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When Liverpool supporters see their club ranked as the seventh richest in the world according to Deloitte, they naturally wonder why the Reds have been cautious in the transfer market in the last two years.
Liverpool’s costliest purchase in 2019/20 was Red Bull Salzburg’s Takumi Minamino for just £ 7.25 million, while the only player to join so far this summer has been Kostas Tsimikas, at £ 11.75 million. Sales from players like Danny Ings have ensured that the Reds currently have a £ 10 million credit in net transactions in this period.
The widespread spending by their Premier League rivals, and particularly Chelsea this year, has left many Liverpool fans disgruntled. Shouldn’t a team with annual revenue of £ 533 million invest more in its squad?
The answer is, as is often the case when it comes to financial and accounting matters, extremely complicated. Fortunately, however, we have Kieron O’Connor, better known on Twitter as Swiss Ramble, a highly respected blogger who researches soccer finance and can explain it all in an easily digestible way.
Kieron posted a long thread on Liverpool’s finances on Monday, and it was a very interesting read. Provided a detailed breakdown of where exactly your turnover and earnings are coming from.
“LFC posted an impressive pre-tax profit of £ 42 million in 2019, which meant earnings of £ 207 million in the last 3 years (£ 40 million in 2017 and £ 125 million in 2018). This was the second highest in the Premier League in that period, ”he wrote in a paragraph that guaranteed to stoke the ire of the social media brigade“ FSGOUT ”.
However, those gains are entirely due to player sales, and the club would have simply bounced back without them (not that that’s to be taken for granted, as the thread later notes that “most soccer clubs they really lose money at the operational level ”).
And as this simple line phrase explains, “LFC has spent everything it earned on expenses: revenue of £ 1,353 million minus £ 1,338 million operating expenses plus interest of £ 15 million.”
Hmm. So perhaps a general lack of spending on transfers is to be expected? It certainly does, as the club’s impressive revenue growth of £ 231 million over the past three years appears to have been largely covered by rising costs. Nothing consumes money faster than buying and keeping world-class players in a club, and that is exactly what has happened in Liverpool of late.
Perhaps this is the key issue that people need to understand. The club’s payroll has grown at a higher rate than its income for the past three years, and now stands at 310 million pounds.
He has grown 144 million pounds since 2014/15, which is a bigger increase than any of the Reds’ rivals from the Premier League’s big six have seen in that period. Winning the big trophies means bonus payouts for the players, but who’s to say that the Liverpool team haven’t earned every penny?
The investment in the workforce has meant that the depreciation costs have also risen. As an example of this concept, if you sign a £ 50 million player to a five-year contract, then £ 10 million goes on the books as cost each year during that period. The signing of the likes of Alisson Becker and Virgil van Dijk has helped nearly double annual amortization totals from 65 million pounds to 112 million pounds since 2016.
This process differs from player sales profits, as they go to the accounts immediately. It allows clubs to sell their team members for less than what they paid for them, and still make money off them as far as the accountant is concerned. When Kieron writes “this is terribly technical,” he is not kidding. And there is much more detail in the thread than this simple summary can hope to provide (or even fully understand).
But perhaps the key line is this: “Over the past 3 years, #LFC had a profit of 207 million pounds, but only a net cash inflow of 29 million pounds.” It’s the difference between numbers like these that helps explain why supporters expect a thing based on the earnings listed in the headlines, when the financial reality is quite different.
Findings in the thread should be viewed as a positive overall. The club is in a healthy financial position, and if its highest income is focused on recruiting and retaining the best players, that is what the fans want to see.
But of course, this system only works well in Liverpool’s favor if the signings continue to be successful. The hit rate has been spectacular in Klopp’s time at the club, but the financial pressure to maintain that would perhaps explain the club’s rather reluctant approach to the transfer market. Each transfer is a bet, regardless of the quality of the player, and it is a bet with millions at stake.
And Kieron believes Liverpool would have to ‘sell to buy’ if they wanted to invest more in the transfer market, unless they changed their business model. As he has allowed the club to become champion of everything in the last 15 months, it is difficult to argue that they should amend it. “Trust the process” is the club’s mantra and it has proven to be a great success.
So when the ins and outs are balanced as finely as it seems, Liverpool need to be as sure as possible that Player X will add something. Fans with the “oh and sign Reus” mentality would do well to read Swiss Ramble’s excellent work.
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