Analysing Liverpool’s Finances and Transfer Activity
When it comes to football, there are few things less interesting then examining sets of accounts. However, the audited set of figures released by Liverpool in the first week of March each year give one of the clearest indications of the off-field standing of the club and its ability to effectively challenge on the pitch. This article aims to explain why the club’s net spend in recent seasons has appeared to be so relatively low, examines the story behind the infamous £200m war chest and looks at forecast revenue for this season to give an indication of how much money will be available to spend this summer.
2016/17 Accounts Breakdown
On March 1st, the club released its accounts for the financial year covering the period between 1st June 2016 and 31st May 2017. Granted, it may seem curious why the club waits a full nine months before publishing its year-end accounts (most larger clubs publish their finances sooner), but despite the lack of celerity with which the club chooses to reveal its figures, the information contained within them are no less interesting.
Despite the club partaking in only domestic competitions during the 2016/17 season, Liverpool still achieved a record turnover of £364m. This was a full £62m increase on the previous season’s total revenue figure of £302m- a season which saw the club play a lot more games at Anfield, participate in the Europa League and indeed reach the finals of two cup competitions (said European competition and the League Cup).
This was due to a £30m increase in broadcast rights fees, a £21m increase in commercial income (an impressive gain given the club didn’t see income from its main sponsors increase between this and the previous financial year) and a £11m increase in match-day revenue (due to the Main Stand expansion – another admirable gain given the club played seven fewer home games during 16/17 as compared with the season prior).
The club turned a profit after tax of £39m (the club’s second highest since 14/15 when it achieved £59m – interestingly, the accounts’ summary report states a profit of £39.8m yet the detailed accounts show the lower figure). However, the profit on operating activities was only £7m and the bulk of the profit was down to player sales. The meagre operating profit was largely down to ‘administrative expenses’ of £320m.
Of that £320m, the club accounts do not provide a full breakdown with only select cost headings comprising that figure being presented (wages and salaries being the most notable) and they amount to only £279m. This means the club has chosen not to disclose where £41m classed as ‘administrative expenses’ had gone (up until the 14/15 accounts, a full breakdown was always provided). The club also incurred a further £38m in ‘cost of sales’ (though a breakdown isn’t provided for that heading either, this figure presumably includes the running costs of Anfield, Melwood, Kirkby, the club’s several offices, business rates, stewarding costs, contributions towards police and ambulance services on matchdays, cost of consumables, merchandise procurement costs, advertising, promotions, TV channel expenses, etc.).
It’s very interesting that the club accounts choose to present only select items classed as ‘administrative expenses’ with £41m not disclosed (in the previous year’s accounts, a similar situation occurred with £26m not disclosed). I strongly suspect the combined £67m from 15/16 and 16/17 relate to the Main Stand expansion and are therefore the sums paid to contractor Carillion during construction of the stand’s stunning extension. If the monies didn’t go towards the Stand, then I’m at a loss to explain where else that money might have been spent. However, if that cost represents the Main Stand expansion costs then the ‘administrative costs’ for the current season should be significantly less.
Total wages and salaries (including social security and pension costs) – by far the biggest cost to the club – remained static at £208m; the same as the previous year (it’s always a contentious cost but I suspect agents’ fees are lumped into this category and signing-on fees will certainly fall under this heading). The wage bill was still in fourth place within the Premier League with Chelsea (£220m), Manchester City (£264m) and Manchester United (also £264m) paying out more for their personnel.
Wages can have a sizeable effect on how much money can be spent on transfers. In 15/16 the club’s wages to turnover ratio was 69% – a figure far too high for a major club. In 16/17 that ratio dropped to 57% and the club is looking to reduce that ratio further still, to 50% or less. That should be achieved for this season, meaning the club’s ability to spend in the transfer market will be notably stronger (more on that later).
Despite the massive-to-the-point-of-eyebrow-raising increase between 14/15 and 15/16 – which saw a 25% jump from £166m to £208m – the wage bill was reassuringly static in 16/17, and though it’s likely to have increased for the current season, it should be nowhere near the figures achieved by the Manchester clubs last season.
Infrastructure and Tangible Assets
Delving deeper into the accounts, it’s worth noting that cash flow towards the acquisition of tangible fixed assets was £150m over the three financial years covering 2014/15 to 2016/17. This perhaps explains why over the corresponding period transfer net spend was relatively low compared with previous seasons.
Indeed, during FSG’s first four full seasons, net spend was approximately £40m per season on average whereas over the three most recent full seasons the net spend was only £11m. Though some borrowing was required to fund the Main Stand expansion, cash flow requirements to fund the works appear to have affected the extent to which money could be spent on transfers. For the current financial year, however, spend towards tangible fixed assets should be less with the Main Stand work complete and only works to the new club store falling in the current financial year (costs for the Kirkby redevelopment should fall into the next financial year with the rumoured Anfield Road End expansion likely to fall into the 2019/20 and 20/21 financial years).
