Liverpool - Over The Wall

It’s been a bit of a mixed bag for Liverpool supporters in recent times. Last season the Reds finished sixth in the Premier League, while they also reached the semi-finals of both domestic cup competitions, before being eliminated by Aston Villa in the FA Cup and Chelsea in the Capital One Cup.

This season looks like it might be another case of Liverpool being the nearly men, having been narrowly beaten by Manchester City in the Capital One Cup on penalties, while they currently lie just outside the European places in the Premier League. They still have hopes of success in the Europa League, having just put bitter rivals Manchester United to the sword at Anfield, but there’s still a long way to go in that competition.

Performances have been inconsistent, the best example being the spanking they administered to City just three days after the Wembley defeat, which is a sure sign of a club in transition. That is indeed the case, as Liverpool changed managers mid-season, replacing Brendan Rodgers with the charismatic Jürgen Klopp in October.

That change came almost exactly five years after Fenway Sports Group (FSG), the American investment company run by John W. Henry, purchased the club in 2010. There is no doubt that the owners have brought financial stability with the club “operating in a sustainable manner despite the cost of football continuing to rise.”

"Boy from Brazil"

Revenue has risen every year since the FSG takeover, while the enormous debt that the reviled former owners, Tom Hicks and George Gillett, had placed on the club through their leveraged buy-out has been largely eliminated. Indeed, last season FSG converted £69 million of debt into equity and invested a further £49 million into the initial stadium expansion costs.

So the club is in far better shape financially, though admittedly it would have been difficult to do worse than the previous hierarchy, whose mismanagement resulted in Liverpool’s future being decided in the High Court six years ago. That said, the club has come a long way, from the brink of administration with the unloved Roy Hodgson as manager, to a profitable operation with the popular Klopp at the helm.

However, FSG put their foot in it recently with the ticket pricing fiasco. Ultimately, they backed down in the face of a major fan backlash, so they were at least big enough to admit that they had made a mistake, but they should never have allowed the situation to get so far that it caused a mass walkout at one home match.

Chief executive Ian Ayre was keen to emphasise that the owners “commitment is unwavering”, noting that they keep pumping money in and have never taken anything out, which is a fair point, but they got it badly wrong over the ticket prices.

"Tattooed Love Boy"

Chairman Tom Werner claimed, “We have strengthened the club both on and off the pitch”, but in all honesty the playing record is nothing to write home about for a club of Liverpool’s glorious history. One League Cup (under King Kenny) and a single qualification for the Champions League is not great, though it would have been a different story if Brendan Rodgers' side had not fallen at the last hurdle in the 2013/14 Premier League, finishing in an agonising second place.

Indeed, Rodgers put his finger on the challenge at Liverpool: “The club needs to decide whether they want a business model or a winning model. Some will think it is about buying a player, developing and improving them and then selling them for a much greater fee; as opposed to getting the best possible player, irrelevant of his age, in order to win.”

To be fair, Liverpool have spent significant sums on bringing players in, but the recruits have often been of dubious quality. Some of this has been attributed to the FSG model, featuring a transfer committee, but it is unclear whether this “Moneyball” approach still holds sway.

Even if the club is not performing too well on the pitch, it is tearing it up off the pitch, as evidenced by the recently published 2014/15 accounts, which featured a massive £60 million profit before tax, up £59 million from the previous year’s £1 million profit.

Ian Ayre said that this was “mainly a result of the sale of Luis Suarez in July 2014”, which increased the profit on player sales by £57 million, though the revenue growth was also impressive, up £42 million (17%) from £256 million to a record £298 million.

Broadcasting revenue was £22 million (22%) higher at £123 million, mainly due to Champions League participation and the domestic cup runs. The additional home games also helped drive an £8 million (16%) increase in match day revenue to £59 million.

Commercial income rose £13 million (12%) to £116 million, due to additional sponsorship from 12 new partnerships and renewals and higher merchandising sales following the opening of 180 new retail outlets around the world including one standalone store in Malaysia.

These improvements were offset by significant increases in player costs: the wage bill surged £22 million (16%) from £144 million to £166 million, while player amortisation was up £20 million (48%) from £41 million to £61 million.

On the other hand, a small credit for stadium development costs meant that exceptional items were £2 million lower, while net interest payable fell £1 million to £4 million.

As Ayre observed, “the club is in rude health financially”, which is confirmed by Liverpool’s £60 million being by far the highest profit of the 14 clubs that have to date published their 2014/15 accounts. The next most profitable clubs are Leicester City £26 million, Arsenal £25 million and Southampton £15 million.

Although football clubs have traditionally lost money, the increasing TV deals allied with Financial Fair Play (FFP) mean that the Premier League these days is a largely profitable environment with only four clubs losing money so far in 2014/15, the largest losses coming from Aston Villa £28 million and Chelsea £23 million.

That said, it is far from unusual for Premier League clubs to report lower profits in the second year of the television deal’s three-year cycle, as there are limited possibilities for revenue growth, while wage bills continue to grow apace. In fact, half of the clubs that have announced 2014/15 figures have reported lower profits, which makes Liverpool’s £59 million growth all the more impressive.

However, it is clear that once-off profits from player sales can have a major influence on a football club’s bottom line, especially at Liverpool, whose numbers were boosted by £56 million from this activity in 2014/15, compared to a £1 million loss the previous year.

The lion’s share of this profit was obviously from Suarez’s sale to Barcelona, but the club also earned money from the transfers of Oussama Assaidi to Al-Ahli Dubai, Daniel Agger to Brøndby and Martin Kelly to Crystal Palace.

