s fairly complicated to get your head round if your not used to it (hence why I’ve not seen one ‘headline post’ quoting anything from it!) I’ll therefore give you my VERY VERY simplified version (that’s not meant to be patronising…I’m just heavily caveating my explanation to prevent people coming back to me with “yeah but what about…..”. If you want it more detailed than this then read the cashflow statement! The group’s overall net position has decreased from a small net asset to a net liability of around £5m in other words what its owes relative to what it owns, and is owed, has gotten worse by around £5m, i.e. ‘debt’ has ‘gone up’ by that much and you can guess who’s put that money in! But we’re trying to support a further loss of around £20m so where’s the other £15m come from? Have a look at the share capital. It’s gone up by £15m and I need to make this clear. THIS IS NOT DEBT. THIS IS INVESTMENT AS IT CANNOT BE RETURNED (very easily!). So three quarters of our funding requirement has been INVESTED…NOT LENT,
So there you have it. A very long winded ‘simplified’ view of the accounts! It seems to me that, in summary, FB mistakenly thought he could overlay business models and that the way to the Promised Land in the timescales he gave was to throw money at the tools of the trade (players) in the same way that you would do in Formula 1. If you follow F1 it’s well known that even if a team starts off having a bad season, if they are one of the teams with a big budget then they will eventually come good and be in with a chance (like both Ferrari and McLaren did last season). The cars WILL get better and performances on the track WILL improve. Continued…
Part 3 - This is why F1 are bringing in budget caps and cost reductions as it was unfair to the smaller, lerss well funded teams (there are parallels in the Premiership as well now). He knows that you can raise those funds through marketing and sponsorship and you can’t argue against the fact that that he was pretty successful there. F1 fans are not really an issue to the teams. They just need to have a bit of merchandise to flog and that’s it. For most fans there is just one ‘home’ race and you very rarely go away! They’re pretty insignificant and that was apparent when FB spoke. That model doesn’t work with us! Where, it also seems, he went wrong was not developing stability with a top class team manager, which is a shame as that is a lesson he should have carried over from F1 as it’s one of the few transferable traits between the respective sports. Both Ferrari and McLaren have had strong charismatic team managers who knew what they were doing and were allowed to get on with it. In fact both teams have struggled since Ross Brawn and Ron Dennis left their teams. There will be those who will be disappointed that I haven mentioned GP in any of this and that’s because the subject bores me to tears. I read the boards every day and there are those who cannot post without spitting some sort of vitriol in his direction, even if their post is totally unrelated! I have no opinion on him whatsoever. He’s made mistakes. Sure, we all have but at the end of the day I’m a football fan and more importantly a QPR fan. We all seem to have forgotten what it was like to turn up on a Saturday (and now midweek too if you’re able!) cheer on the lads, have a pint and a laugh with your mates, discuss the game (it didn’t matter if we’d lost as there’d still be things to talk about), go home and spend time with the family waiting for it all to come round again. Now it seems to be a too political for everyone. We’ve lost that ability to step away and be something other than a QPR fan for a few days (I can hear the sharp intakes of breath as I write that from a few!). What I’m saying is that I shout, holler and cheer (and groan…sometimes!) for 90 minutes in the stadium. After that I’m a family man and a professional…who also happens to be a QPR fan and have been since I was a small boy growing up in Harrow (I’m the same age as you Pete!). This sort of non stop politicking used to be constrained to the fans groups and you can tell because it’s the same protagonists that have found a new, global, 24/7 forum for their angst (that’s a huge generalisation I know but you know what I mean)!! The internet has a hell of a lot to answer for on that front.
If we want to learn a lesson from politics perhaps we should learn to go ‘back to basics’. Just be a QPR fan. People shouldn’t need to spit vitriolic comments every time they feel the need to think about GP or this board member or that board member. It’s well known that hate is easier than love as an emotion. Anger is easier than happiness. Both hate and anger take less effort to sustain over long periods. Maybe we should all just step back, consider and..well…just try harder! Everyone benefits!
Anyway, I hope you’ve found my ‘summary’ useful (just be glad it’s not an in depth report!). I’m sure you can understand why I haven’t posted it myself but, as I very really post, I don’t want to get dragged into justifying myself to people who don’t know me and don’t understand. I’ve seen it too many times where people get dragged into ad hominem or straw man arguments and I really can’t be bothered. I’m just trying to be helpful but some people don’t respect that.
I wanted to send you a PM because I thought you might appreciate my thoughts on the accounts. I’ve been reading all the comments across the various boards and the conclusions being drawn are so far off the mark it’s embarrassing! I would post this myself but I would rather not have to deal with the barrage of questions from people who simply cherry pick information to feed their own obsessions (GP!). Report would refer to this condition as Cognitive Dissonance and, if you look it up, he’s not wrong!
For what it’s worth, I am an accountant. In fact I’m a Fellow of two accountancy institutes as well as being a Partner in an accountancy practice. In addition I have an MBA from a top UK business school and I have various interests in a number of small businesses. You can probably see now why I do not want to post this on the board myself…it will only attract the ‘flies’!
