Between the Lines
Why You Should Learn to Stop Worrying and Love Technical Debt
Technical debt sounds scary, but it and its cousin, organizational debt, can be leveraging tools on your balance sheet if you know how to account for them
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When you raise money, you get cash now in exchange for the promise to pay it back later. This is usually a formal promise. Borrow money, promise to pay it back with a set amount of interest; raise equity, promise to pay the investor some percentage of the proceeds when you get acquired or pay a dividend. Most of what we think of as finance is just elaborations on one of these two maneuvers: an interest rate or a share of ultimate proceeds, with some if/then statements for spice.
But some kinds of borrowing involve uncertain proceeds and uncertain costs. A few times in the past, there’s been a vogue for bonds that paid interest based on some variable, like the price of oil or the number of shares traded on the New York Stock Exchange. These are fun to think about. (They make sense to the seller — I know why an oil driller would want to issue a bond whose interest payments dropped by half if WTI dropped a similar amount, but I don’t know why the lender would prefer that bond to oil futures.)
But there’s another category of borrowing that is hard to model and much less fun to deal with: the implicit leverage from technical and organizational debt.
Defining the terms
Technical debt is a concept familiar to anyone who programs, or even anyone who uses Excel. It refers to the trade-off between decisions that make something easy in the short term and the ones that make it maintainable in the long term.
Financial models often include checks: You hard-code total revenue and revenue by segment, then add a row that just makes sure they sum to the same number. Multiply this by a dozen rows, and it starts to get annoying. If you’re in a hurry, you might be tempted to just hard-code the numbers you care about and assume they’re correct.
This would be a bad idea because the numbers don’t always add up. Sometimes, a check can reveal that a company is doing something…