This is the second year in succession that Liverpool have reported a profit, following five years of losses that amounted to a hefty £176 million, including an average of £47 million for the three seasons between 2011 and 2013.

In fairness, many of these losses were caused by FSG having to spend substantial sums on player recruitment in order to repair the damage caused by the previous owners’ lack of investment in the squad. It should also be noted that the 2011/12 accounts only included 10 months after the club moved the accounting date to 31 May.

The other factor that has had a strong influence on Liverpool’s losses is the amount booked for so-called exceptional items, which adds up to nearly £100 million over the last nine years, mainly due to writing-off £61 million spent on unsuccessful stadium developments and £31 million paid-out as a result of changes in coaching staff (e.g. the departures of Roy Hodgson and Kenny Dalglish). There were also £5 million of legal and professional fees incurred as a result of FSG’s purchase of the club.

In fact, Liverpool would have made a profit of £10 million in 2011 without such exceptionals. These have been steadily reducing and actually produced a £0.3 million credit in 2014/15 against costs previously booked for the stadium development in Stanley Park, though next year’s accounts should include a sizeable payout to former manager Brendan Rodgers, who had three years remaining on his deal when he was sacked.

Profits and losses have also been greatly influenced by player trading. In the six seasons up to 2011, player sales boosted profits (or at least reduced losses) by an average of £18 million a year. This was most evident in 2011 when £43 million of profits on player sales, mainly Fernando Torres to Chelsea, reduced the annual loss from a horrific £93 million to “only” £49 million, though, as we have seen, that was also affected by £59 million of exceptional stadium costs.

However, the club’s ineptitude in the transfer market resulted in three consecutive years of losses on player sales between 2012 and 2014, most notably the sale of Andy Carroll to West Ham.

That drag on the club’s financials spectacularly changed in 2015 with the Suarez sale and we already know from a note in the accounts that the 2016 figures will include £41 million of profits from player sales, mainly the lucrative sale of Raheem Sterling to Manchester City plus Fabio Borini’s permanent move to Sunderland.

"Can you feel the beat?"

Ayre is perfectly aware of the influence of player sales: “Our real financial position is closer to break-even and it is the underlying revenue growth that’s important and provides us with the long-term stability.” Indeed, excluding the £56.2 million made from player sales in 2015 would leave only a small £3.8 million profit.

It is worth exploring how football clubs account for transfers, as this can have such a major impact on reported profits. The fundamental point is that when a club purchases a player the costs are spread over a few years, but any profit made from selling players is immediately booked to the accounts.

So, when a club buys a player, it does not show the full transfer fee in the accounts in that year, but writes-down the cost (evenly) over the length of the player’s contract. To illustrate how this works, if Liverpool paid £25 million for a new player with a five-year contract, the annual expense would only be £5 million (£25 million divided by 5 years) in player amortisation (on top of wages).

However, when that player is sold, the club reports the profit as sales proceeds less any remaining value in the accounts. In our example, if the player were to be sold three years later for £32 million, the cash profit would be £7 million (£32 million less £25 million), but the accounting profit would be much higher at £22 million, as the club would have already booked £15 million of amortisation (3 years at £5 million).

This is all horribly technical, but it does help explain how it is possible for clubs like Manchester City to spend so much and still meet UEFA’s FFP targets.

Notwithstanding the accounting treatment, basically the more that a club spends on buying players, the higher its player amortisation. Thus, Liverpool’s player amortisation has shot up from £34 million in 2012 to £61 million in 2015, reflecting renewed activity in the transfer market. It should be even higher next year, as this figure does not reflect last summer’s purchases of Christian Benteke, Roberto Firmino and Nathaniel Clyne.

Liverpool have also booked around £20 million of impairment charges in the last four seasons, though the vast majority was in 2012 and 2013. This happens when the directors assess a player’s achievable sales price as less than the value in the accounts.

Despite rising by nearly 50% in 2015, Liverpool’s player amortisation of £61 million is still surpassed by the really big spenders like Manchester United, whose massive outlay under Moyes and van Gaal has driven their annual expense up to £100 million, Manchester City £70 million and Chelsea £69 million, but it is now ahead of Arsenal £54 million.

The other side of the player trading coin is that player values have also shot up, nearly doubling from £85 million in 2010 to £166 million in 2015.

As a result of all these accounting shenanigans, clubs often look at EBITDA (Earnings Before Interest, Depreciation and Amortisation) for a better idea of underlying profitability. In Liverpool’s case this metric highlights the major improvement in their finances, as it is has steadily risen from £10 million in 2011 to a very healthy £73 million in 2015.

That’s excellent and is only outpaced by the two Manchester clubs, United £120 million and £83 million, but Liverpool are actually ahead of Arsenal, the poster child of profitability in English football, at £63 million.

However, before people get too complacent, United are projecting astonishing EBITDA of £178-188 million for 2015/16, following their return to the Champions League and their new kit deal.

Revenue has grown by 61% (£113 million) since FSG took over in 2010, though most of this (£92 million) has come in the last two seasons with revenue being relatively flat over the previous seasons. As Ayre stated, “growth in our commercial, media and match day revenues…continues to add strength to out financial position.”

The main growth driver has been commercial income, which has increased by 87% (£54 million) over that period, though broadcasting is also up 54% (£43 million), largely due to the new Premier League TV deals. Match day income has, perhaps surprisingly, also risen by 38% (£16 million).

Even after the 2015 revenue growth, Liverpool remain in fifth place in the English revenue league with £298 million, though they have closed the gap to the top four. Nevertheless, they are still almost £100 million behind Manchester United (£395 million) and over £50 million lower than Manchester City (£352 million).

