A simple test for whether or not you understand an organization

Can you identify the implicit leverage in that organization?

Most (not all) organizations have forms of leverage which are built in and which do not show up as debt on the balance sheet.  Banks may have off-balance sheet risk through derivatives, companies may sell off their valuable assets, and NBA teams may tank their ability to keep draft picks and free agents in their future.

Or a university may have ambitious plans, or payroll commitments, which require an ongoing stream of tuition increases or admissions boosts, usually from out-of-state students.

None of this has to be a bad thing — many growing organizations should have leverage.  Nonetheless leverage it is.

So take your favorite organization.  Do you know where the hidden leverage is?

If not, you probably don’t understand it very well.