The club’s finances were looking far healthier in 16/17 compared to 15/16 when the dangerously high wage-to-turnover ratio coupled with Main Stand construction costs led to a loss exceeding £20m (which would have been far worse had it not been for a sizeable profit on disposal of players’ registrations). To have therefore turned a profit of £39m when further stadium expansion costs were incurred and with no European football revenue is a fine effort from those that make financial decisions at the club.
Looking at the previous three seasons, the club averaged a net spend of only £11m. On the evidence from the accounts, it’s clear that growth in wages comfortably outstripping increases in turnover alongside the Main Stand expansion costs were key to the club having to spend frugally. The outlook for the future, based on how the club’s finances are shaping up this season, are looking markedly different, but that’s something this writer will come onto after addressing the small matter of a war chest.
The Infamous War Chest
Let’s establish a simple fact to start with. When a football club is said to be spending £50m on a player, the buying club very rarely part with the full figure up-front. When clubs’ best players are sold, the selling club often portrays through the press that they have received the bulk or all of the agreed yet undisclosed fee up-front but in reality that isn’t how it works.
Now that’s out of the way, let’s look at the story that created almost unprecedented levels of fume last summer.
Fans had hopes at sky-high levels when several of the more reliable Merseyside-based journalists wrote articles towards the end of last season suggesting the club would break the transfer record three times during the summer with some noting that the club could spend close to £200m by the August 31st transfer window deadline.
Of those that were brave enough to float figures, they did also note their estimates included player sales and suggested outgoings could reap the club £80m-£100m. On that basis, the implication was that the club had £100m-£120m available to spend.
As noted at the start of this section, transfer fees are paid incrementally so on that basis, depending on how negotiations would have fared and assuming an average contract duration for new players of four years, the club may have had to commit to as little as £25m-£30m for initial instalments. On that basis, a ‘£200m spend’ was certainly feasible in theory, especially given the £39m profit that was achieved.
In practice, the club for various reasons generated significantly fewer proceeds from player sales than was expected (only £36m, largely because the club didn’t sell Daniel Sturridge, Alberto Moreno, Lazar Markovic and several peripheral members of the squad for an assortment of reasons). Furthermore, selling clubs either refused to part with their players during the summer or were demanding significantly more fees to be paid up-front than would normally be expected. This explains why the summer’s window ended with a greatly underwhelming air about it- the club failed to land several key targets for the summer and the transfer situation’s finances would certainly have played a part.
The Coutinho Money
In the final days of the transfer window, it emerged that the club had tried to sign Thomas Lemar. Some reports suggested two bids had even been submitted to Monaco for the services of the much-vaunted attacking midfielder. Though there were the obvious denials, word on the street suggested Lemar was being lined up in case Barcelona submitted a late offer for Philippe Coutinho that was too good to turn down.
Clearly, such an offer never transpired from the Catalan outfit in late-August which meant Phil didn’t secure his desired reunion with Luis Suarez. As a result, Liverpool never looked to match Arsenal’s £90m bid on transfer deadline day – a figure that Monaco’s board accepted but one the player rejected, reportedly because he preferred a move to the five-time European champions instead.
Phil did manage his move eventually for an overall fee of £142m this past January. Reports suggested £106m of that was paid up-front with the remainder noted as ‘achievable and realistic’ add-ons (gone were the Ballon d’Or-tied increments contained within the summer bids). What’s more, reports from multiple Liverpool-based journalists stated all of the Coutinho money is and was available for the club to spend with the same reporters adamant (no doubt on behalf of the club themselves) that the money wasn’t going towards funding the van Dijk deal (and Southampton briefed reporters close to them that Liverpool had paid nearly the entire £75m fee up-front too).
I am highly dubious of both Liverpool and Southampton’s claims. There is a fair chance Liverpool received more than the initial £16m that Barca were looking to pay towards Coutinho in August but colour me sceptical over the Catalans finding another £90m in the space of four-and-a-half months to pay an up-front payment of £106m.
Regardless, is all of the Phil money available to spend? I suspect the answer is yes and no. This is based on my belief that the van Dijk deal was agreed on an incremental instalments basis and not with £70m paid up-front and that a similar arrangement was reached with Barcelona for Coutinho. On that basis, some of Coutinho’s fee will go towards paying off van Dijk over the coming years and likewise some of that fee will also be available to go towards other signings. We will have a much clearer idea when the club’s cash flow statement for the current season is published, but that is nearly a year away!
2017/18 Financial Outlook and Beyond
As already noted, the 16/17 accounts provided reason for cautious optimism but the forecast for this season’s financial accounts is looking extremely bright.
