This was the title of an interesting piece on The Lawyer.com (2/18/08).  It speaks of the the possible emergence of a global elite — two firms who have surpassed the $2 billion dollar annual revenue threshold.  While this is a major milestone and could very well be the early signs of a permanent realignment; it may not be what all firms aspire to.  What if a firm wanted to consistently out-earn its competitors?

Using the 2007 AmLaw 200 and NLJ 250 (both based on 2006 results) we see that Latham & Watkins and Skadden Arps were both approaching the $2 billion annual revenue threshold.  But they were neither the largest by number of lawyers or the most profitable by profits per equity partner.  The largest was Baker & McKenzie and the consistently most profitable firm is Wachtel Lipton (although they came in at # 2 in 2006). 

View the Comparison Table to see these four firms and their rankings in revenue, revenue per lawyer, profits per equity partner and total number of lawyers.  

View the Correlation Graph to see how the AmLaw 200 look when you graph the relationship between profits per equity partner and the total number of lawyers.

We are often asked how much debt a law firm should carry.  The precise answer varies based on the collective financial leverage tolerance of the partners and the capital needs of the firm.  However, here are two simple rules for a fiscally prudent answer.

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.