They are also below Arsenal (£329 million) and Chelsea (£314 million), but are a long way ahead of their other Premier League rivals, being £100 million higher than Tottenham (£196 million) and around £170 million higher Newcastle United (£129 million).

This is the reason for many Liverpool fans’ frustration, as they should have enough spending capacity to do better than the likes of Spurs (and Leicester City), even if they might expect to struggle from a financial perspective against the top four.

In fact, Liverpool’s revenue growth of £42 million (17%) was easily the best of the leading six English clubs last season, both in absolute and percentage terms. United actually saw a £38 million (9%) decline, due to their failure to qualify for Europe, while Chelsea’s revenue also dropped £6 million (2%).

Of course, the boot will be on the other foot next year, as United made their return to the Champions league, while Liverpool only qualified for the Europa League.

Liverpool comfortably retained ninth place in the Deloitte Money League, though the gap to Juventus in 10th place increased from £22 million to £52 million, partly due to the strengthening of Sterling against the Euro. However, even excluding currency movements, Liverpool enjoyed the second highest revenue growth in the Money League last season, only beaten by Barcelona.

That’s obviously a fine accomplishment, but the Money League highlights a new challenge for clubs like Liverpool, as no fewer than 17 Premier League clubs feature in the top 30 clubs worldwide by revenue, thanks to the TV deal. This means that the mid-tier clubs have more purchasing power than ever before, so are more competitive as a consequence.

If we compare Liverpool’s revenue with the other clubs in the Deloitte Money League top ten, it is immediately apparent where their main problem lies, namely commercial income. Liverpool’s £116 million might seem pretty good, but it is substantially lower than most of the elite clubs.

Granted, the £110 million shortfall against PSG (£116 million vs. £226 million) is largely due to the French club’s “friendly” agreement with the Qatar Tourist Authority, but there are still major gaps to the other clubs in commercial terms: Bayern Munich £95 million, Manchester United £84 million, Real Madrid £72 million, Barcelona £69 million and Manchester City £57 million.

This makes it all the more perplexing that the owners would focus on match day income and try to “nickel and dime” the community, when the larger opportunity is surely in the commercial arena.

On the plus side, Liverpool are very competitive on broadcasting revenue, only really losing out compared to the individual deals negotiated by Real Madrid and Barcelona, and Juventus, who were boosted by particularly high Champions League distributions last season.

Actually, match day only accounts for 20% of Liverpool’s total revenue with broadcasting (41%) and commercial (39%) far more important, following the huge growth in these revenue streams.

Liverpool’s share of the Premier League television money fell £5 million from £98 million to £93 million in 2014/15, largely due to lower merit payments for only finishing in 6th place in the league, as opposed to finishing second the previous season.

The only other variable element in the Premier League distribution is the facility fee (also 25% of the domestic deal), which depends on how many times your team is broadcast live. Liverpool always do well here, due to their box office appeal. All other elements are equally distributed among the 20 Premier League clubs: the remaining 50% of the domestic deal, 100% of the overseas deals and central commercial revenue.

Of course, there will be a substantial increase from the mega Premier League TV deal starting in 2016/17. My estimates suggest that Liverpool’s 6th place would be worth an additional £46 million under the new contract, taking their annual payment up to an incredible £138 million. This is based on the contracted 70% increase in the domestic deal and an assumed 30% increase in the overseas deals (though this might be a bit conservative, given some of the deals announced to date).

The other main element of broadcasting revenue is European competition with Liverpool receiving €33.6 million for Champions League participation plus an additional €0.5 million after dropping down to the Europa League, where they were eliminated by Besiktas.

Here it is worth noting the importance of the TV (Market) pool to the Champions League distributions. Half of the payment depends on how far a club progresses in the Champions League, but also how well the other English clubs do. In this way, Liverpool’s share was smaller than the other English clubs, as they went out at the group stage, while the others reached the last 16.

The other half of the market pool is based on where the club finished in the previous season’s Premier League, so Liverpool did well here, as they finished 2nd in 2013/14, giving them a 30% share (1st 40%, 3rd 20%, 4th 10%).

Incidentally, the reason why Juventus received such an enormous slice of the Italian market pool is that they only had to share it with one other club (AS Roma), while the UK pool was split between four clubs.

Having won the European Cup/Champions League five times, nobody needs to explain its importance to Liverpool, but the club’s failure to qualify for Europe’s premier tournament more than once in the last five years has really hurt their bank balance.

In that period, Liverpool have earned €45 million from Europe, which is around €100 to €180 million less than the top four received – and that does not include revenue from additional fixtures and sponsorship clauses. That’s a huge competitive disadvantage and makes it all the more difficult for Liverpool to break into the Champions League qualifying places.

The financial significance of a top four placing is even more pronounced from this season with the new Champions League TV deal worth an additional 40-50% for participation bonuses and prize money and further significant growth in the market pool thanks to BT Sports paying more than Sky/ITV for live games.

Match day income grew by £8 million (14%) from £51 million to £59 million, mainly due to seven more home games from European competition and domestic cup runs, with the average attendance virtually unchanged at 44,659. This means that match day income has increased by a total of £14 million in the last two seasons.

That’s good news, but Liverpool’s match day income is still miles behind Arsenal (£100 million) and Manchester United (£91 million). In order to address this difference, FSG plan to expand the Main Stand capacity by 8,500 seats taking the overall Anfield capacity to around 54,000, which should be complete for the 2016/17 season. Potentially, there would also be a further increase of 4,800 seats in the Anfield Road stand at a later date.

