Monthly Archives: February 2019

Financial Model vs. Operating Model

Reading Time: 4 minutes

One of the more valuable things that I think I contribute is that I’ve worked on both sides of the table.  I’ve been an operator for almost eight years now. Prior to that I spent about five years in financial advisory and investment management roles, and another four years in consulting.

This background gives me some perspective about the modus operandi of different stakeholders in a business.  

In my prior role, our original founder (President & CEO at the time) wasn’t quite sure about that.  He had an entrepreneurial background without a lot of exposure to private equity investors. Over time though, I think he came to realize that having someone on the team that thinks a lot like our backers is pretty useful.  My next two CEOs both had considerable experience with private equity investors, and I think my background was a big plus in their eyes. Simply “speaking the language” is certainly a confidence builder and can help bridge some divides.  

Which brings me to the point I want to make here.  I still see a fairly different approach to models. And due likely to some fundamental misunderstandings of how they’re going to be used.  

I recall my first close.  Our CFO at the time sent me the ledger output and asked me to run it through what we were using as the “operating model” at the time.  So, I dutifully did. I blew out the existing values and added the new values and proudly came back to him and showed him the results.

He asked, well how did that compare to the forecast?  Yes, the forecast I had deleted and not saved. I only made that mistake once, but it was a valuable lesson in the difference between a financial model and an operating model.  Having really only run financial models as an investment banker, the operating model was not something I understood..

A financial model is mostly static.  You build it. You add your inputs. You look at the result – mostly the full year numbers – maybe out a few years.  The full year numbers are the major output. You do some y/y comparisons. But the long term values are still the key output.

Many times the financial model may be simplified (all models are simplified to an extent) in a way that standardizes the inputs and outputs across different types of businesses.  And this makes sense. Sometimes customized “helper” tabs have more company specific drivers, but in may cases those are shoehorned into the model. This is all fine. It’s a short-term work around.  

The model might be an annual model, quarterly model, or sometimes monthly.  But anyone who has spent time forecasting knows that the resolution at a monthly level a few years out is gibberish.  The only thing I am 100% sure about in any of my forecasts, is that I am off. I just don’t know the direction and magnitude.

The financial model probably has a robust set of ratios and metrics.   All of these are useful to some businesses. But all are not useful to all businesses.  This is also fine, as the financial model generally is a one size fits most type of product.

An operating model is a living, breathing, evolving creation. It’s as much a thing as it is a process.  It’s very much customized to your businesses. And, you’re going to live with it a long time and update it a lot.  Monthly or maybe more frequently. My operating model in my last role had over ten years of monthly data and I had been evolving it over almost seven years.  

And the short-term comparisons are the key output.  Comparisons to prior year, prior month, forecast, and budget (not necessarily in that order).  

I’ve been working with the operating team of our investors to setup a new reporting package.  They are much closer to understanding an operating model than others. But they’re still missing some key points.

Budget was still dynamic.  They rolled December forward and my budgeted balance sheet and cash flow statement moved. No, paste values.  My budget never changes at this point.

And where’s the spot for my forecast?  And comparison forecast? Non-existent.  Forecast does not equal budget, not even in January.  I know more about my business at the beginning of January than I did when the budget was approved in mid-December.  I still find forecasting the month and comparing actuals to my forecast, the best way for me to see if I have a good handle on the dynamics of the business.  Even if no one else wants to see it, I do it for myself. The last CFO I worked for didn’t want to see a forecast. Red flag. To be fair, our CEO never really asked either. Red flag.

What about prior month?  My current business is pretty dynamic.  We’re growing fast. We’ve made a lot of changes.  My trend to last month is probably the best way for me to see something changing.

And ideally on one page.  Keep it simple. I don’t need twelve tabs of every financial ratio you read about in a text book.  If I have to look up the ratio on investopedia, it’s not going to be useful to me on a monthly basis.

I want to peel the onion.  Provide a digestible snapshot.  This is not every line of the ledger.  This is not my expenses in three categories (G&A, S&M, R&D).  Usable. You will know it when you see it.

And, pop the important variances.  Easy to see. Depending on your business, this might be dollars, percent, or per unit.  But it probably isn’t all three. Pick the most important.

