Picking The Bones

Last updated : 25 March 2009 By The Big Purple One
If Sir David Murray has any rights left in our eyes, we should at least indulge him his annoyance with punters and pundits alike who think a smattering of football knowledge, coupled with the ability to recognize the front end of a spreadsheet somehow melds into absolute financial know-how. Damnant quod non intellegunt… as they say in Rome!
Whether it's words of wisdom from disgruntled hacks, evermore mind-numbing verbosity by our favorite trickster of truth, or the inaudible grunts of forum fascist billyboybearfrombearsden, it seems everybody has claimed a stake in the right to pick through the bones of our club's finances. Eh… including me.
So why so much disgruntlement you may ask? Well, unless you've been visiting the outer reaches of some distant galaxy of late, it couldn't have escaped your attention that the half-yearly results for 2009 make seriously grim reading.
Not that, as Rangers fans, we're not used to such financial fragility. I'm sure most of us can hardly remember a time when the subject of our club's debt, and poor fiscal house keeping wasn't an issue for national debate. Indeed, there has only ever been three years in the last ten where the club has turned a profit. Coupled with the even more depressing statistic that none of those years was debt free, makes for some serious disgruntlement, let me tell you.
Ok, so this isn't any great surprise to us, but here's the scary bit: SDM has racked up combined debts in the last ten years (excluding what we expect to see this year) totaling (and the squeamish might want to look away at this point) just over one-third of a billion! Yes, you did read it right. That's on a combined income of just over half a billion, and pooled losses of 137 million for the same period. Fortunately, our combined retained profit reached the dizzy heights of 20 million… every cloud, as they say.
It only seems like yesterday, and not 2004, when John McClelland, the then chairman, was "confident the club was on course to reduce its debt". In the same article in The Independent On Sunday, he was buoyant enough to espouse his confidence that his three year plan would reduce the debt, which at that time was 68 million.
Unfortunately, that rose to an unprecedented 74 million the following year, and it took at much maligned, and controversial share deal the following year to make any significant impact on the debt. Hardly the stuff of three year plans, and more in keeping with extraordinary (some would say desperate) fiscal measures designed to get out of a hole.
The next significant milestone in the great debt saga was the JJB deal, where initial payments took the debt levels from 22 million in 2005, to a respectable 6 million in 2006. The steady rise in revenue from the Rangers stores year on year made comfortable reading for the accountants, but the figures post JJB deal are somewhat skewed on account of the UEFA cup final run. It's unclear whether the JJB deal is destined to be a long term success, and can only be measured in the long term… so the jury is still out on that one.
The alarming point is that Rangers' debt is climbing again, and unless there is another pecuniary ace up Murray's sleeve that we don't know about, the next round of fiscal policies had better measure up. Simple arithmetic tells us that current expenditure and the way the club finances playing staff is unsustainable without continued success on the park.
There hardly seems a time when Sir David wasn't harping on about the amount of money Rangers have spent in the transfer market year on year. Most of which seems to have happened on the back of years where European campaigns fell flat.
Ok! Ok! I hear the accountants and financial experts amongst you screaming that it's not just about retained profit and loss, and that there is far more to business finance than just pounds shillings and pence and debt levels. Of course there is, and it would be remiss and somewhat insulting of me to emblazon my piece with the headline grabbers without drilling down into the bedrock.
We also have to be a tad more pragmatic about discussing debt levels in a business. Unfortunately, debt isn't a finite, or absolute figure it the traditional sense of the word when it relates to a specific business. Yes, it's something that needs to be financed and ultimately paid, but debt in any successful company is measured against other factors that relates to the financial structure of the company.
For example, the liquidity ratio (or acid test) is a measure of a companies ability to meet it's commitments to its short term debt obligations. Its one of the financial metrics used by bankruptcy analysts to determine whether or not a company remains a viable concern. So it's not the debt that's the concern, but the ability of the business to be able to cover those debts that counts.
Solvency is also important , and isn't necessarily linked to profitability. In other words, a business can still be solvent and loosing money. Ok, so you don't have to be Adam Smith to understand that such conditions can't exist for ever, and companies finding themselves in such a position need to make the necessary changes to the business to turn certain situations around.
Murray has often stated that the main problem for Rangers' current financial situation is excessive fixed costs and overheads in the face of falling revenue. He seems happy (or as happy as can be expected) that Rangers' ability to meet it commitment to the current debt levels is not a problem, the liquidity ratio of the business is healthy and the company is still solvent. In reality, there are very few businesses not facing the prospect of higher costs and lower revenues in the current financial climate, and it would appear that Rangers are no different.
In a piece in the Telegraph, he stated : "We are no different from any other business," Murray said. "Our static overheads are too expensive and we have less revenue. We had to take these things into consideration because the club must be run professionally and financially correct. Yes, we could continue to spend money but we would develop more problems and the club would not be in a good condition."
It's patently obvious that aspirations for success were at the root of the spend, spend, spend philosophy under Murray that, quite frankly, wasn't matched on the park. It's ironic that it took McLeish's poorly funded squad to get us to the last sixteen of the CL and the "big money". Something previous managers (including Smith) with their multi-million pound squads couldn't do.
Rangers FC needs a change of philosophy, and a change of strategy, where a large percentage of the squad is home grown, and merely supplemented by one or two signings each year. We don't have the revenue streams to support any other way. However, what is even more important, is our success on and off the park.
Success on the park leads to increased revenue from CL money, TV sponsorship and increased merchandising; success off the park is shedding the rank rotten image that follows us everywhere we go, which makes us unattractive to the rest of the world. You aint gonna like this, but we live in liberal, bleeding-heart times, where the PC brigade is in the ascendancy and winning the debate. How are we ever going to sell the Rangers brand to the "outside world" if we're happy to be see as the FTP brigade?
If I were to summarize, I would say that current debt level when measured against the asset value of the company, probably isn't an issue for the company as it stands. However, the rise in year on year debt has to stop, or it could suck us back into the financial abyss.
In my opinion, and it is only my opinion, Rangers remain solvent, but it's likely we'll see more fiscal measures this year on top of the ones we've already seen. Murray has indicated that the playing squad will suffer next season, and the income from this level of divestment will probably go to shore up the poor fiscal performance.
I don't foresee the banks calling in debts under "normal" circumstances, as the whole point of banks is to rake in revenue payments from investments (loans), but we live in strange times and it seems the banks need cash, so who knows.
If the banks do call in their debts, it's inevitable we will see the divestment (sale of assets) required to meet those debts. Rangers do have more than enough liquid assets to clear the debts, and is actually fairly strong in that area (asset value of around 125million) but the divestment scenario could result in some very uncomfortable fiscal measures. However, nothing new for businesses in times of trouble.
The real question is whether or not the boss can get us to a place where we don't find ourselves sucked into a cycle of boom and bust, with future fiscal measures reflect the level of income we expect. Unlike the "real" business environment, football has nowhere to go, and there is a ceiling on revenue streams.
Unless we start to think smart, outside the box, and how we exploit new and existing revenue channels, we'll always find ourselves in this howk… but that's a whole new debate.