It is estimated that this would increase revenue by £25 million: £20 million from the extra seats and £5 million for naming rights for the stand, though a partner is still not in place. Importantly, the club would keep the famous Anfield name for the stadium as a whole.

This project will cost well over £100 million, but it is likely to be funded by an interest-free loan from the owners, thus eliminating the need to make steep interest payments. Indeed FSG has already loaned the club £49 million for the initial expenditure.

Ayre stressed the importance of the stadium expansion: “The new Main Stand at Anfield is another significant investment by this ownership which is vital to the health of the club and part of our long-term strategy to ensure we remain competitive and sustainable.”

He added, “It gets us towards the capacity we want, and at a better cost than building a new stadium”, though the 25,000 fans on Liverpool’s season ticket waiting list may have preferred the more expansive option.

"Miss You"

Although this all sounds very promising, especially given the numerous false starts in the past, it does not really excuse the owners not addressing the supporters’ concerns over ticket prices, especially in light of the growing TV riches. This is a great opportunity for football clubs to make prices more affordable and avoid the traditional fan base being priced out.

According to the BBC Price of Football survey, Liverpool have the fourth most expensive cheapest season tickets, only behind the big London clubs (Arsenal, Tottenham and Chelsea), but there is obviously a vast salary gap between those two markets.

While it is understandable that the board would want to narrow the match day income gap, the stadium expansion will go a long way towards that without price gouging the fans. In any case, the owners finally recognised the value of the supporter base and abandoned their plans and froze prices. That said, that gesture has since been effectively trumped by Everton actually reducing ticket prices by 5%.

Commercial revenue rose £12 million (12%) from £104 million to £116 million, mainly due to additional sponsorship and merchandising sales. New sponsor deals included Garuda (training kit), Subway and Dunkin’ Donuts, which is an example of Liverpool’s stated strategy of “leveraging the club’s global following to deliver revenue growth.”

Liverpool’s commercial income has overtaken Chelsea (£108 million), though the Blues will be boosted next season by their new shirt deal with Yokohama Tyres, but it is still a long way below Manchester United £197 million and Manchester City £173 million.

To reinforce this point, Liverpool’s commercial income growth of £36 million over the last three seasons is only better than Tottenham of the leading English clubs. In the same period, Manchester United have increased their commercial income by £79 million – and that’s before United receive the full benefit of their massive new Adidas kit deal. In fact, the gap between Liverpool and United has grown from £10 million in 2009 to £81 million in 2015.

Liverpool have extended their shirt sponsorship deal with Standard Chartered by three years to the end of the 2018/19 season, increasing the annual payment from £20 million to £25 million (though some reports suggest that this might be as high as £30 million). That’s not too bad, but is lower than Manchester United £47 million (Chevrolet), Chelsea (Yokohama) £40 million and Arsenal (Emirates) £30 million.

Liverpool’s “record” New Balance kit deal is basically worth the same amount as the six-year deal signed with Warrior in 2012, namely £25 million a season, with the increase coming from the other part of the deal, i.e. earnings from merchandising sales, due to New Balance’s better distribution network.

Whatever the exact details, it is still lower than Manchester United’s “largest kit manufacture sponsorship deal in sport” with Adidas, which is worth £750 million over 10 years or an average of £75 million a year from the 2015/16 season.

Wages increased by £22 million (16%) from £144 million to £166 million, though the underlying growth is even higher, as the previous season included high bonus payments “as a result of the impact of the 2nd place Premier League finish.” The number of employees rose from 567 to 636, largely in the administration, commercial and other department.

The highest paid director, presumably Ayre, received an inflation-busting 16% pay rise from £1.0 million to £1.2 million, which is nice work if you can get it.

Despite this wages growth, the wages to turnover ratio was maintained at a very respectable 56%, which is around the same level as the likes of Arsenal (58%), Tottenham (56%) and Manchester City (55%).

Liverpool’s £166 million is the 5th highest wage bill in England, exactly in line with revenue. Chelsea once again have the highest wage bill in the top flight at £216 million, which is the first time since 2010, ahead of Manchester United £203 million, Manchester City £194 million and Arsenal £192 million. There is then a big gap to the other Premier League clubs with the nearest challengers being Tottenham (2013/14) £100 million and Aston Villa £84 million.

What is interesting is how the wage bills at the top four clubs have been converging around the £200 million level. Both Manchester clubs actually saw a reduction in wages in 2014/15. United’s decrease was due to their lack of success on the pitch, as bonuses fell, while City’s is partly due to a group restructure, where some staff are now paid by group companies, which then charge the club for services provided.

Liverpool’s gap to Arsenal in 4th place has remained fairly constant over the last there seasons at around £25 million.

The different investment policies of the last two sets of owners can be clearly seen by looking at the net transfer spend: in the five years leading up to the FSG takeover the club averaged net spend of just £10 million, but this has tripled to £30 million in the five years since then, even after a number of big money sales including Torres and Suarez.

It was imperative that Fenway splashed the cash after Hicks and Gillett kept their hands in their pockets and they have done so. In the 2014/15 season alone, Liverpool bought Adam Lallana, Lazar Markovic, Dejan Lovren, Mario Balotelli, Alberto Moreno, Emre Can, Divock Origi and Rickie Lambert.

As Ayre said, “We are very fortunate in that everything we generate goes back into the team”, though many would argue that the proceeds of the Suarez sale have not been wisely reinvested, as there seems to have been a focus on quantity rather than quality. Furthermore, Liverpool spent more last year on agents’ fees (£14.3 million) than any other club in the top flight, which is a fairly damning indictment.