When I stepped into this role, the private equity team was running the operating model (I’m not sure they we’re running it like I mean, but they said they were).  For some reason they didn’t want to hand the model over right away.

One, if the PE team is running the operating model and the operating team isn’t asking for it, you’ve got a problem.  That’s abdication, imho.

Two, if the operating team doesn’t have an operating model, they’re steering using the rear view mirror.  Or using a financial model for the wrong purpose, so the feedback loop is going to be too long. Hand over the model.

When I didn’t get the model by week two, I went home that weekend and built my own.  I’m not doing my job without it.

Here are some additional thoughts on Operating Models.

Please let me know if you have questions or other topics you want me to write about in the comments.

Colorado Ski Trip

Reading Time: 4 minutes

“This is no longer a vacation, it’s a quest.” – Clark Griswold

Copper Mountain, CO

Our neighbors invited us to go skiing in Colorado over the Martin Luther King holiday weekend.  We hadn’t gotten out west to ski since 2016, when we did a week at Keystone.

It was a great trip.  Since we were traveling with friends, we did some things differently than if we had been planning the trip ourselves, but that generally turned out to be a good experience.

Downtown Frisco, CO

Frisco.  We didn’t stay at a resort, but instead stayed in Frisco.  This is a cool little ski town. We had more space, for less cost, and didn’t miss being at the resort.

Copper Mountain. We skied Copper Mountain, which we had never done.  Our friends had a connection on some discounted passes.  Really enjoyed the resort. Nice terrain with low key, family friendly vibe.

Airbnb.  This one will make me sound out of touch, but we had never used Airbnb.  Easy. No issues. Place was awesome.

Turo. We used Turo to rent a passenger van at a great rate.  There were no family trucksters available. Rate was great, but there were a few things less than convenient.  Pickup and drop off were in the general parking areas. Found the requirement to wash the vehicle yourself (or incur an additional charge) a bit inconvenient.  Found the requirement to vacuum out the vehicle entirely impractical, unless you dropped off all your gear at the airport and then went back out to find a car wash somewhere (Denver’s airport is not exactly close to anything).

Southwest. We flew Southwest.  I hadn’t flown Southwest since 2007, when I flew the airline on a business trip from St. Louis to Cleveland (I think) and was seated in this middle seat of a rearward facing row.  This trip was much more pleasant than the prior. With kiddos, you get some preference in boarding priority. And, ski gear flies free (one bag = ski bag + boot bag).

Day 1 – Friday.

First flight out put us on the ground in Colorado early.  After some delays getting through the tunnel, we managed to get checked in early and headed over to Copper for a few hours of skiing.  They had gotten about 3” overnight and 6” throughout the day, so conditions were fantastic.

We hit up Peppino’s Pizza since we hadn’t stopped for groceries yet and I would recommend it.





Day 2 – Saturday.

Pancakes, Pancakes…

Our rental place was super well stocked.  They even had an electric griddle. Pancakes play an important part in our lives.





Learning Experience

Breakfast and then off to ski.  Great day, although my daughter did learn some valuable lessons about tree wells.






Day 3 – Sunday.

Good day.  A bit crowded due to the holiday weekend.  We found the Rendezvous Lift and the Wheeler Creek and Union Park runs, which were a lot of fun and kept us out of some of the longer lift lanes at the base.

The resort had put in a couple of new lifts but they were not operating at 100%, and combined with the crowds, were causing some longer lines.

Copper Mountain Resort, CO

Day 4 – Monday.

Yep, more skiing.




Day 5 – Tuesday.

Trails in Frisco, CO

Our flight was later in the afternoon, but decided not to try to ski.  We did a short hike up to Rainbow Lake, which was accessible from some trails basically out the backdoor of our rental place.

Rainbow Lake
Red Rocks

We checked out and grabbed breakfast at Bread + Salt.  Highly recommended.

On our drive back down to Denver, we stopped by Red Rocks and Lookout Mountain.

So, all in all, great trip.  Add four more days of skiing to our season count.  We’re planning to be back in Colorado in mid-March.


Be Back In March









This article was helpful in making a few panorama’s when Google Photos failed me.

Fumbling Through February

Reading Time: < 1 minute

It seems to happen every February.  

It’s the first reporting cycle of the new year (unless you are blessed / cursed with a non-calendar year fiscal year).  And inevitably something isn’t ready.