There is a lot of information in the accounts and you can over complicate things by trying to explain too many things in too much detail. You also need to steer clear of agendas or simply trying to get numbers to fulfil a predetermined answer! For the sake of this PM I’ll give you my simplified ‘helicopter view’ description of what’s happening in the accounts (sorry if that sounds patronising…it’s not supposed to as I use the same phrase when discussing my own clients’ accounts with them as they don’t understand them either!)
1. This whole idea of the Club making a profit and Holdings making a loss is a total red herring. The club accounts clearly state (page 8 under the heading ‘Turnover’) that Turnover represents management fees receivable from the parent company. This simply means that they wanted to keep the club’s affairs as simple as possible and keep and profits/losses in Holdings where all the funding is. They would have decided what figure sounded like a reasonable breakeven number, e.g. c£500k, added it to the costs in the company (c.£19.5m) and then sent an invoice from the club to Holdings for the balance (i.e. £20m) in the form of ‘Management Fees’. It really is that simple! There’s nothing ‘dodgy’ there at all. It would appear that all of the group’s income, including match day and sponsorship, etc. goes directly into Holdings so the Club has no external turnover of its own. By effectively transferring all of the costs from the Club to Holdings via the management fee they are simply putting everything into one ‘pot’ (Holdings) once all the separate activities have been accounted for throughout the year. We do this all the time!
2. Why have we made a £20m loss (I like to work in round numbers when I’m simplifying things!)? Obviously I’m working from the same limited information that you are so I can only talk in generalisations. The way I look at these things is to assume the market is relatively stable and thus the same things happen this year that happened last year and thus the results should be pretty much the same (this is more of an art than a science!). You then look for the major differences and try to offer an explanation for them. If we start with the Club we see that the individual component parts of the Balance Sheet really haven’t changed that much (relatively speaking) year on year but the Profit and Loss tells a different story. I’m going to ignore turnover for the reasons explained above. The major change here is cost of sales which has increased by about £8m. That means we spent the same amount as last year PLUS a FURTHER £8m. On what? Again we have limited information but a gander in the notes is quite revealing. From this I’m quite sure that the increase is all due to us getting new and more expensive (from a salaries perspective) players. We know from page 8 that new player registrations are amortised over the life of their contracts. That means that if we buy someone for £4m and put them on a four year contract we ‘chop up’ that fee into four and put £1m of it as a cost in the Profit and Loss account each year (even if we have to pay for it all up front – now you can see why often the amount of profit or loss a company makes and the amount of funding it requires can be dramatically different and therefore some of the conclusions Ingham has been drawing with regard to £50m debt levels are a little misguided). Anyway…I’m digressing! You can see from page 9 that the amount of amortisation has increased by about £1.5m from the previous year and as there is no change in accounting policy (which would have to be disclosed) we can conclude that we must have bought more players (there’s rocket science telling us what we already knew!). Continued…
Part 2 - However new players cost the club in wages and we can see from page 10 that the upshot is an INCREASE in wages over the previous year of c£6.5m. The two points that I’ve raised total (c£1.5m + c£6.5m) = c£8m, which is the total increase in Club’s cost of sales cost that was then transferred to Holdings by way of a management charge.
3. So, what can we gather in Holdings? Everyone is saying that there is something dodgy going on because Holdings hasn’t produced its own P&L under CA06! There’s nothing dodgy at all as they’ve produced a group one. If you want to know what Holdings has done simply deduct the P&L for the Club away from the one for Holdings and ignore any transactions that would be between the two entities as these are excluded. That sounds even more complicated than it is! Let me give you an example. The turnover in Holdings (representing the Group) is shown as c£15m (round numbers!). In Club it’s £20m but we know that the entire turnover in Club was to Holdings so it would be excluded when the two entities are added together. Therefore all of the turnover shown in the Group accounts must be Holdings’. See…easy! Because of peoples’ obsession with trying to find headline numbers to ‘Paladini Bash’ no one has mentioned that the group’s turnover (match day, sponsorship, etc.) has increase by 60% which is bloody good in my opinion!
4. Using my same approach mentioned above (last year happens again…what’s changed) we can see that cost of sales has increased by c£11.5m. We know that c£8m of that was in Club to do with new players’ costs so a further c£3.5m increase is in Holdings and it’s impossible to say what this is made up of with the information available. Add to this an increase in admin expenses of c£1m (a large chunk of which is made up of increased depreciation due to the stadium improvements(i.e. chopped up and spread over a number of years)); lower profit on player sales (c.£2m) and a slightly better position on interest (c£0.5m) and we’ve explained the entire movement from last year except £3.5m of costs in Holdings! For the sake of simplicity I’m ignoring Calliendo’s one of loan write off last year. Without that the loss in the previous year would have been c.£10.2m. The loss this year is c.£18.8m. A difference of £8.6m. Turnover better £5.5m. Cost of sales worse £11.5m (of which we can explain c£8m). Expenses worse £1m (mostly stadium improvement depreciation). Player disposals worse £2m and interest better £0.5m. All in all that totals (if you’ll excuse the rounding!) the £8.6m we were looking for.
