What ever happened to the concept of an apprenticeship?  An apprentice is defined in Webster’s Collegiate dictionary as “one who is learning by practical experience under skilled workers a trade, art , or calling.”  This is an essential element to progress from book knowledge to practical skills.  From educated student to effective counsellor.  Apprenticeships are evidenced in medicine where the economics of getting the requisite education are more severe — per year tuition costs are comparable but medicine may edge a bit higher on average.  And medical school is typically a four year curriculum.  The newly minted physician then must complete a multi-year residency.  I raise this because one might assert that if law school graduates had to apprentice they would not pay (currently or with debt) the cost of gaining a law school education.  The assertion may have value, but it should not effectively dismiss the concept of apprenticeship.

Lawyers are able to practice without a formal apprenticeship and the very best of the best are paid significant incomes.  Yes, there is an element of the open market economy as well as traditional supply and demand economics at play here.  And there are many factors that come into play.  But the concept is worthy of debate.  For surely the status-quo is not tenable for law firms or their clients.

To open the debate further I recommend the blog post “Should associates pay their law firms in the first 2 to 3 years?“. 

Much effort is made to encourage a work career of disciplined retirement saving using proper investment techniques.  Now that Boomers are approaching retirement it might be a good time to think about how to make those savings last a lifetime or two.  This is the central concern of many retirees and a significant concern for those approaching that milestone.

The accepted rule of thumb suggests a 4% withdrawal rate will safely provide for a thirty year retirement.  This level of understanding may be sufficient for much of your work life.  However, as you near retirement a deeper appreciation of the assumptions and variables is prudent.  A three decade retirement will likely require many course corrections along the way to navigate the vagaries of investment markets, inflation and government policy.

A number of articles have been written on safe withdrawal rates.  A new entry by William Reichenstein, CFA, provides a solid review of two prior works and what can be learned from the numerous studies on this topic.  The article appeared in the July issue of AAII (American Association of Individual Investors) and is entitled Will Your Savings Last?  What the Withdrawal Rate Studies Show. 

A law firm recently inquired about its capital structure after its bank indicated that it considered the firm’s debt high and its capital low.  A review of the year-end balance sheet indicated the following:

Debt to Net PP&E                60%             Good is 50% - 75%; 85% is acceptable
Months Free Cash Flow    (0.10)            Poor should be at least positive 0.5, but 1.0 to 2.0 would be better
WIP & AR to Debt                  2.7               Low, should be 9.5 or higher

The debt as a percentage of net fixed assets (PP&E) is reasonable; however the pipeline (WIP + AR) as a multiple of debt is low.  At this particular firm this is primarily driven by disciplined billing and collection rather than a lack of work.  In this credit environment however, bankers are likely to be more concerned about this relationship as it indicates how much cushion exists to cover their loan.  Conclusion:  Debt is okay at its current level and is properly leveraging fixed asset investments and spreading a significant portion of the costs of those assets to the individuals who benefit from their use.

However, we did concur with the bank that the partner’s invested capital was low for their needs.  It is apparent if one looks at the Months of Free Cash Flow in the above table.  The key driver in this analysis was undistributed income at year-end.  Had the firm converted this to capital and retained the cash, its liquidity would have been acceptable (i.e. it would have internally generated a minimally acceptable permanent working capital base on which to operate the law firm).  This is an area where the firm can improve over time — probably over the next three to five years — as it is not an urgent issue, but it should be attended to.

The Discussion On Partner Capital continues in an upcoming issue of Accounting and Financial Planning for Law Firms (an ALM Law Journal Newsletter).