Kilmarnock FC´s financials (part 1)

Scottish Premier League side Kilmarnock FC just started their first season with local businessman Billie Bowie as a majority shareholder and a board member of the club. Bowie became the owner last spring, after a complex arrangement, where the club was essentially freed of it´s debt. Before Bowie came into the club, Kilmarnock had been a steady figure at the Scottish Premier League for a long time, but during the past few years result had been mixed. Their positions at the premier league between 2010 were, respectively, 11th, 5th, 7th and 9th. Off the pitch, the club has operated with a seemingly tight budget. Chairman Michael Johnston has had his hands full with managing the finances. Not all fans have appreciated Johnston´s efforts, and in 2013 some of the fans of the club who felt Johnston was not acting in the best interests of the club, protested heavily in order to get rid of the chairman. 

B

When Billie Bowie came to the rescue, he insisted the club is not at all a lost cause. Interwieved by Daily Record in October 2013, Bowie stated: “I asked for, and carried out, a full examination of the club’s books. I went over the past five years’ worth of audited accounts and was left to conclude that Kilmarnock Football Club is a very well-run business.” So is it? A man who has invested so heavily in the team should know what he´s talking about. The thing with Kilmarnock FC is that it is a question of how you decide to look at it. Below is the club´s profit and loss account from the previous four seasons, May 2014 accounts have not been released yet.   

	2010	2011	2012	2013
Turnover	6 136 449	7 134 354	7 413 789	6 093 484
Other operating income	56 868	103 368	56 868	56 868
Cost of sales	-891 402	-899 758	-792 722	-813 361
Administrative expenses	-5 963 378	-5 535 477	-5 994 815	-5 413 774
Profit on player sales	1 209	0	0	0
EBITDA (%)	-660 254	802 487	683 120	-76 783
Amortisation of player registrations	-55 286	-49 993	-8 039	0
Depreciation	-431 114	-425 732	-408 403	-385 881
Operating profit	-1 146 654	326 762	266 678	-462 664
Exceptional Items	900 000		0	-1 478 504
Interest receivable and similar income
Interest payable and similar charges	-219 993	-140 165	-255 294	-269 962
Profit before taxation	-466 647	186 597	11 384	-2 211 130
Tax on loss on ordinary activities
Profit for the period	-466 647	186 597	11 384	-2 211 130

The first thing that comes to mind is that the club´s turnover is not a huge one. Having said that, excluding Celtic (and previously, Rangers), few clubs at SPL operate with a significantly higher turnover. For example in 2011, the combined turnover of SPL was £ 164 million, of which Ranger´s and Celtic´s shares were, respectively £ 52,6 million and £ 57,2 million. Excluding Rangers and Celtic, Kilmarnock FC´s turnover was actually third highest, after Aberdeen and Hearts. As with any club, Kilmarnock´s turnover is heavily dependent on their final position in the league, and it is easy to see how the changes in Kilmarnock´s turnover are very much in line with their league positions. A curious detail with Kilmarnock´s turnover is that while it´s main source of income is obviously football related, until recently the club also owned a hotel not too far from the stadium. The Park Hotel was valued at £ 2,7 million in the accounts of 2013, after an impairment of  £ 1,5 million. In 2012, the hotel´s value was still £ 4,4 million. The impairment cost was actually a substantial factor in 2013´s loss of £ -2,2 million. 

Turnover-wise, the hotel´s signifigance is not at all small. The following figure shows the club´s turnover-distribution in £ millions:

 

While the income from football activities varies quite a bit, mainly due to variations in ticketing income and tv-payments, the turnover generated by the Park Hotel has been relatively stable around £ 2 million. When football related income has diminished, the hotel´s share of total turnover has been actually been more than half, as in 2013. 

Kilmarnock has been taking a pretty good care of their wage bill. Many football clubs have incredibly high wage bills that can sometime consume almost all of the turnover. With Kilmarnock, that is not the case. The wage/turnover -ratio, as can be seen below, was at 65,5 % in 2010, but has since declined and was at 57 % in 2013, which is not that high for a football club. According to the annual report, in 2013 the average monthly number of employees was 179. Of this, 61 were football related, 4 related to administration, 14 were retail and commercial staff and 100 hotel and part time –employees. 

 

So far everything looks fine. A hotel to support the turnover, moderate wage bill, no problem. But looking at the income statement, the club´s administrative expenses are actually not that small. Despite the mild wage bill, the total administrative costs vary between £ 5,4 and 6 million. Total costs also vary very little compared to the turnover. What these costs actually are is a little unclear, since the annual report doesn´t specify the issue. But it is safe to say that at least a part of it is related to running the hotel. 

Whatever the case, the fact is that the club´s operations are not very profitable. EBITDA ( Earnigs Before Interest, Taxes, Depreciation and Amortisation) was positive in 2011 and 2012, when the income was boosted by succesful positions at the SPL, but with less success on the pitch, EBITDA fell to negative figures in 2010 and 2013. In other words, the club´s costs have not adjusted to changes in turnover. 

One slightly peculiar thing about the cost structure is that according to the financial statement, in 2013 and 2012 ”£ 60 000 worth of consultancy and legal fees were charged during the year by Messers J & A B Boyd, a firm in which Mr Michael Johnston is the principal.” In 2011 and 2010 these amounts were, respectively, £ 55 000 and £ 50 000. What these legal and consulting services are is not stated. Obviously these are not decisive numbers in the big picture, but image-wise enough to raise a few eyebrows. 

Player registrations´ amortisations are not significant in Kilmarnock´s case. Combined amortisations during 2010-13 were only slightly over £ 100 000. This is a clear indication of how tight the budget at Kilmanock has been. According to transfermarkt-website, Kilmarnock has bought only two players between 2010 and present. Rui Miguel and David Silva arrived in 2010—2011 with transfer fees of £ 44 000 each and left later with free transfers. Apart from Miguel and Silva, all the other players have arrived through free transfers, loans or end of loans. With very few players bought, the amount on intangible assets is mininal, and consequently, amortisations very small as well. While this is financially a solid strategy  for keeping the amortisations low, it might not be the right way to build a winning team.  A team consisting of loan players and free transfers rarely produces that many fireworks. But this is a question of perspective. Europe is full of clubs with bloated wage bills and huge amortisations; clubs that invest more than they can afford and are on the brink of bankruptcy as a result. Kilmarnock have obviously chosen a different route and have still managed to keep the club in the league, if barely at times.

  

Depreciations have been around £ 400 000, and are mostly related to Rugby Park and the Park Hotel. The club ´s operating profit has been positive in 2011 and 2012, but the figure has been relatively weak in 2010 and 2013.

Looking at the income statement, after operating loss comes a very telling figure of the club´s situation. Since the clubs operations haven´t been too profitable and they haven´t had an owner to inject interest-free funds, the club has had to rely on bank loans and overdrafts. As a result, the club´s interest payments have been substantial. The interest payments may not seem that big at first glance. But the fact is that even when the operating profit has been positive, interest payments have consumed a lot of that sum. When the operating profit is negative, interest payments only make the situation worse.

So while there has been an obvious effort to keep costs at a reasonable level and manage the finances smartly, the fact is that the club is not really making profit in the long run. It is often the case with football clubs that there is a kind of a tradeoff between making a profit and having success on pitch. With Kilmarnock FC, there hasn´t been expensive investments to help achieve that success, but then again the club isn´t really making any money, either.

In part two, I will take a look at the club´s balance sheet, and how having Billie Bowie on board has changed the situation.