Analysis – The accounts are okay, but certainly not ‘historic’

THE press release sent out last Monday to support Scottish Rugby’s 2018 Annual Report was a monument of Murrayfield’s unfaltering dedication to self-aggrandisement. Below the amour propre was a set of accounts that can, at best, be described as ‘reasonable’ – but not ‘great’ – and certainly not ‘historic’.

Turnover

“Record turnover of £57.2 million achieved (rise of £5.8m) + 11.3% on previous year.”

“Represents 63% rise in income growth since 2011.

However, there was no mention that Operating Costs over the same seven-year period have risen 68% to £55 million – and 12.3% in the last 12 months. Turnover is a key driver for the professional and international game – but it is a dangerous measure if costs are not being controlled or managed equitably.

The IRFU announced their 2018 financial results last week with much less hubris and much more detail than their Scottish counterparts – and they provide a compelling benchmark for Scottish Rugby. Turnover rose 14.4% from €76.586 million to €85.724 million – and cost increases were held to 11.2%.

With ticket and commercial income dropping this year, the jump of £4.47 million in ‘Other Operating Income’ in the SRU accounts has driven the growth in turnover. This  is presumably down to the Lions dividend and the introduction of the two South African teams to PRO14 – there needs to be some clarity on whether this growth figure is indeed driven by one-off payments or can truly be regarded as an indicator of sustainable growth.

Surplus

“A record turnover of £57.2 million has generated a surplus of £1.8 million, among the highest ever recorded for the organisation.”

Yet, the Operating Surplus of £2.17 million is 9.7% below last year’s £2.40 million and 1.8% below the £2.11 million (£2.57 million in today’s money) returned in 2011, shortly before Gordon McKie was fired as Chief Executive. Effectively Operating Surplus is 40% less in turnover percentage than it was in 2011.

Staffing

Employment costs are a constant at 49% of turnover meaning that: for every pound raised, 50p goes on wages. Employee numbers are up from 283 in 2011 to 358 (36.7%) in 2017; and to 387 in 2018 (8.1%). That includes 103 professional players supported by 31 pro team ‘coaching and operations’ staff, which equates to one ‘coaching and operations’ staff member for every three players.

The average annual wage (playing / non-playing) for 2018 was £62,946. The part time chairman was paid £35,000 and the non-executive directors were on £15,000 per annum. The recent practice of not providing salary details for the four executive directors – Chief Executive Mark Dodson (who recently signed a new contract), Chief Operating Officer Dominic McKay, General Counsel Robert Howat and Finance Director Andrew Healy – has continued.

There is a 14.2% increase in pension costs but it is not clear whether this is general or specific?

There is no mention of the financial impact of the now infamous NDAs.

Investment

“Funds generated allow significant on-going and increasing investment to be earmarked for grassroots rugby.”

“Scottish Rugby has generated one of the strongest operating results for the game in its history, which will lead to a continuing increase in investment across the sport in Scotland.”

A lack of empathy with the clubs and a prolonged antipathy towards investing in the grassroots were key reasons why Gordon McKie lost his job. Seven years down the line, Scottish Rugby is still only investing the same 5.1% of turnover in Club Support & Development – while transparency is virtually non-existent.

The IRFU invest 12.4% of turnover in ‘Domestic & Community Rugby’ compared to Scottish Rugby’s 5.1% – and whilst Scottish Rugby claim that the comparison is not on a like for like basis, they will need to match the IRFU’s perspicuity to win over the many sceptics.

Debt

“Average debt down to £2.4 million, a fall of £2.8million on previous year.”

“The record-breaking financial results have also enabled Scottish rugby to record its lowest average debt in the professional era.”

“A figure of £2.4 million has been reported, a drop of £2.8 million on the average debt reported in the previous year creating a platform for increasing sums of money to be reinvested into the grassroots game.”

The £2.4 million remaining average debt referred to is presumably bank debt relating to the £10 million loan taken out in 2004 and renegotiated in 2012 and 2014.

There is a further £15.789 million current (due within one year) debt which, less £10.013 million current assets, comprises the working capital at a current ratio (measuring the ability to meet current liabilities out of current assets) of 0.63, against a break-even of 1.00 and the IRFU’s figure of 1.96.

According to the Annual Report the bank loan has been reduced from £10 million to £3.5 million (average £2.4million?) since 2011 – but cashflow (from the Operating Surplus) has not been strong enough to service the repayment programme and provide the necessary working capital.

Instead the repayment programme appears to have been funded out of two soft targets – a severe restriction on capital expenditure (a £1.74m shortfall against depreciation over the period) and the starvation of the grassroots (still just 5.1% of turnover). Both stratagems have worrying long term implications.

SRU Board Chairman Colin Grassie alluded to the former in last year’s Annual Report (but not this year’s) when he said: “BT Murrayfield, the home of Scottish Rugby, was last renovated 22 years ago and the ageing stadium is in need of substantial investment”; meanwhile, the growing angst and falling playing numbers in the club game is ample testament to the latter.

If the target is to clear the bank debt then costs must be reduced.  There are no reserves, the debenture holders (£31.787 million) have first call on Murrayfield Stadium, and while the land around the estate has considerable value – as Murrayfield Wanderers are well aware – it is not readily realisable.

How can the SRU promise new money for Agenda 3 – or for anything else for that matter – without clear evidence of an imminent improvement in cash flow on a year on year basis?

As IRFU Chief Executive Philip Browne said when unveiling his organisation’s accounts for this year: “Success is never guaranteed, and for that reason we must always be careful how we distribute funding across all aspects of the game. Given the political and economic uncertainty in the world at the moment, and as a number of the provinces are expecting that finances will be very tight next year, we must continue to ensure we don’t live beyond our means.”

Johnston calls for full and independent review of SRU governance