It is difficult to imagine a more traumatic season for Nottingham Forest than 2011/12. Following the sacking of Billy Davies former England boss Steve McLaren was appointed only for his tenure to quickly turn sour. McLaren resigned and the fallout led also to the resignation as Chairman of the club’s owner Nigel Doughty. As Steve Cotterill battled to keep the team away from relegation the club was rocked further by the shock death of Doughty and although Cotterill succeeded the season closed in disarray.

Since then things have moved on considerably with Doughty’s estate selling the club to the Kuwaiti Al-Hasawi family and, following a flurry of appointments and sackings, Billy Davies returning to the manager’s role which he left only a year and a half before. It has been another rollercoaster season for the club this time around but financial statements have now been released for the year ending 31 May 2012 which help us to understand Doughty’s final year in charge and also the nature of the takeover last summer.

In my last article on Forest’s finances I covered the whole of the Doughty era up to May 2011 (read it here). I now intend to continue looking at the club’s financial performance on an annual basis, although the nature of statutory reporting means that there is a delay before the public has access to this information. I also intend to expand my coverage to local rivals Derby County and Leicester City to understand how the clubs compare and contrast in their financial strategy and management. For now though I will focus solely on Forest and what has happened since the last set of accounts. To do that I will look at two things, firstly the financial performance of the club during the year to 31 May 2012 and then the mechanics of the takeover which took place last summer.

The Year to 31 May 2012

The headline news from this latest set of accounts was that cash losses in the year to 31 May 2012  fell to £7.5M (2011: £10.1M). The reasons for this reduction being a lower spend on fixed assets in the year, £0.1M verses £1.7M in the prior year, and a £1.5M net profit on transfer fees compared to a £2.0M loss in the previous year. These favourable movements more than offset the negative impact of reducing income and increasing running costs – however, the net profit on transfer activity cannot be guaranteed in future years whereas increasing the cost base does have a  potential impact on the future.

All revenue sources saw a year on year reduction, likely to be largely due to the struggle of the team on the pitch, meaning that turnover fell from £15.2M in 2010/11 to £14.7M in 2011/12. Staff costs increased from £16.3M to £17.4M an increase of almost 7% whilst there was a significant 20% increase in other costs, which are not provided in detail in the accounts, from £5.0M to £6.0M. The addition of high profile signings by Steve McLaren in the form of Andy Reid, Jonathan Greening, Ishmael Miller and Matt Derbyshire make the staff costs movement understandable but the increase in other costs could be a reason for concern.

As a result operating losses (before capital investment and player transfers are taken into account) rose from £6.4M to £8.9M in the year.

From a financing perspective Nigel Doughty had either paid off or consolidated all external debt into a single loan facility provided by himself. At 31 May 2011 this loan facility stood at £75.6M and the club had cash balances at the bank of £0.7M.

Doughty (and his estate) injected a further £7.7M of cash into the club during 2011/12 to cover the cash loss of £7.5M and increase balances at the bank to £0.9M. In addition to the cash injection a further £2.0M of interest was accrued on the loan account, meaning that the total debt to the Doughty estate as at 31 May 2012 stood at £85.3M – made up of £71.9M cash invested and £13.4M of accrued interest).

This is the position that has essentially been handed to the Al-Hasawi family as the new owners. With Financial Fair Play (FFP) on the horizon they will need to consider both how to increase revenues and also manage costs with wages clearly running well in excess of income.

With the Doughty era now fully drawn to a close it is difficult to argue that it was a success in so much as he spent  a lot of money on the club he clearly loved but got very little glory in return, essentially delivering it back to where it was at the start via an embarrassing three years in League One. It makes one ponder a comment he made towards the end of his tenure about “killing the club with kindness”.

In this context it is easy to understand why there has been a wholesale change of management since the new owners took over as the impression is given that the club had tended to simply rely on Doughty’s generosity rather than driving itself forward in any innovative way. Whilst some of the actions the Al-Hasawi family have taken have been unsettling and the way they have conducted themselves publicly has on occasion been concerning it is clear that change is needed at the City Ground one way or another.

The club has neither achieved on the pitch nor been well managed financially off it. If the club had managed one of these two key areas of concern then the lack of the other could be to some extent forgiven but to achieve neither reeks of poor management. As the Al-Hasawis settle into their ownership of the club, which seems to be taking shape since the appointment of Billy Davies and a subsequent overhaul of both the football and administrative functions, they will hopefully be able to address both the way the club is run and the way it competes on the field of play.

The Takeover

Due to the level of change that has taken place since the date of these financial statements further notes have been applied to the Director’s Report to explain some of what happened in the takeover of the club. The debt to the Doughty estate of £85.3M has been split into two with £20M becoming a long term loan and the remainder being capitalised.

What cash transaction took place between the Al-Hasawi family and the Doughty estate is not shown, however, one assumes that cash was paid over for the immediate purchase of the club and that the remaining £20M debt to the Doughty estate will be repayable should the club be promoted to the Premier League.

Outside of the normal debtors and creditors that any business works with this means that the sole debt the club carries at the point of transfer of ownership is that £20M to the Doughty estate. As such, although there are undoubtedly issues that need to be addressed with regard to the day to day running of the club it’s overall financial position is fairly good.

Promotion to the Premier League would see substantial increases in revenue that would manage the loan repayment, although a single payment on promotion (rather than a staged payment over a number of years) might reduce the immediate ability of the club to invest in the playing squad, and the Al-Hasawis have a couple of season to structure the finances more satisfactorily before FFP begins to bite.

Here begins a new era for Nottingham Forest, may it be a long and fruitful one.