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Month: February 2016

Book reviews – Flex and the Flux

People that know me know my travel schedule is very demanding.  I fly back and forth to Asia far too often.  One thing my schedule give me is time to read and I thought I would use my site to occasionally post reviews of what I have read recently.  For my blog, I will only post about things I liked.  I want to give recommendations of things to try with the idea that the person reading it might buy the book right before jumping on a plane for a trip.  So I will provide links to the books, but Kindle versions only as I am imagining you buying the booking online in the airport right before you board.

I decided to start with two books by Ferrett Steinmetz, the first two books in his ‘Mancer series.  I chose them for a few reasons.  They are good and they are entertaining and certainly will help a flight go faster.  My daughter Rachel  loved them so much that she wrote her first ever fan letter to Ferrett.  Finally, I actually know Ferrett personally.  Not really as close friends or anything, but someone I have met a couple of times in real life and who I have followed his online writing via Magic the Gathering editing and articles, web comic and blog for years.  He was someone that I always thought would end up being a good fiction writer and he certainly deserves a boost.

Ferrett has created a very interesting world where people who are obsessed with something can, in the right circumstances, harness their obsession to break the laws of reality and use magic.  People can be obsessed with many things, and usually the obsession makes the characters loners in some ways.  They certainly need to hide their magic as it is illegal.  Magic is dangerous for two reasons – the first is that there always is a negative consequence to using magic call The Flux.  The second is that powerful enough magic, especially when more than one person is doing it, can tear reality and open a hole to a malevolent dimension.  Europe was destroyed because of reality being torn there.  The government actively hunts and stops people who use magic.

The main character is Paul Tsabo, an insurance adjuster that can harness the power of bureaucracy to perform his magic (I am sure you can see why an accountant like me would like that).  A personal tragedy caused by an improper use of a powerful drug called Flex (distilled magic that can be used by anyone but you cannot escape the consequences) forces him to be  much more aggressive in using his magic.

The two books so far have an interesting cast of characters and they come in all shapes, sizes, colors and sexual preferences.  Certainly no stereotypical backgrounds here.

Flex  5/5 (book 1)

I’m not so into video games as one of the sub-themes in the work requires and I really did not feel the gel between the main male and female character, the reasons for friendship really were too flimsy for me, but the story and the characters were well done. The writing also was quite developed and it had a good and enjoyable rhythm. It was hard to put down once it got going.

The magic system fits somewhat together but does not quite click for me. It needs a little more fleshing out and the “flux” doesn’t seem really proportionate to the magic being used at times. I also wonder that considering the flex that the main character is able to make – magic with no consequences – why he was not able to get better help. That is the problem with any magic system, though. It is magic and logic just breaks down at a certain point.

The book was very entertaining and I am comfortable with a “five star” rating as I think that it really does deserve to be read by more people.  I rarely give books a 5 star rating, but this one was fresh and interesting and a good read.

Flex – Kindle version

The Flux 4/5  (book 2)

I enjoyed the book, but did not think it was quite as good as Flex. I really thought the scenes in the Institute dragged on too long and then were wrapped up too abruptly in the end. The ending almost felt like it was written differently than the middle section of the book, felt like the book maybe was a little too short or something and was padded or edited differently in the middle.

The story itself did move along OK, with several set piece fights and confrontations. We learn more about the world the stories are set in and some more information on what happened to Europe and why it happened. Really not much change in the main characters compared to what was happening at the end of Flex. I did not note any real growth or change in them which was a little disappointing.  Even so, I liked the ending and I am looking forward to book three which should be out soon.

The Flux – Kindle version

What is network attached storage and why should you use it?

I have had a keen interest in computers even since grade 9 when I started to have access to the Apple ][+ computers that my high school had purchased. This is not meant to be an article on the old history of personal computers, but Apple was one of the very first companies that got a few basic things right and that laid the foundation for their early success. One of these things was the introduction of floppy disk drives for their products and the leap in usefulness that happened when you moved from cassette tape to a floppy disk gave them a big advantage. The speed and storage gave them a big advantage.

Storage has always been a niche but crucial part of the experience of using a computer, even if a computer is disguised as a smart phone or tablet. With exception of terminals that were just a screen and a keyboard connecting to a remote computer that had the storage, most home users have relied on local storage, or storage located in the device or computer you use. The main reasons for this has been speed and ease of access. If you want to watch a movie or listen to a song, the huge drop in speed to download over slow connections compared to it just starting to play immediately.

The problem is that media files take up a lot of storage. So you either need to have larger and larger hard drives in your computer, pay for more storage memory in your mobile device, or rely on outside storage and download over the Internet which can be slow and hard to access. If you have a family with kids, everyone will want more and bigger hard drives and sharing files can be either a drop down to the “sneaker nets” that always seem to exist (copy onto a flash drive and walk over to the other computer) or opening up your computer hard drives to sharing and dealing with it computer by computer.

The first time a hard drive crashes and you do not have a back-up is all most always the motivation to make backing up something you want to do on a regular basis. The first solution many people try is a USB drive plugged into their computer and manually copying files. This also only covers the one computer it is plugged into. Multiple back-ups means either multiple back-up disks or moving the sub hard drive from one computer to another.

Another reason is because you want access to media files and you don’t want to have multiple local files. With many devices that can now play media files to TV’s or audio systems or some other playback device, it makes sense that you would want one access point and source within your house instead of keeping many copies that all take space.

