Cobbetts posts a profit despite prior reticence

Last September Cobbetts featured prominently in The Lawyer UK 200 ­Annual Report. In stark contrast with the industry norm, managing partner Michael Shaw refused to divulge the firm’s profit.

“You won’t be receiving a [profit] figure,” he barked. “Goodbye.”

Partly as a result of Shaw’s comment, but coupled with a turbulent period for the firm, rumours had plagued Cobbetts that it was on the point of going into administration and, critically, that it had made no profit during the 2008-09 financial year.

However, Cobbetts’ LLP accounts reveal a financial picture better than either Shaw’s reticence or the ­market rumours suggested.

As one City partner put it when the news first broke earlier this month: “These aren’t great results, but they’re not a basket case either.”

First off, Cobbetts made a profit. The firm posted an operating profit of £9.38m, down by 38 per cent on the previous year’s £15.1m. The profit before members’ remuneration and profit shares dropped further, by 44.5 per cent, from £16.4m to £9.1m.

With an average of 95 members during 2008-09, that works out at £96,000 each. In a year when most firms, including Cobbetts, have been going all-out to slash headcounts, the firm’s average number of ­members actually grew by 17 per cent, from 81. Cobbetts’ highest-paid partner took home £257,000 last year.

According to BDO Stoy Hayward head of ­professional tax services Colin Ives, the accounts reveal that Cobbetts’ ­borrowings increased last year partly as a result of paying out the balance of the prior year’s profit to its members.

Total members’ interests as at 1 May 2008 stood at £16.1m, but after paying drawings of £14.7m that dropped to £10.7m.

“It looks like a classic ­situation faced by firms last year,” said Ives. “Paying out partners the balance of undistributed prior year’s profit. The ­problem is if it hasn’t been replaced by ­current year profit, therefore reducing the funds available for the business, resulting in a need to increase ­funding from the bank.

“Fortunately for Cobbetts the bank’s been ­supportive and must ­understand their business case for additional funding.”

A spokesman for Cobbetts said partner drawings were funded by an improvement in working capital, including a reduction in debtors of £5m, and retained profit.

But while Cobbetts did manage to post a profit, the firm’s debt has been growing apace. During the 2008-09 financial year net debt was up by 60.3 per cent, from £7.17m to £11.49m, while total cash at bank and in hand decreased by 87 per cent, from £587,000 to £78,000.

Bank overdrafts due ­within one year fell from £4.8m to £2.6m, but bank loans due within one year went up from £1.6m to £8m.

Cobbetts’ borrowings included a post-balance sheet facility from RBS secured by a debenture for its wholly owned debt ­recovery subsidiary ­Incasso.

In the notes to Cobbetts’ accounts the firm highlighted the slowdown in the ­economy as having had “a severe impact […] with an obvious detrimental effect upon turnover and profit.” (Cobbetts’ turnover fell by 20.6 per cent, from £59.79m to £47.5m last year.)

The notes continued: “One half of identified cost savings was removed in the year with the balance becoming effective in 2009-10.”

One City partnership expert expressed surprise at the speed with which ­Cobbetts has managed to reduce its costs.

“The key question is, how has Cobbetts managed to take out so much cost that ­quickly?” said the partner.

One cost saving was apparent in the accounts. Cobbetts flogged off a ­company car for £8,000.