5. Lastly we need to consider that this overall loss of (lets say) £20m needs to be funded and this is causing a few people to pop veins in the foreheads as they’re assuming that we are riddled with debt and that administration is looming. I may have missed something here but I haven’t come across one post that mentions the fact that the share capital of the company has increased substantially. If anyone wants to look at how the loss was funded they only need to study the cashflow that is included in the accounts, however this statement needs to be read along with a number of the notes in the accounts and it’s fairly complicated to get your head round if your not used to it (hence why I’ve not seen one ‘headline post’ quoting anything from it!) I’ll therefore give you my VERY VERY simplified version (that’s not meant to be patronising…I’m just heavily caveating my explanation to prevent people coming back to me with “yeah but what about…..”. If you want it more detailed than this then read the cashflow statement! The group’s overall net position has decreased from a small net asset to a net liability of around £5m in other words what its owes relative to what it owns, and is owed, has gotten worse by around £5m, i.e. ‘debt’ has ‘gone up’ by that much and you can guess who’s put that money in! But we’re trying to support a further loss of around £20m so where’s the other £15m come from? Have a look at the share capital. It’s gone up by £15m and I need to make this clear. THIS IS NOT DEBT. THIS IS INVESTMENT AS IT CANNOT BE RETURNED (very easily!). So three quarters of our funding requirement has been INVESTED…NOT LENT,
So there you have it. A very long winded ‘simplified’ view of the accounts! It seems to me that, in summary, FB mistakenly thought he could overlay business models and that the way to the Promised Land in the timescales he gave was to throw money at the tools of the trade (players) in the same way that you would do in Formula 1. If you follow F1 it’s well known that even if a team starts off having a bad season, if they are one of the teams with a big budget then they will eventually come good and be in with a chance (like both Ferrari and McLaren did last season). The cars WILL get better and performances on the track WILL improve. Continued…
Part 3 - This is why F1 are bringing in budget caps and cost reductions as it was unfair to the smaller, lerss well funded teams (there are parallels in the Premiership as well now). He knows that you can raise those funds through marketing and sponsorship and you can’t argue against the fact that that he was pretty successful there. F1 fans are not really an issue to the teams. They just need to have a bit of merchandise to flog and that’s it. For most fans there is just one ‘home’ race and you very rarely go away! They’re pretty insignificant and that was apparent when FB spoke. That model doesn’t work with us! Where, it also seems, he went wrong was not developing stability with a top class team manager, which is a shame as that is a lesson he should have carried over from F1 as it’s one of the few transferable traits between the respective sports. Both Ferrari and McLaren have had strong charismatic team managers who knew what they were doing and were allowed to get on with it. In fact both teams have struggled since Ross Brawn and Ron Dennis left their teams. There will be those who will be disappointed that I haven mentioned GP in any of this and that’s because the subject bores me to tears. I read the boards every day and there are those who cannot post without spitting some sort of vitriol in his direction, even if their post is totally unrelated! I have no opinion on him whatsoever. He’s made mistakes. Sure, we all have but at the end of the day I’m a football fan and more importantly a QPR fan. We all seem to have forgotten what it was like to turn up on a Saturday (and now midweek too if you’re able!) cheer on the lads, have a pint and a laugh with your mates, discuss the game (it didn’t matter if we’d lost as there’d still be things to talk about), go home and spend time with the family waiting for it all to come round again. Now it seems to be a too political for everyone. We’ve lost that ability to step away and be something other than a QPR fan for a few days (I can hear the sharp intakes of breath as I write that from a few!). What I’m saying is that I shout, holler and cheer (and groan…sometimes!) for 90 minutes in the stadium. After that I’m a family man and a professional…who also happens to be a QPR fan and have been since I was a small boy growing up in Harrow (I’m the same age as you Pete!). This sort of non stop politicking used to be constrained to the fans groups and you can tell because it’s the same protagonists that have found a new, global, 24/7 forum for their angst (that’s a huge generalisation I know but you know what I mean)!! The internet has a hell of a lot to answer for on that front.
If we want to learn a lesson from politics perhaps we should learn to go ‘back to basics’. Just be a QPR fan. People shouldn’t need to spit vitriolic comments every time they feel the need to think about GP or this board member or that board member. It’s well known that hate is easier than love as an emotion. Anger is easier than happiness. Both hate and anger take less effort to sustain over long periods. Maybe we should all just step back, consider and..well…just try harder! Everyone benefits!
Anyway, I hope you’ve found my ‘summary’ useful (just be glad it’s not an in depth report!). I’m sure you can understand why I haven’t posted it myself but, as I very really post, I don’t want to get dragged into justifying myself to people who don’t know me and don’t understand. I’ve seen it too many times where people get dragged into ad hominem or straw man arguments and I really can’t be bothered. I’m just trying to be helpful but some people don’t respect that.
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