Thread by @SwissRamble

Many Liverpool fans cannot understand why their club seems unwilling to buy players. Surely they should be awash with cash after winning the Champions League and then the Premier League? This thread looks at where the money has gone and suggests why they are not buying #LFC

To date this summer #LFC have only spent £12m on Olympiacos full-back Tsimikas, while #CFC have splashed £201m. Other have been more prudent, but still been more active than the Reds: #MCFC £71m, #THFC £59m, #MUFC £35m and #SFC £31m. #LFC actually have £3m net sales.

It was a similar story last season, when #LFC only spent £9m, mainly Minamino from RB Salzburg, so gross spend over last 2 seasons is just £21m with £31m net sales. In terms of purchases, this is way behind rest of the Big 6 (£175m to £241m), though #CFC also had net sales.

This is somewhat puzzling, given that #LFC have been highly profitable in recent years, so let’s look at what is behind their revenue growth and the impact on the bottom line. As well as the last published accounts (2018/19), we will take a broader view of the last 3 years.

#LFC posted an impressive £42m pre-tax profit in 2019, which meant £207m profits over last 3 years (£40m in 2017 and £125m in 2018). This was the second highest in the Premier League in that period, only surpassed by #THFC £278m, but twice as much as the next highest #MUFC £110m.

However, worth noting that this £207m pre-tax profit is entirely due to £207m profit on player sales. Excluding these profits, #LFC would have broken-even. #LFC have spent everything they earned on expenses: revenue £1,353m less operating expenses £1,338m plus interest £15m.

To reinforce this point, #LFC operating profit was just £1m in 2019 and £15m over the last 3 years. That said, most football clubs actually lose money at the operating level, though #THFC and #MUFC are exceptions to the rule with £205m and £120m respectively over last 3 years.

Player sales have been an important part of #LFC strategy, generating £207m profits from this activity over the last 3 years, only surpassed by #CFC £243m, but far higher than the rest of the Big 6: #AFC £139m, #THFC £124m, #MCFC £112m and #MUFC £55m.

#LFC revenue has shot up by £231m (77%) in last 3 years from £302m to £533m. This is 2nd highest growth in the Big 6, only behind #THFC (low base), but is still 3rd highest in England, below #MUFC and #MCFC. In fact, over 3 years, they have earned £445m and £156m more than #LFC.

#LFC match day revenue has grown £22m (35%) in last 3 years from £62m to £84m, mainly due to the expansion of Anfield’s Main Stand. This is the 2nd highest in the Big 6, only surpassed by #THFC (due to their new stadium and playing at Wembley during the construction).

The main driver of #LFC revenue growth is broadcasting, which has more than doubled from £124m to £261m in last 3 years. The £137m growth is the highest in England, just ahead of #THFC, but a lot more than the rest of the Big 6, e.g. #AFC and #CFC only £42m and £57m respectively.

Revenue distributions from the Premier League TV deal grew by £62m (68%) in last 3 years, partly due to the new deal, but also because #LFC improved their league position from 8th to 2nd. This success on the pitch meant that #LFC growth was the highest of Big 6.

European TV money has also seen significant growth, rising £70m from £28m to £98m in the last 3 years, as #LFC first reached the Champions League final in 2018, then won the trophy. This has enabled the Reds to significantly outpace #CFC and #AFC and close the gap with #MCFC.

In the last 3 years #LFC commercial income has grown by £72m (62%) from £116m to £188m, which has helped narrow the gap to #MUFC (flat over this period), due to new sponsorship deals and record retail sales, along with contractual bonuses for winning the Champions League.

However, here’s the thing. Much of the revenue growth has been eaten up by higher costs. In fact. Since 2015 #LFC wages have grown 87% (£144m), i.e. at a faster rate than revenue 79% (£235m), the highest in the Big 6, due to recruiting better players and higher bonus payments.

Similarly, #LFC player amortisation, the annual charge to expense transfer fees over a player’s contract, is up by £47m (73%) from £65m to £112m since 2016. This reflects investment in the team, but is still a lot lower than #CFC £168m, #MCFC £127m and #MUFC £126m.

The profit and loss account does not tell the whole story, as it only shows an accounting profit, which is very different from actual cash movements. Over last 3 years #LFC had £207m profit, but only £29m net cash inflow. We shall now look at where the rest of the money has gone.

For the cash flow statement, we need to strip out the non-cash accounting entries, both for player trading, namely profit on player sales and player amortisation, and other depreciation, impairment, etc; then adjust for working capital movements.

At this stage we need to understand how football clubs account for player trading, both for purchases and sales, as the accounting treatment in the profit and loss account is quite different to the actual cash movements.

Football clubs do not fully expense transfer fees in the year a player is purchased, but instead write-off the cost evenly over the length of the player’s contract via player amortisation, while any profit made from selling players is immediately booked to the accounts.

So if a player is purchased for £30m on a 5-year contract, the annual amortisation in the accounts is £6m, i.e. £30m divided by 5 years. This means that the player’s book value reduces by £6m a year, so after 3 years his value in the accounts would be £12m, i.e. £30m less £18m.

If the player were to be sold at this point for £35m, profit on player sales from an accounting perspective would be £23m, i.e. sales proceeds of £35m less remaining book value of £12m.

Given the rise in transfer fees, player amortisation is a major expense in the profit and loss account. However, as we have seen, it is relatively low at #LFC, so over the last 3 years they only add back £277m to operating profit, compared to over £400m at #MCFC, #MUFC and #CFC.

Working capital measures short-term liquidity, defined as current assets less current liabilities. Changes in working capital can cause operating cash flow to differ from net profit, as clubs book revenue and expenses when they occur instead of when cash actually changes hands.

