Redwood Analytics

 Jim Cotterman, in a recent post, writes on how much debt a law firm should carry:

1. Total debt (including capitalized leases) should be no more than 100% of the net book value of the fixed assets; 90% is okay, but 80% or less is much better.

2. Lines of credit should have a zero balance at year-end and for most of the year.  The credit line should not be used to pay partners or be used as the first source of working capital.  It should be there to augment working capital, covering unusual economic conditions (i.e., negative economic performance beyond one standard deviation of norm).  An available line of credit equal to the funds required to cover one month of payroll (including owners) is one rule of thumb. 

 Cotterman has written on the subject before.  Click here to read an article on law firm debt he wrote in 2003.

As the potential exists for law firms to dip into reserves to offset economic challenges, setting your metrics now to prepare for managing debt can help you avoid financial crisis.

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