On the edge of the precipice — Column

Our resident accountancy expert Simon Dorset offers his annual deep dive into the QPR accounts, which this year show a loss north of £24m for the 2021/22 season.

I downloaded QPR’s latest accounts with some trepidation. If a club generally regarded as well-run such as Preston North End had lost £16.8m going nowhere last season, what would the latest set of accounts reveal about our accident-prone Queens Park Rangers? Then, of course, there were those prophecies of Financial Fair Play doom looming on the horizon.

I immediately scrolled down to the club’s profit before taxation, the starting point for any FFP calculation. A loss of more than £24 million. I had been hoping for less, but wasn’t too surprised. Trying to draw any comparison with the 2020-21 season would be pointless as that was the season most severely impact by Covid 19, but to help give some context to that number, Preston’s loss for that season before taxation was £20.2m.

The same difficulties exist trying to compare our revenue streams, so I’ve done so against the average for each since being relegated to the Championship at the end of the 2014/15 season excluding the two seasons distorted by Covid (2019/20 and 2020/21).

The Broadcasting Rights comparison is heavily distorted by parachute payments. This is the revenue stream least affected by Covid; compared to the last two season, broadcast rights increased by more than £500k. The other revenue streams were all above average with the exception of Other Income. This is where any income which does not sit in any of the other categories defaults to; in recent seasons money received through the government’s Job Retention Scheme (furlough payments) has been posted to here. Overall, the revenue showed an increase against all of the post-parachute payment seasons, but that is pretty much where is good news ends.

The exact split of the costs between cost of sales and administration expenses is not specified and not especially important, but I think it is safe to assume that the more volatile costs associated with the playing squad are shown in the cost of sales which, worryingly, has risen back towards the levels not seen since the club was still enjoying parachute payments.

The largest cost increase was in the payroll which rose by approximately £3.5m to £27.5m. The likes of Charlie Austin and Stefan Johansen don’t come cheap. For a club whose season ticket sales don’t cover the cost of running the stadium, a wage bill equivalent to 125% of the total revenue is ill advised. This figure does not compare favourably with QPR’s average payroll figure since their parachute payments ended (£22m) nor with Preston’s payroll of £24.5m, however Preston’s payroll to revenue percentage is even worse than QPR’s at 178%.

A season-by-season comparison of QPR’s wages as a percentage of revenue from their last season in the Premier League to the present day shows the careful path that the club adhered to in keeping wages tracking their declining revenue as their parachute payments reduced.

Understandably there was a major hiccup in 20/21 as all of their matches were played behind closed doors due to the Covid-19 pandemic, but for that percentage to remain over 100% sets alarm bells ringing. Lee Hoos has always said that one of his main priorities is to provide the biggest budget he possibly could for the team on the pitch and, encouraged by a strong second half to the 2020/21 season, he certainly did that. Had QPR not collapsed in such a dramatic fashion after January the decision to gamble could well be viewed very differently, but now it just looks reckless and is a complete reversal on all the messaging that had previously emanated from the club.

The player amortisation also rose significantly. For those still unsure about amortisation, it is to do with the treatment of the cost of buying players. When a player is bought by a club his cost isn’t immediately debited to the club’s profit and loss. Instead, his cost is debited onto the club’s balance sheet (as an intangible asset) and his cost is subsequently debited to the profit and loss in equal annual instalments over the length of his contract. If a player was bought for £4m and his contract was for 4 years, he would be shown on the profit and loss as costing the club £1m per season.

QPR re-invested a significant portion of the money realised by the sale of Ebere Eze to Crystal Palace in the preceding summer. Their purchases included Dykes from Livingston, Willock from Benfica, Dickie from Oxford, Amos from Spurs and Bonne from Charlton and totalled £8.3m. This resulted in their amortisation charge increasing by around £2m.

Any business which regularly losses money is inevitably going to accumulate debt; QPR is no exception. These can create frightening headlines but, despite being mindful not to get too blasé about this, the vast majority of QPR’s debts are with their owners and, as long as the historical precedent is maintained, will be converted into equity in the future at no detriment to the club.

The burning question, as always, is where does this leave the club with regard to Financial Fair Play. As a very quick reminder, Championships clubs are permitted losses of up to £39m over a rolling three-period. In addition to infrastructure projects and any transactions related to our historic FFP fine, certain costs, such expenditure on youth development, community schemes and women’s football, are excluded from the FFP calculation. The excellent Swiss Ramble estimates this figure to be £4m for QPR. The following table shows where I believe we are.

A couple of brief non-explanations before continuing. For full details of why the 2019/20 and 2020/21 seasons are shown as one and how I’ve calculated the Covid costs, please see last year’s article Paying Dividends, written when the outlook seemed far rosier. The FFP amortised cost charge is down to the accounting conventions surrounding our FFP fine. I think it will be an unnecessary distraction for me to try to explain it.

On the assumption that the estimates I’ve used are close enough to the mark, the headroom of £13m looks very comfortable. A slight reduction in loss will mean, that with £5m loss rolling out of the equation, that there is no problem with this season’s accounts either, but then we hit the wall.

It is very easy to visualise a scenario where the rumoured £10m shortfall next season becomes a reality. If we focus on the reporting period encompassing the 21/22, 22/23 and 23/24 seasons, this starts with a FFP loss of approximately £20m. Moving away from Harlington and losing a few high earners like Austin, Barbet and Wallace, although countered by the knowledge that Roberts, Balogun and Clarke-Salter, their replacements, aren’t sitting in the treatment room for free, could see around £5.5m being shaved from the loss. This would give a total loss of £34.5 for those two seasons, leaving only a £4.5m loss as the maximum permissible for the 23/24 season; in other words, a further saving of £10m would need to be found.

How can this be achieved? QPR have already received some additional revenue this season. Hopefully the compensation received from Rangers for Michael Beale and from FIFA for Ilias Chair and Seny Dieng being called up to the World Cup has not been completely swallowed up by the compensation paid to Neil Critchley and Wycombe Wanderers for Gareth Ainsworth.

Selling a couple of players would be of great benefit, but the collapse of the Championship transfer market since the Covid-19 pandemic combined with a dip in form of our more obvious assets has severely curtailed this option. A big money move for Eze from Palace and subsequent sell-on fee looks less likely too as he is struggling to hold down a first team place at the moment.

Some small gains could be accomplished by extending the contract of any player who still has a remaining net book value — the unamortised proportion of their initial cost. This would spread their net book value over the length of their extended contract and so reduce next season’s amortisation. Of course, a cup run would bring in extra revenue too, but would clearly be the least likely alternative.

Once these options have been exhausted, it comes down to saving money on the cost of the players. I have my doubts as to whether the required saving could be achieved solely through slashing the wage bill, but a significant proportion will surely have to be found this way.

QPR are on the edge of the precipice. If the club can manage to extricate themselves from this position without losing their Championship status, either through fielding a drastically weakened team or a points deduction from breaching FFP, it will be an effort worthy of Houdini. This summer is when this needs to be addressed and the club are only too aware of it — I don’t expect it to be pretty.

Also by this author >>> Paying Dividends >>> 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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