Even with the increased activity in the transfer market, Liverpool have still been significantly outspent by some clubs over the last three seasons, maybe understandably by Manchester City £241 million, Manchester United £199 million and Arsenal £111 million, but also by West Ham £79 million. They have also been nearly matched by Newcastle £71 million, Everton £65 million and Crystal Palace £65 million.

Legendary Liverpool defender Alan Hansen suggested that the club would need to spend £200 million “to have a real go”, but he cautioned, “From what I understand FSG have told the manager it is not a bottomless pit. So the problem Klopp might have is that the owners have invested so much already, will they be reluctant to do it again?”

Gross debt has reduced by £28 million from £127 million to £99 million, comprising bank loans of £50 million (down from £58 million) and £49 million from the owners in order to fund stadium expansion work. Note that the reported net debt excludes £20 million owed to the subsidiary Liverpoolfc.TV Limited.

The previous £69 million owed to FSG has been converted into equity. As Ayre said, “It’s effectively writing-off that debt for the club and putting us in a healthier position. It’s another great example of the commitment that the owners make to the club.” The owners would only get this money back if they were to sell the club.

Maintaining their customary position, Liverpool’s gross debt of £99 million is the 5th highest in the Premier League, though is much less than Manchester United, who still have £444 million of borrowings even after all the Glazers’ various re-financings, and Arsenal, whose £232 million debt effectively comprises the “mortgage” on the Emirates stadium.

It is also worth highlighting that the club’s debt position is stratospherically better than the shocking levels reported under the previous owners. While there was “only” £123 million net debt in the football club, the full picture was revealed in the holding company where borrowings had grown to nearly £400 million. Fortunately, this debt was largely eliminated following the change in ownership.

In addition to this debt, Liverpool have contingent liabilities of £13 million, which represent fees that may be payable depending on contractual clauses such as number of appearances, Champions League qualification, etc. Similarly, Liverpool will potentially receive £4 million from other clubs. The accounts also note that the net amount payable in transfer fees arising from this summer’s transfer is £37 million.

It is worth noting that the net interest payable of £3.6 million has come down significantly since the bad old days of Hicks and Gillett, when it peaked at £17.6 million in 2010. As a comparison of what might have been, Manchester United incurred £35 million of interest costs last season as the price of their leveraged buy-out, while Arsenal have net financing costs of £13 million.

The amount of cash Liverpool generate from operating activities has been increasing, reaching £65 million in 2015, after adding back non-cash expenses like player amortisation and depreciation. Nevertheless, they still required £49 million of funding from FSG to cover their cash outlay, as they spent a net £59 million on players (gross £96 million), £40 million on the stadium development, £9 million on bank loan repayments and £3 million interest payments.

In the five years since FSG bought Liverpool, the club has had available cash of £320 million. Less than half of this (£146 million) has come from operating activities, while £114 million has been provided by the owners in the form of loans and a further £46 million from the bank facility.

Nearly two-thirds of this funding has been seen on the pitch with £211 million spent on net player recruitment, while another £55 million went on infrastructure investment. An outstanding stadium loan of £38 million was repaid, while £16 million of interest payments on external bank loans have been required.

Unlike other American owners, FSG cannot be accused of hoarding cash, as Liverpool only have £4 million in their bank account. In stark contrast, Arsenal had £228 million and Manchester United £156 million.

It is difficult to disagree with Ayre’s view that Liverpool are “making good progress”, but the question remains whether the club can break into the top four, given that it is ranked fifth in just about very category (revenue, attendance, wage bill, debt).

Whether Klopp is given enough funding to successfully overhaul his squad is debatable, but at least Liverpool now have a manager that everybody can get behind. Not to mention the fact that the German has already demonstrated his ability to revive a sleeping giant at Borussia Dortmund.

"I'm in love with a German film star"

The owners are keen to stress that they are ambitious to win trophies: “We have great conviction in our world-class manager and our young, talented squad and know that in time the on-pitch success we all crave will be realised.”

That’s easier said than done, of course, but after a period of stability, Klopp might just be the man to bring the glory nights back to Anfield. Whichever way it goes, it’s sure to be an exciting ride.

Arsenal - Brass In Pocket

As Arsenal enter the business end of the season, there is still much to play for, even though they are now likely to be eliminated from the Champions League by the mighty Barcelona. The domestic double is still up for grabs with nobody running away with the league, while the Gunners’ recent record in the FA Cup is second to none. However, many supporters are nervous about the team’s ability to finish the job, as the customary spate of injuries has led to a distinct dip in form.

The club’s wonderfully named chairman, Sir Chips Keswick, is keeping the faith: “This has been an unpredictable Premier League season thus far. What is important is that we are in contention and I am sure that we have the resources and ability within the squad to sustain a strong challenge.”

However, the club has not really strengthened the squad in the last two transfer windows. In the summer, they were the only Premier League club not to buy an outfield player, though the arrival of top-class goalkeeper Petr Cech has been an undoubted success. It was much the same in January when Arsenal only signed Egyptian midfielder Mohamed Elneny from Basel.

The fans’ frustration that the club has not fully utilised its spending power has once again been underlined by the publication of Arsenal’s financial results for the six months up to 30 November 2015, which revealed hefty cash balances of £159 million.

This is in line with the £162 million cash at the same time last year, but is lower than the £228 million reported in the annual accounts as at 30 May 2015. This is nothing to worry about, as this is simply due to the usual phasing of cash inflows and outflows with most of a football club’s income coming in the second half of the season. In particular, most season ticket renewals are paid in April and May, so Arsenal’s cash balance will always be at its highest when the annual accounts are prepared.