If current liabilities increase, a club is paying its suppliers more slowly, so is holding on to cash (positive for cash flow). On the other hand, if a club’s debtors increase, this means it collected less money from customers than it recorded as revenue (negative for cash flow).

Some clubs had large working capital movements, e.g. #THFC cash flow benefited from a £197m positive movement (increase in creditors), but #LFC only had £16m beneficial impact, while #CFC cash flow was adversely impacted by a £75m negative movement (increase in debtors).

This is horribly technical, but important for #LFC, because, as a result of these adjustments to the profit and loss account, other clubs’ available cash has been boosted much more, e.g. #LFC £293m (amortisation/depreciation £277m, working capital £16m) against #MCFC £544m.

In this way, over the last 3 years #LFC £15m operating profit has been adjusted to give £307m operating cash flow, while #MCFC operating loss of £74m becomes a much higher operating cash flow of £470m. #THFC £640m and #MUFC £635m had even more.

This helps explain why #LFC had much less money available to spend on players than their rivals, despite their reported high profits. As a consequence, they only spent £147m cash (net) in the last 3 years, the 2nd lowest in the Big 6, comprising £425m purchases less £278m sales.

#LFC have also spent £90m on capital expenditure, including the Main Stand expansion and Kirkby training ground. This outlay is only reflected in the profit and loss account via depreciation. Second highest in Big 6, though dwarfed by #THFC £1 bln investment in new stadium.

#LFC £129m debt is much smaller than most of the Big 6 (#THFC £658m, #MUFC £511m and #AFC £209m), while their loans from the owners are interest-free, so they have only paid £6m interest in the last 3 years, compared to #MUFC £53m, #THFC £46m and #AFC £34m.

Thanks to tax losses in previous years, #LFC has not had to pay any corporation tax in the last three seasons, compared to large payments at #THFC £47m, #AFC £20m and #MUFC £15m.

After the hideous Hicks and Gillett years, #LFC are now in a much better debt position. Indeed, they have actually managed to reduce debt by £53m in the last 3 years from £182m to £129m.

#THFC had to take on £510m additional debt (to finance the new stadium), while Abramovich pumped £258m into #CFC and #MCFC received £64m more funding (mainly new share capital). In contrast, #LFC had £34m net repayment of loans, while #MUFC paid £69m dividends to their owners.

After all these ins and outs, #LFC had a net cash inflow of £29m over 3 years, below #MCFC £77m and #MUFC £61m. The two North London clubs saw net cash outflows: #AFC £60m and #THFC £49m.

#AFC and #THFC could absorb those cash outflows, as they had built up large cash balances in prior years. Even after #LFC £29m cash inflow, their £38m cash was still significantly lower than their rivals (as at end June 2019): #MUFC £308m, #AFC £167m, #MCFC £130m and #THFC £123m.

Furthermore, #LFC transfer debt, i.e. stage payments still owed for previous transfers, has been steadily increasing. This is not divulged in the accounts, but if we assume 90% of Trade Creditors, this was up to £167m in 2019 (£59m net of amounts owed by other clubs).

The good news is #LFC have absolutely no issues with Financial Fair Play. Their £207m profit over the three-year monitoring period is further boosted by £69m allowable expense deductions (youth, community, women, depreciation, etc), which gives them a £275m break-even surplus.

Looking ahead, I estimate that #LFC will report a worse financial result in 2019/20, albeit probably still a small pre-tax profit of £10m, compared to £42m in 2018/19. The assumptions include £23m lower revenue, £19m smaller profit on player sales, offset by £10m wages cut.

Based on average revenue of £3.2m a match, #LFC match day income will be around £13m lower in 2019/20, as there were 4 fewer matches, including 4 Premier League games played behind closed doors. The reduction in Champions League games was offset by more FA Cup games.

The new Premier League TV deal means #LFC distribution will increase by £23m from £152m to £175m, though this is almost entirely offset by their £22m share of the £330m rebate to TV companies. The Sky element will only be paid in 2020/21, but the overseas piece is this season.

The impact of #LFC being eliminated in the Champions League last 16 by Atletico Madrid, compared to winning the trophy (for the 6th time) in 2018/19, is £27m (£71m vs. £98m). The decrease in prize money is slightly offset by a higher TV pool (better league position prior season).

In addition, #LFC will report profit on player sales in 2019/20 of £26m (per my model), which is £19m lower than the £45m booked in 2018/19. This is mainly driven by sales of Danny Ings to Southampton, Ryan Kent to Rangers and Simon Mignolet to Club Brugge.

Like every other club, #LFC will be very concerned about the impact of COVID-19 on their finances. This is almost impossible to quantify, especially how this will affect sponsorships, including the lucrative new Nike kit deal, and when fans will be allowed back to the stadium.

Notwithstanding the “finger in the air” nature of the estimate, I have estimated £96m revenue shortfall over two seasons, assuming games are played behind closed doors until 31st December; or £135m if no fans are allowed back for the entire 2020/21 season.

In any case, it’s clearly a major financial concern, which has resulted in many clubs taking out huge loans, e.g. #THFC £175m and #MUFC £140m, while even Stan Kroenke at #AFC has replaced an external loan with an owner’s loan (to lower interest payments).

To date, #LFC have not yet done this, though they have announced a delay to the Anfield Road Stand expansion, which could free up funds. They could also improve their cash position if they did not make £34m loan repayments (as they did in 2018/19)

Could #LFC invest more money in the transfer market? Yes, but they would probably have to “sell to buy”, unless they changed their business model, which would require increasing debt (either via an external loan or an injection from the owners).

This approach, which is effectively the #CFC or #MCFC strategy, has been resisted by FSG (except when financing the Main Stand expansion), who have encouraged a self-sustaining model. It’s unlikely they would act differently now, but these are unprecedented times, so who knows?