Processes that have been refined over the last twelve months, don’t go smoothly.

That trusty “fill right” that worked all last year goes awry.  There’s no data where there should be.

That analysis you setup a year ago, needs to be setup anew.

All those formulas that were trustworthy for so many months and barely required checking, are no longer reliable and need to be checked.

And in so many cases, it’s difficult to setup in advance without that first month of data.

So you fumble through the first close of the year.  Saying to yourself, that next year you will find a way to make it easier.

The only silver lining is that you have one more month until you really need to figure out those year to date reports.

Current Sentiment

Reading Time: 6 minutes

“Predicting the future is harder than misremembering the past.” – Cliff Asness

I learned a long time ago (the hard way), not to give people investment advice.  However, I will share what I am thinking and doing. Before I discuss any specific thoughts or observations, let me provide some background for context.

First Do No Harm. Conservative.  Arguably overly conservative.  I sort of take the Hippocratic Oath of Investing: first lose no money.  And please don’t risk money you need, for money you don’t.

Boring Is Fine.  I’m ok with boring.  There are no style points in my book. I’m not looking to impress anyone.  I don’t plan to get rich quick through my saving and investing.  Short term opportunities may come my way, but I am certainly not looking for them.

Patience.  This might be my only advantage in investing.  I have no annual reporting requirements. I do not earn a year end bonus based on my investing performance.  I do not have fund life issues or investor withdrawals to worry about.

Source of Income.  My main source of income is my job.  That’s not going to change any time soon.  I count on consistently adding more money to my savings by saving current income than by growing my savings through investing returns.  So I plan to earn my way to retirement. I am not a professional investor. That’s not how I make my money. Important distinction.

Bubbles.  Much of my experiences have been heavily influenced by bubbles. I worked for a software company from 1999 – 2003.  I moved to San Francisco in 2000. After business school, I joined an investment bank in 2005 and worked there through 2010.  I bought a house in 2005 in Baltimore – which thankfully I was forced to sell in 2006 due to a corporate move. Now I work for a private equity-backed business…uh oh. (more on that later).

Fixed Income Guy.  This is a chicken and egg problem.  Not sure if fixed income appeals to me because of my personality, or my personality is a good fit for fixed income.  Let’s just say my weightings toward fixed income would not align with the allocations of any Target Date funds for my age bracket.  

Trend Watching

There’s been a pretty dramatic shift in interest rate expectations in the last 90 days.

There were some pretty large movements in a few areas I was watching at the end of 2018.  And I totally failed to pull the trigger on any of them. We will see if that was a short-term miss or something I’m going to regret at the end of the year.  To be fair, I did add a small position of NTG into one account.

When you look up “v shaped recovery”, these pictures show up.

Nuveen Pref & Income Opps Fund:JPC


Tortoise MLP Fund:NTG

U.S. equity markets have produced much better returns than markets outside the U.S. for a fairly prolonged period.  I’m just not that eager to put a lot of money to work in U.S. equity markets at the moment given how far they have come, the duration of the economic cycle, and with so much geo-political uncertainty.  

Source: MarketWatch

Rate expectations are impacting currency trends.  This is probably a blinding glimpse of the obvious.

Source: MarketWatch

Current Thoughts:

Certificates of Deposit (CDs).  Yep, boring.  But patiently conservative.  Principal protection. FDIC insured presuming you stay under the limits of any one institution.  Rates ( on par or better than comparable treasuries.

Before you stop reading, go ahead and take a look at this chart:


I’ve made purchases of CDs through my brokerage account as well as directly at a couple online banking institutions.  We sold my prior business in May 2017 and a good portion of those funds went into CDs and money market funds. Then, we sold our house in Sept 2018 when we moved, and much of those funds went into CDs as well.

Source: Fidelity

Historically, Treasuries would be considered to have an advantage over CDs as a diversifier to equities.  Bonds historically have moved inversely to equities. With correlation so strong across markets these days, some of that argument seems to be losing its basis.

Side note: Looking at this chart, someone would have to explain to me why any investor would want to take on the credit risk associated with the corporate market at the moment for very similar yields?  I always keep an eye on senior loans. They have a special place in my heart. Some of what I am seeing in the market as well as direct experience in my business has similar hallmarks of the 2005 – 2007 period. For those of you who may not remember, that period was followed by some slight under performance.