That said, the current £159 million cash balance is still one of the highest Arsenal have had in their interim accounts: 2011 £115 million, 2012 £123 million, 2013 £143 million and 2014 £162 million.

Everything else being equal, Arsenal’s cash balance will again be significantly higher when the next set of annual accounts is released. Depending on when transfer fee stage payments come due, it should be around the £225-250 million level.

Unsurprisingly, Arsenal have more cash than any other club in world football. Although not every Premier League club has published its accounts for the 2014/15 season, the North London side is clearly in a class of its own with the closet challengers being Manchester United, though their £156 million was still £72 million lower than their London rivals, followed by Manchester City £75 million.

It’s a similar story with the leading continental clubs, all of whom held significantly lower cash than Arsenal in 2015: Real Madrid £84 million, Bayern Munich £78 million, Barcelona £58 million and Juventus £5 million.

While it is advisable to put some money aside for a rainy day, there would have to be a monsoon of biblical proportions to justify Arsenal’s current cash levels. At the end of the 2013/14 season, they actually held 40% of the entire Premier League cash balances. However, the relative value of this cash is diminishing, as other mid-tier clubs are now benefitting from the influx of TV funds, e.g. Crystal Palace and Stoke City have £29 million and £26 million respectively.

Clearly Arsenal have been spending money. In fact, in the last six months the club had a net cash outflow of £69 million, even though they basically only broke-even on operating activities (after adding back non-cash expenditure on player amortisation and depreciation and adjusting for working capital movements). They then spent a net £39 million on player registrations (purchases £47 million less sales £8 million), largely due to stage payments from previous transfers.

They also invested £10 million in infrastructure improvements, notably substantial redevelopment at the London Colney training centre and Youth Academy at Hale End, plus some Emirates enhancements such as LED floodlights.

A further £14 million went on servicing the outstanding debt (loan repayment £8 million, interest £6 million), which is worth remembering whenever any ill informed amateur starts spouting nonsense about Arsenal’s debt being fully repaid. There was also a £5 million corporation tax payment, being the balance of the tax bill on the 2014/15 profits.

It is worth highlighting that Arsenal generated positive cash inflows of around £65 million in the second half of each of the last two seasons to turn around the outflows of the first half of the season, e.g. 2014/15 had a net outflow of £46 million at the interims, but this was converted into a net inflow of £20 million by the end of the year.

"I still haven't found what I'm looking for"

Of course, the raw figure in the accounts is a bit misleading, as not all of this cash balance is available to spend on transfers. Once more, for the cheap seats: not all of the cash balance represents a transfer fund.

In the face of growing criticism, chief executive Ivan Gazidis has emphasised this point: “It is quite untrue that we are sitting on a huge cash pile for some unspecified reason. The vast majority of that cash is accounted for in various ways.”

In fact, the club is so sensitive on this point that last year’s annual accounts noted that “proper consideration” of the cash balance should make deductions for the debt service reserve and the net amount owed on previous player purchases.

The irritating debt service reserve has been required ever since the 2006 bond agreements, though it does raise the question of whether these arrangements could be renegotiated given Arsenal’s significantly better financial position today, thus freeing up this money (£23 million in these accounts, £35 million for the full year).

"Genius of Love"

Like every other football club, Arsenal have not paid all the cash upfront for transfer fees, but have (sensibly) agreed stage payments, so part of the cash balance has to be reserved to pay sums due on those transfers. This has been reduced by £20 million following settlements of some transfer liabilities, but it still stands at £45 million.

As a good economist, manager Arsene Wenger has explained that the club’s relatively low spending is due more to supply and demand than an unwillingness to spend: “It is not a shortage of money, just a shortage of players”, adding that there was “quantity, not quality” in the transfer market. He has a point; though it is disappointing that Arsenal’s scouting network has failed to identify a few decent (available) players somewhere in world football that could improve the squad.

It might be difficult to find value in the market, especially as the prices quoted to Arsenal and other leading English clubs tend to be higher than those for continental clubs, with sellers clearly being aware of the wealth coming from the Premier League TV deals. This may be a little reminiscent of Harry Enfield’s “I saw you coming” sketch, but that’s the reality of the football market today. Clubs like Arsenal need to blow the other clubs out of the water – or there’s simply no point having more money.

"How was it for you?"

The other problem with hoarding cash was noted by no less a person than Sir Chips Keswick, when he spoke of the forthcoming blockbuster Premier League TV deal: “the increased revenues will also very likely bring with them inflationary pressures in terms of both the wage bill and the transfer market.” Exactly – so why not splash the cash before then?

This is exacerbated by, of all things, Brexit, as the Pound has depreciated by around 10% against the Euro in the last few months, thus reducing the spending capacity of English clubs abroad.

Despite all of these factors, there is still substantial money available to spend. It’s clearly not as much as the figure in the books, but we can say with some conviction that Arsenal should have around £100 million to spend in the summer on improving the squad.

Nonetheless, it should be acknowledged that Arsenal have been spending more in the transfer market in the past few seasons. For example, it might come as a surprise to Arsenal fans that they have the third highest net spend in the Premier League over the past three seasons of £111 million (according to Transfer League), only behind Manchester City £241 million and Manchester United £199 million.

In that period, the club has brought in Mesut Ozil, Alexis Sanchez, Danny Welbeck, Calum Chambers, Gabriel and Mathieu Debuchy, though it is somewhat strange that they have only spent a net £13 million this season on Cech and Elneny.

