As QPR finish 15th in the Championship for the second year running while posting another £20m+ loss in their latest set of accounts, we turned to our finance expert Simon Dorset to examine where the owners are spending their money and what they’re getting in return.

It is no secret QPR are totally reliant on continual investment from the shareholders and their commitment to carry on doing so is affirmed in every set of accounts released, but what actually is the scale of their investment and where does it all go?

A standard misconception is the owners’ investment for any given season is equal to the club’s reported loss; it is not. However, that is as good as any starting position for this analysis.

As we are considering the use of the money being pumped into the club, I need to stress that we are solely looking at the movement of money into and out of the business, so before going any further, it is important to recognise the difference between cash flow and the profit and loss statement as shown in the accounts. Cash flow is not affected by accounting conventions such as depreciation and amortisation which are integral components of the business’s profit and loss. I will give a few examples of the difference.

The transactions around signing a player are ideal to highlight the difference between the two. If a player is signed for £4m on a four-year deal, for the accounts his cost is amortised at £1m per season. However, the payment schedule to secure his registration would perhaps be £2.5m on completion of the transfer and the remaining £1.5m a year later. Both columns add up to £4m, but follow very different paths.

While the purchase of the player in that example is purely hypothetical, the commonly believed figures resulting from the sale of Ebere Eze to Crystal Palace provides another good example of the difference between cash flow and profit and loss. Before contingent payments (the accounting term for add-ons), Eze was sold for £16m, but Palace paid for him in two equal instalments. As Eze had been signed as a free agent, he had no net book value and so the whole of the transfer fee agreed with Crystal Palace was profit.

As a final example, season tickets are generally available before the club’s financial end of year on May 31. Any payments the club receives for these before their year-end will be included in that year’s cash flow but the revenue is only be released into the profit and loss as the matches take place.

I have based this analysis on the accounts for the 2021/22 season because, from an accounting point of view, it was one of the more interesting ones. Let’s start by looking at the brief profit and loss overview included in the statutory accounts.

The accounts always include a comparison to the previous season which does the 2021/22 season no favours because the sale of Eze to Crystal Palace happened the 2020/21 season although, as mentioned above, not all of the transfer fee was received during that season.

To understand the categorisation in the club’s accounts a little better, it is important to understand the split between the club’s primary business activities and other revenue streams or investing activities. A professional football club’s primary business 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 such as wages, general business expenses and player amortisation. Football clubs do not exist to buy and sell players and so these are generally regarded as investing activities and, as such, are not included in the operating figures. Typically, cashflow would be split into three sections which reflect these categories: cash used in operations, investing activities and financing.

To obtain the “cash used in operations” figure non-cash items and working capital movements need to be stripped out from the earnings before taxation figure. These encompass a variety of transactions that do not involve the immediate exchange of cash but still have substantial financial implications such as depreciation and amortisation.

To help a business’ accounts reflect a more accurate picture of their profitability, the purchase cost of most assets is spread across the useful life of those assets which helps match the expense of those assets with the period in which they will be generating revenue. There are two types of asset, tangible and intangible.

A tangible asset can be seen and touched such as the club’s stadium or training facility. The accounting process used to spread the cost less its residue value of a tangible asset over its useful life is called depreciation. While all of the major construction costs of Jim Gregory’s reconstruction of Loftus Road would have been written off by now, I would expect that there will still be some remedial works and improvements, such as the rail seating, being depreciated. At the other end of the scale, the club’s new training facility is just starting its depreciation life.

Whereas tangible assets can be seen and touched, intangible assets are generally described as having no physical form and include items such as brands, goodwill, licences and, significantly, the cost of acquiring players’ registrations. The cost of these is also reduced over their lifetime, which is generally a much shorter period than a tangible asset. This is known as amortisation. I feel it is worth confirming that is an age-old established accounting convention used in businesses in all walks of life and not a scheme dreamed up to help circumvent FFP/PSR as seems to be believed in some quarters.

Next to be stripped out are any profits (or losses) recorded against the sale of assets, regardless of whether they are tangible or intangible. These are purely book figures for the profit and loss based on the difference between the sale price and its initial cost less any depreciation or amortisation that has been applied to it and generally not equivalent to the money received. It is also worth mentioning at this point that the agreed price for the asset may not all be received on the transfer of the asset.