I-Bonds.  Yep, boring. There is really no one with any incentive to sell these to you, so they fly under the radar.  These are purchased through the Treasury, offer competitive rates, are inflation protected (with a floor), and interest is deferred and potentially exempt. Note, annual purchases are limited and there is a small early withdrawal penalty.


I need to make my annual purchases for me and Mrs. SFTE.

Taxable Munis.  Exciting, no sorry, boring.  Probably a lesser known world of the municipal market.  I like traditional municipals as well, but take a look at this space.  This space got more attention several years ago with the Build America Bond (BABs) program that expired in 2010.  It’s still can be an attractive space, when paired with a tax efficient strategy (i.e., holding in a tax advantaged retirement account).

Given that the supply of BABs was shrinking, some BAB-specific fund have altered their mandates recently.

Nuveen Taxable Muni Income:NBB


Side note: I have an affinity for Closed End Funds (CEFs).  Must be another personality quirk.

International.  Oh my, getting crazy.   Focused here on reducing home country bias, investing in sectors with lower valuation multiples than U.S. markets, and potentially getting some tailwinds from currency movements now that rate hike expectations for the U.S. are declining.  Good article here. Since my tendencies are to be (overly) conservative, I use my automated 401k contributions to ensure that I am going to put some dollars to work here.

Value Portfolio.  In full disclosure, I also manage an account focused on individual equity positions.  Generally, I hold 8 – 10 positions that are focused on what I call “value”. I use an ROIC screen plus business and financial analysis.  Interesting ideas have been hard to find here. I’ve been working on sizing positions better. Reviewing the returns on this portfolio is a good reminder of how hard investing really is.  But I enjoy the process and it keeps me engaged. I’m also not 100% bought into passive investing.

“As sure as night follows day, passive is going out of favor.” – Jeffrey Gundlach


It’s certainly an environment that makes me shade even more conservative than usual.  Go read some Howard Marks and be patient.

Book Report: High Output Management

Reading Time: 3 minutes

“I take notes in just about all circumstances and most often end up never looking at them again. I do it to keep my mind from drifting and also to help me digest the information I hear and see.” – Andy Grove

This is meant to be more of a book report, than a review.  In particular, I want to highlight three lessons from the book, High Output Management by Andy Grove, that I found impactful.

Maybe this is well trodden territory, but I wasn’t that familiar with the book.  This article by Ben Horowitz led me to the book.

In general, I enjoyed the book.  It took me a bit to get going. The Breakfast Factory was not gripping reading for me.  But once I made into the managerial sections, the take-aways and reading flowed much quicker.  My undergraduate training is as an engineer, with an emphasis on systems, so there was much to relate to here in terms of thinking.  There were some topics that I considered less relevant to those of us managing smaller organizations. For example, I’m less concerned about dotted line relationships across my company and more concerned about the fact so many lines lead back to the same person – my Director of Engineering is also our Director of IT and the Director of Security and the Director of Whatever Comes Up Next.

However, three topics that did alter my perspective were:

Stagger Charts.  I adopted this one before I even finished the book.  It’s been useful as I’ve started to dial-in my forecast model for my new business.

“Another sound way to anticipate the future is through the use of the stagger chart, which forecasts an output over the next several months.The chart is updated monthly, so that each month you will have an updated version of the then-current forecast information as compared to several prior forecasts”

“I have found the ‘stagger chart’ the best means of getting a feel for future business trends.”

Meetings: The Medium of Managerial Work.  Maybe I was in a place where I was open to this message.  In my prior company, I felt most meetings were a waste of time.  Or maybe more precisely, something where I generally walked away with having only gained more more work and now less time to actually get it done.  Generally I was already in the know for most things (not much new to learn) and it seemed like most decisions were not made in formal meetings (no reason to spend time debating a topic).

In my new role, meetings have taken on a new dimension.  There’s much more of a two-way value proposition going on.  

“Earlier we said that a big part of a middle manager’s work is to supply information and know-how, and to impart a sense of the preferred method of handling things to the groups under his control and influence.  A manager also makes and helps to make decisions. Both kinds of basic managerial tasks can only occur during face-to-face encounters, and therefore only during meetings. Thus I will assert again that a meeting is nothing less than the medium through which managerial work is performed.  That means we should not be fighting their very existence, but rather using the time spent in them as efficiently as possible.”