Arsenal did report a small £3 million loss after tax for the latest interims, compared to a £6 million profit for the same period the previous season. They were actually boosted by a £3 million tax credit, due to the revaluation of deferred tax balances based on the UK’s lower future rates of corporation tax. Before tax, Arsenal suffered a £12 million deterioration, as a £6 million profit swung into a £6 million loss.

By far the biggest reason for this decline was profit on player sales, as the club made hardly any money from this activity, compared to £27 million last season, mainly due to the sales of Thomas Vermaelen to Barcelona and Carlos Vela to Real Sociedad.

As a counterpoint, Arsenal’s underlying profitability actually increased with EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) rising from £23 million to £35 million.

This was because revenue grew by £10 million (6%) from £148 million to £158 million, mainly due to broadcasting, up £7 million (14%) to £60 million, thanks to higher UEFA Champions League distributions. There was also growth in commercial income, up £3 million (5%) to £55 million, and player loans, £1 million higher at £1.5 million. On the other hand, match day revenue was £2 million (4%) lower at £41 million, due to fewer home matches being played.

Expenses (including wages) were £2 million lower, but player amortisation rose £4 million to £29 million.

"Hector was the first of the gang"

There was limited activity in the property business, with the only transaction of note being recognition of the final instalment of the sale of Queensland Road development, though revenue and profit were both £2 million higher.

The accounts also benefited from a £5 million reduction in net finance charges from £12 million to £7 million, thanks to the introduction of Financial Reporting Standard (FRS) 102. Although this had minimal impact on this year’s profit, it has meant a restatement of prior year comparatives.

In particular, the interest rate swap, used to fix the interest rate on the floating rate stadium bonds, has to be included on the balance sheet at fair value with any changes in value reported in the profit and loss of each period. As there was a significant increase in negative fair value last year, with the financial markets anticipating that UK interest rates would remain lower for longer than previously expected, this meant a higher charge.

Of course, Arsenal have been very much the poster child of the Premier League in terms of making money. In fact, you have to go back as far as 2002 to find the last time that they made a loss. They have made total combined profits before tax of £226 million in the eight years since 2008.

The question is whether this year’s loss at the interim stage will mark a change in this positive trend? It seems unlikely, given that Arsenal have been in a similar position twice recently, namely in 2011 and 2014, when they managed to convert a first half loss into a full year profit on both occasions.

Nevertheless, these accounts again show how much influence player sales (and property development) have had at Arsenal. Excluding these items, Arsenal have actually lost money in each of the last five seasons.

More encouragingly, Arsenal’s underlying profitability was actually better in these interims compared to last year, as they would have reported a smaller loss after excluding these once-off factors: £8 million in 2015/16 compared to £21 million in 2014/15.

Actually, stability in the playing squad with no major sales might be considered as “a positive factor for the club”, according to Sir Chips. The good news is that Arsenal no longer need to sell players from a financial perspective.

The only other English club that has published half-year accounts is Manchester United and it is interesting to compare the Red Devils with Arsenal, as this highlights one major difference between the two. United made a £33 million profit before tax, which was £39 million better than Arsenal’s £6 million loss, even though their costs were £48 million higher.

The main reason for United’s superiority is their commercial revenue of £137 million, which is an incredible £82 million more than Arsenal’s £55 million. Match day revenue is also £14 million higher, but that is misleading, as United have played six more home games in the period than Arsenal.

Nevertheless, Arsenal have the seventh highest revenue in the world, based on 2014/15 annual accounts, having overtaken Chelsea last season. This is obviously pretty impressive, but the harsh reality is that they are still a fair way behind the leading elite, e.g. at £331 million they are around £100 million lower than the two Spanish giants, Real Madrid £439 million and Barcelona £427 million.

If we compare Arsenal’s revenue with the other clubs in the Deloitte Money League top ten, it is immediately apparent where their biggest problem lies, namely commercial income. Arsenal’s £103 million might not seem so bad, but it is only higher than Juventus, and is lower than every other club at this level.

Granted, the £123 million shortfall against PSG (£103 million vs. £226 million) is largely due to the French club’s “friendly” agreement with the Qatar Tourist Authority, but there are still major gaps to the other clubs in commercial terms: Bayern Munich £108 million, Manchester United £97 million, Real Madrid £85 million, Barcelona £82 million and Manchester City £71 million.

On the plus side, Arsenal enjoy the highest match day income in the world, while they are also competitive on broadcasting revenue, only really losing out compared to the individual deals negotiated by Real Madrid and Barcelona.

Arsenal’s commercial revenue passed £100 million for the first time in 2014/15, as it shot up £26 million (34%) from £77 million to £103 million, largely due to the new PUMA kit deal, which started in July 2014.

Looking at previous years, we can see that usually the full year commercial revenue is more or less double the first half. On that basis, we could estimate Arsenal’s 2015/16 revenue as £110 million (i.e. twice £55 million).

Although the chairman described the interim increase of £2.8 million (5%) as “robust growth”, his comments last year seemed more appropriate: “Inevitably, this growth rate will now slow as we have our key partnerships with Emirates and PUMA in place for the medium term.”

Even though Arsenal had the highest percentage growth since 2012 of the leading six English clubs, the reality is that they are still a long way below the Manchester clubs: United’s 2014/15 revenue was up to £197 million (nearly twice as much), while City’s revenue was £173 million. That might be to be expected, but less understandable is that Arsenal are also behind Liverpool £116 million and Chelsea £108 million.