Any items bought or sold for operating activities on credit terms are recognised immediately in the club’s profit and loss, but are only reported in the cash flow whenever payment is made or received. These transactions result in a change in the amount of money the club owes or is owed or the levels of stock held for re-sale and so these changes in debtors, creditors and stock need to be pared back to just leave the financial transactions behind them. Disappointingly for our purposes, loans such as the loan from the EFL to help cover costs over the Covid-19 shutdown, are simply treated as creditors.

Interest payable and receivable are generally regarded as investment activities and so are excluded at the point as well.

This gives us the cash used in operations.

Having established the net cash outflow from operating activities, we now need to examine the investment activities used to support these. As we are looking at the cash flow it is important to bear in mind that these are the payments and receipts made during the financial year, which will not directly correspond to the purchases and sales made during that season as many deals are paid by installments and may also have contingent payments (add-ons).

The vast majority, if not all, of the payments to acquire tangible fixed assets would have been for the TSG Elite Training and Performance Centre. The acquisition of the freehold to the Heston Sports Ground cost around £4.5m with a further £15m expected for the construction of the facilities. An initial £10m bond was issued to Shirieene Hajamaideen (Ruben Gnanaligam’s spouse) with a further bond of £6.8m funded by supporters and other investors. The balance of any other funding required will be covered by the principal shareholders of the club.

The receipts from sale of player registrations includes, among other deals, the second payment from Crystal Palace for Eze, so while the profit from his transfer (excluding any contingent payments) was included in the 2020/21 accounts, the cash flow in this season benefited from the second tranche of transfer money.

So now we have a better understanding of the cash required during the season to cover the total outflow, where did the funding required come from? One of the reasons I’ve used this season in my example is slightly unusual because it is one during which supporters were able to invest in a bond to help build the new training facility at Heston meaning that there was a second source of funding available to the club.

The difference between the cash spent by the club in the financial year and that invested is simply reflected by a change in the club’s bank balance.

You may have noticed that there was no obvious mention of any payments regarding the club’s historic FFP fine. This is because of the accounting treatment of it. The fine was declared in full in the club’s 2017/18 accounts and because the EFL gave the club ten years in which to pay the fine, this is then treated as a creditor and, as such, the annual payment of £1.7m is included in the change of creditors in the cash used in operations table.

Collating this data for the last 10 seasons gives a clear picture of how much money the shareholders have invested into the club and where it has been spent, while also re-enforcing the importance of player sales.

The usage is probably better represented as a pie chart, because who doesn’t love a pie chart?

Even at a quick glance, this shows that over half of the investment in the club is spent on day-to-day operations and this increases to two thirds if servicing external debt is included. This immediately prompts the question as to whether the cash used in operations can be broken down further?

As the club elects not to publish its profit and loss statement (as is their right), accurate figures regarding the breakdown of the cost of sales and administrative expenses are a little more problematical. They show little outside of the wages paid. The figures in the following table are profit and loss figures not cash flow but, as a rule of thumb, I think it is safe to apply the same percentages across the board.

The cost of wages is 58% of the total costs so, applying that percentage to the usage of funds, would equate to over £81m of the shareholders’ investment over the last ten seasons. Let’s see how that looks in the Usage of Funds pie chart.

This chart can’t be taken as gospel because of the rule of thumb used in breaking out the wages from the rest of the operations expenditure, but it won’t be far from the mark. While two thirds of the funds have been spent on the day-to-day running of the club (I’ve included service the external debt in that figure), the remaining third has been spent trying to improve the playing squad and infrastructure with more than half an eye on the future.

To prevent this massive level of investment leaving the club with an equally massive level of debt the shareholders regularly convert some of their loans to equity. While this can be described as exchanging debt that will never be repaid into worthless shares, it does leave the club in a stronger financial position and should be welcomed. The following table shows the effect of this and total share allocation over the same period.

Despite all of this loan conversation, including the £22m which was part of the club’s FFP settlement, the club’s debt has steadily risen throughout this period, although it should be noted that 95% of the debt is owed to the club’s owners and the vast majority of the remainder is owed to the bond holders in the training facility.

In the Strategic Report at the beginning of the 2015/16 season’s accounts, there was a change to the section entitled Future Developments which, until that point, repeatedly stated the club’s short-term aim to return to the Premier League or at least secure a play-off position. Their desire “to ensure the club operates within its means and to be a sustainable outfit in the near future” was added. The impressive training facility is undoubtedly an important step on this path but, ten years later, with £180m invested and a steadily rising debt, there is not even a top ten finish to show for their efforts. It seems they are running to stand still.

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Pictures - Ian Randall Photography

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