February 8th, 2008 by Jim Cotterman
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.