Despite an increase in the number of worldwide partnerships to 33, the concern is that Arsenal’s commercial performance will continue to place them at a competitive disadvantage relative to other leading clubs. Further substantial increases are only likely to come as a result of success on the pitch, which again makes you wonder why the available cash has not been spent on strengthening the squad.

Although match day income fell in the interims, this was because Arsenal played two less home games (9 compared to 11) this season, so it should be made up in the rest of the year. Match day revenue is always weighted towards the second half, so my expectation is that Arsenal will again top £100 million by the end of the season. The actual amount will depend on the number of home games, i.e. progress in the cup competitions.

Incidentally, Arsenal have confirmed that there will be no general increase in ticket prices next season.

Similarly, broadcasting income is always higher in the second half of the year, though the actual amount received will depend on Arsenal’s final Premier League position and how far they progress in the knockout competitions.

Each place in the Premier League is worth an additional £1.2 million, while the amount received also depends on the number of Arsenal games broadcast live, though the vast majority of the payment is based on an equal distribution among the 20 clubs: half the domestic payment, 100% of the overseas payment and commercial income.

However, Arsenal will earn more from the Champions League, as the prize money has increased in the first year of a new three-year UEFA revenue cycle, e.g. €12 million for group participation (compared to €8.6 million), €1.5 million for a group stage win (€1 million), €5.5 million for reaching the last 16 (€3.5 million).

The market pool is also significantly higher, thanks to BT Sports paying more than Sky/ITV for live games. Arsenal’s 2015/16 payment will partly depend on how far they progress in this season’s Champions League, but also how well the other English clubs do, so if City and Chelsea get past the last 16, Arsenal will receive a smaller share for this element than 2014/15.

However, the other half of the market pool is based on where they finished in the previous season’s Premier League (3rd in 2014/15, compared to 4th the year before), which means that their share here will increase from 10% to 20%.

Unfortunately, Arsenal do not disclose their wage bill in the interim accounts, but they do include some comments that suggest that it was around the same level as the previous year. On the one hand, there was no Champions League qualification bonus in this year’s figures, as the 2014/15 accounts included the players’ bonus earned as a result of finishing in third place. On the other hand, the chairman stated, “This has been offset by increases in the underlying wage bill arising from certain contract extensions within the squad”, (e.g. Santi Cazorla and Theo Walcott).

What is interesting is how the wage bills at the top clubs have been converging around the £200 million level. Arsenal’s £192 million is still the 4th highest, but the gap has been closing. Chelsea once again have the highest wage bill in the top flight at £216 million, which is the first time since 2010, ahead of Manchester United £203 million and Manchester City £194 million.

Both Manchester clubs actually saw a reduction in wages in 2014/15. United’s decrease was due to their lack of success on the pitch, as bonuses fell, while City’s is partly due to a group restructure, where some staff are now paid by group companies, which then charge the club for services provided.

Continued investment in the playing squad has seen a further increase in player amortisation to £29 million, up £4 million (14%). On a full year basis, this has risen from just £22 million in 2011 to £54 million in 2015, and is likely to be higher still in 2016.

As a reminder, player amortisation is the way in which player purchases are reflected in the profit and loss account. To illustrate how this works, if Arsenal paid £25 million for a new player with a five-year contract, the annual expense would only be £5 million (£25 million divided by 5 years) in player amortisation (on top of wages).

As might be expected, those clubs who have traditionally spent big in the transfer market have the highest player amortisation: Manchester United £100 million, Manchester City £70 million and Chelsea £69 million.

There is no mention of whether the interims include another payment to the company of majority owner Stan Kroenke. This has amounted to £3 million in each of the last two years for a “wide range of services”, albeit with precious little transparency about exactly what these services comprised.

Gross debt has reduced by £2 million from £234 million to £232 million with net debt virtually unchanged at £72 million, due to a similar decrease in cash from £161 million to £159 million.

Arsenal’s debt comprises long-term bonds that represent the “mortgage” on the stadium (£194 million), debentures held by supporters (£14 million) and derivative financial instruments (£24 million). The club has no short-term debt to worry about.

Prior year debt figures have also been restated following the implementation of FRS 102, so the debt as at 31 May increased from £234 million to £239 million.

Although Arsenal’s debt has come down significantly from the £411 million peak in 2008, it is still a heavy burden, requiring an annual payment of around £19 million, covering interest and repayment of the principal. The interest payable of £13 million is a lot more than any other Premier League club (£5-6 million at Manchester City, Everton, West Ham and Liverpool) with the exception of Manchester United, who leapt to £35 million in 2014/15.

Although the net debt stands at only £72 million, thanks to those large cash balances, the gross debt of £232 million remains the second highest in the Premier League, only behind Manchester United, who still have £444 million of debt even after all the Glazers’ various re-financings.

Overall, it feels a little like Groundhog Day at Arsenal. To paraphrase the late, very great David Bowie, “The film is a saddening bore, for we’ve lived it ten times or more.”

While Arsenal might not be at the very pinnacle of football clubs financially, they are still better placed than most, so it is difficult to understand why the club has not used all of its resources to give itself the best chance of success. Very few fans want the club to throw caution to the winds, but they could surely invest more than they have done.

By most standards, Arsenal have a fine squad that is certainly capable of challenging for major honours, but in recent years there has always been something lacking. The latest financial figures continue to demonstrate that there is enough money to be competitive in the market.

Who knows whether a couple of world class recruits would make the difference and take the club to the next level, but surely it would be better for the club to spend what it can, so that its wealth can be seen on the pitch rather than gather dust in the accounts.