Your squad is bigger than 16 but you have 16 main players usually. Them you have a group of around 6 who are a bit more fringe players and then a couple fringe youngsters and that's how you get a squad of 25. Nobody has 25 senior prime level players, it doesn't work due to the spread of minutes and is too expensive anyway.
If you're cutting 15 games from a season, it's literally common sense that you need fewer players. You're reducing your total games by 25% if not more. Fewer fixtures, fewer injuries, less rotation, smaller squad.
Also... We aren't real Madrid. So stop comparing us to teams like that. You can't just buy endless players and spend money that you don't have and the regulations don't permit us to spend. You are saying we need to do the same shit that got us into this mess and what ended up being a waste of a billion pounds over 10 years. No, we can't and we shouldn't spend beyond our means just because we are currently shit. Going to take a bit of time to get the finances in order, move on some players who are on big wages, become a more attractive club for players and work our way up. It doesn't take much to become a top 5 level club anyway, and getting the right striker is signing wise honestly all we should need, for 1 year at least. Much more difficult to stay in it and build on that, but the 1 year bounce up in there when you don't have fixture congestion isn't that hard.