Firstly, the club is set to smash its total revenue record. I expect TV revenue to be at least £204m thanks to Champions League revenue. Commercial income should be at least £145m (up from last season’s £136m) thanks to shirt sleeve sponsorship from Western Union and strong sales of the 125th-anniversary kits and associated memorabilia. Matchday revenue should be up at around £89m given the club is generating £3m per matchday and will play at least five more games this season than it did in 16/17. On that basis, the club revenue for this season should be at least £438m (and if the club manages to win the Champions League, that figure should top £460m).
Given the club’s costs are likely to be not dissimilar to last season (costs of developing the Main Stand should make way for repayments towards borrowing of £183m, most of which relates to the same capital investment), the club should have in excess of £70m at its disposal. The owners and management may wish to apportion that between new signings and further infrastructure work (i.e. the Kirkby redevelopment and initial costs on the Anfield Road End expansion).
On top of that, the club will be in a position to sell a lot of players that may be considered surplus to requirements. Below is a potential list of outgoings along with potential fees:
Daniel Sturridge: £15m (only a year left on his contract; four years ago he would easily have fetched £50m+)
Divock Origi: £15m (only a year left on his contract and has had a disappointing season for Wolfsburg, otherwise could have fetched £25m+ following a strong campaign)
Adam Lallana: £20m (turning 30 in May, appears unlikely to be a regular starter again but still highly regarded amongst Premier League clubs)
Dejan Lovren: £15m (has several years left on his contract, derided by many Liverpool fans but another who some new or current Premier League clubs might see as a coup- inexplicably)
Alberto Moreno: £10m (another with a year left on his contract and looking destined for the exit door)
Simon Mignolet: £15m (still has several years left on his contract, in his, erm, prime and seen as a solid shot-stopper who more defensive clubs may consider a better fit for their style of football)
Harry Wilson: £15m (may seem odd that I’m suggesting the same fee for Wilson as Sturridge but he signed a new long-term contract in January before joining Hull on loan, has been playing well at Hull and even for Wales and was prolific at u23 level; less talented players in the Championship have been sold for similar fees)
Sheyi Ojo: £10m (20-year-old has looked good in spells for Fulham this season but has faced competition from the likes of Lucas Piazon and Floyd Ayite; would certainly have a number of Championship clubs keen on the pacey wide attacker)
Ryan Kent: £7m (seems clearly surplus to requirements but would be a good fit for a Championship team looking for a pacey wide forward)
Danny Ward: £7m (player seems highly rated in certain quarters based on his performances for Huddersfield in 16/17; Klopp would probably like to keep him but the player seems keen to move on in search for regular appearances rather than to provide back-up to Lloris Karius)
Lazar Markovic: £5m (another player with only a year left on his contract; likely that a club on the continent will fancy their chances of helping Lazar fulfil the potential many saw in him several years ago)
Ovie Ejaria: £5m (the rangy midfielder hasn’t developed in the way some hoped; moving to a Championship club would be Ovie’s level)
Conor Randall: £2m (Liverpool-born Academy alumnus has never looked like cutting the mustard; League 1 or the Scottish Premiership is where Randall can find meaning)
Pedro Chirivella: £2m (out on loan to Eredivisie strugglers Willem II, the midfielder has struggled to impress in the Dutch league; player is still good enough to find a career somewhere but certainly not in the big leagues)
Flanno: free (frankly a disgrace he is still officially a Liverpool player; out on Loan to Bolton since January and with a year left on his contract, he needs to be quietly ushered out of the club this summer)
Assuming the club reaps, say, a quarter of that sum during the summer then that’s approximately £35m of funds available to finance the initial payments and associated fees for incomings. Add that to the acutely increased revenues for this season and the club – depending on how negotiations go – will be well placed to fund incomings that could significantly exceed £200m should Jurgen Klopp and Michael Edwards wish to acquire incomings of such collective values.
Looking further ahead, key commercial deals come to an end in the summer of 2019. If the club maximises the club’s worth to secure competitive main kit, training kit and shirt sponsor deals, and perhaps even secures naming rights to the redeveloped Kirkby training facility, overall revenues should exceed £500m and the club’s ability to sign and pay for elite talents will be stronger than ever.
The project FSG have been progressing under Jurgen Klopp has been a long-term one that has required us to be patient. However, off the back of a larger Anfield, the return of Champions League football and the arrival of some fantastic talents thanks to far shrewder recruitment, for the first time in years, Liverpool seem to be genuinely well placed to challenge all of its domestic and continental rivals for silverware.
One thing is for sure- should Liverpool qualify for the Champions League by season’s end then FSG and those that run the club should have absolutely no excuses for not being able to put the finishing touches to a squad this summer that can be a genuine force for the foreseeable future.