Performance Appraisals.They key for me is the forward-looking point of view Mr. Grove imparts here.  

“But what is the fundamental purpose?  Though all of the responses given to my question are correct, there is one that is more important than any of the others: it is improve the subordinate’s performance”.

It makes a lot of sense.  It’s not a box to be checked or a way to memorialize historical accomplishments or areas for improvement.  The appraisal should be focused on improving performancing in the future.

I read this right in the middle of a round of appraisals.  It would have been nice to have read it prior to authoring the appraisals, but I was able to make some adjustments before delivering the reviews and hopefully take a more constructive tone than I might have otherwise.

All in all, definitely worth a read.  I see myself re-reading parts of this book as I encounter new challenges or come upon another round of employee reviews.  I’d also like to spend some time working through the “One More Thing…” exercises at the end of the book.

Kinco 5210 Alyeska Lined Ragg Wool Half Finger Glove

Reading Time: 2 minutes

“Handle your tools without mittens.” – Benjamin Franklin

Ben may want to rethink his quote with these half finger pocket gloves from Kinco.

We’ve lived in Ohio for about eight years now.  And, winter activities have become a necessary way of life.  Neither I nor Mrs. SFTE grew up with winter sports. We are from warmer locales. But, we’re not inside people, and in order to be outside in Ohio for a good portion of the year, you better be geared appropriately.

This main issue with gloves and mittens is the loss of dexterity.  And with our daughter still needing help with her own gear, you find yourself removing your own gloves on a frequent basis.  Plus, the touchscreen on your phone. I’ve not found the gloves that claim to be touchscreen compatible to work that well – and they’re generally more of a liner weight anyway.

I picked up a few pairs of these Kinco Wool gloves ahead of our indescribably amazing Yellowstone trip over the winter break in 2017.  They worked great on that trip. Warm. Grippy. And dexterity without having to remove your glove. There’s a magnet that keeps the pocket flipped back – to stay out of the way.

They’re perfect for winter hiking, shoveling the driveway, or gearing up for skiing in the parking lot – when you need to get the skis off the roof rack and put your boots on – but need something on your hands.

This photo is from a recent hike up to Rainbow Lake in Frisco, Co with ambient temperatures in the low teens.  No temperature issues at all. Perfect for helping the kiddos get buckled into their snowshoes.

Frisco, CO
Frisco, CO

The price (~$18) is well within budget.  I’ve purchased an assortment of Kinco gloves from Discount Work Gear.

The only consideration is these are not liner weight gloves.  They are beefy. That means they have some bulk.

Overall, a great addition to Dad Gear.

Influential Reads – January 2019

Reading Time: < 1 minute

More on my process for collecting, filtering (Feedly), reading, saving (Evernote) and reviewing my reading list later.  

As part of evolving that system to add some more structure, I will be posting the most influential reads I have encountered over the past month.  That does not mean they are the best reads, that I necessarily agree with them, etc. It means they have helped to influence and evolve my thinking – essentially the primary purpose of reading, right?

In addition to incorporating the step of going back and reviewing all my reads from the month, by limiting the list to ten, the process will utilize a theme that I’ve been employing on a more frequent basis lately.  That is to inject a constraint. It’s like air in a balloon. Hint: gases expand to fill their containers.

Here are my most influential reads from January – in no particular order:

  1. New Year, new mantra
  2. Why to Take Notes
  3. You Should Adopt the Boring Habits of Successful People
  4. The game-day caffeine routine that powers the NBA’s most frequent flyers
  5. Updating My Favorite Performance Chart for 2018
  6. Switch Your Devices to Dark Mode to Give Your Eyes a Break
  7. The Insane Numbers Behind Cycling’s Most Masochistic Race
  8. Gundlach Warns U.S. Economy Is Floating on ‘an Ocean of Debt’
  9. The Biggest Valuation Spread in 40 Years?
  10. Intro to The Media Bias Chart

There were a lot of great articles at the end / beginning of the year.

Note: This is based on when I read the article, not necessarily when it was first published.  Unfortunately, my backlog of things I would like to read always seems to dwarf the amount of time I can devote to reading.