Finally, you may want access to some files when you are traveling. You can again use a USB drive or make local copies, but you need to plan in advance then and know what file you want to bring with you.

Since this post is about NAS, I am sure that many readers might expect me to jump right to the different main companies out there, but there actually is an intermediate step. If it is just back-up and file access you need, your router may already have a built in solution. Many higher end home routers come with a USB port and the ability to share files if you plug a USB hard drive into it. Even if your current router doesn’t have that feature, that fact alone probably means that you have a lower end router. If you are moving a lot of data around, a higher end router that lets you plug in and share a hard drive might be all you need.

If you will have multiple people streaming or using files at the same time (or multiple devices), then a dedicated NAS unit may be better. There are two main companies that provide NAS and quite a few companies that are not the leaders but do sell dedicated devices. You can even build your own. The two main companies are Synology and QNAP. Some examples of smaller companies or companies that also provide NAS are Asustor (the company I chose), netgear, and the main hard drive companies like Western Digital and Seagate.

When you buy an NAS, you are essentially buying a small, dedicated server. Small as in size of the device compared to a normal computer, not small in storage area. Typical HD configuration is either 2 drives or 4 drives. I suggest 4 TB NAS drives which means 8TB or 16TB before the effects of RAID (is any). The main NAS on the market all have a modified version of Linux in their firmware. What they have done is add a “skin” or outer layer that you can access via the A web browser that allows,you to configure and use your NAS. They have tried to make configuring the files as easy as possible compared to straight Linus.

The basic function of serving files comes from SAMBA, a well developed service. The file services generally available are SMB (server message block) and CIFS (common internet file system) both based on protocols that Microsoft introduced. You don’t need to know all of this to use your NAS, but it should work fine with standard Windows and Mac computers. All of the mainstream NAS allow the NAS to be a Time Machine back-up target. That means that backing up your Mac should be easy and automatic. All of the major NAS allow you multiple accounts for different users and allow you to even determine how much disk space each gets.

One of the very first choices you need to make when first setting up your new NAS is what RAID you will use. RAID stands for redundant array of inexpensive/independent disks and is a technology that allows several disks to be seen as one logical unit and may also help in integrity of your data via mirroring of data across several disks. The most commonly used RAID is RAId 5 and it basically allows a 4 disk array to keep working even if one disk goes bad at then penalty of losing 25% of your storage (it actually is n-1 disks available so 3 disk means you can lose 1 disk but you lose 33% of your storage).

Before I get any further, let me state clearly that RAID is not back-up. Even if only one drive does fail, there is a reasonable chance that something else will go wrong when the drive is replaces and a new array is built. RAID can help partially protect your data depending on what type you choose. Some RAID like RAID 0 are very fast but one disk failure will result in data loss in all drives.

My general advice is this. RAID 5 or no RAID. I personally use RAID 5 and sacrifice the space for a little pice of mind. No matter what you choose, back up the files on your NAS. You need at least 3 disks to run RAID 5, so if you go with a 2 disk model for your NAS you need to make another choice. Let me assure you, what RAID to use is almost a religious decision. There are quite a few people that strongly dislike RAID 5 and they would disagree with my advice here.

You will want to connect the NAS via an Ethernet cable to your router. Most do not come with built in wifi capability, so you need to do that anyways. Since they do not need a screen or keyboard, they can be put just about anywhere that is handy for them to be connected to the router. Many come with 2 Ethernet connection ports. If you use both they will try and balance demand over both ports to keep throughput as good as possible.

Once the NAS is up and running, you should explore all the additional programs available over and above the basic file service. You may also have to forward a few ports in your router if you want to access the NAS from outside your home network.

Some example programs that are available: surveillance camera software (all that storage is good for something), iTunes server (unfortunately does not work with Apple TV), ERP, customer service ticket systems, media servers such as Plex, photo file servers, personal cloud software, Teamspeak servers, anti virus software and sophisticated back-up software and many more.

You can always use an online, cloud service to back-up and it might be the right way to make occasional offsite back-ups of your NAS.  However, this can be slow to do on a regular basis and you can serve files on your local network much faster from a local source than an external, internet based source.

I like using my NAS and I recommend that you consider getting one for your own home. I probably will return to this topic in a while with a lot more details on a few areas.

Some home or small office NAS I recommend

I personally picked the Asustor 5004T for my own use but I like all three I recommend here.  This was mainly because you get a little more hardware bang for the buck.  The user community for QNAP and Synology is much larger.  Each of these should be able to handle some media transcoding.

Asustor NAS 5004T

QNAP TS-451

Synology 415+

NAS Hard Drives

I recommend the WD Red 4 TB drives.

NAS hard drives

What does it mean to be a strategic CFO?

I think that the term I hear the most often when a recruiter calls me for a CFO opportunity is that their client is looking for a “strategic CFO”. I also see a lot of articles in Finance trade press on the importance of being strategic or on the new CFO that goes beyond the traditional roles of the CFO.
I’ll start by saying that many of the definitions used by those articles of a “traditional CFO” are quite narrow and probably apply to a Controller or Head of Accounting more than that of a typical CFO. I can forgive that, it makes for a more likely to be read article if you are claiming to provide some new insight, but I do find many of the articles to be shallow and they often do not seem to understand what a CFO has always done.

Quite often one of the main things claimed to be needed to be a strategic CFO is to be forward looking. That is probably the claim that puzzles me the most. Even basic accounting and reporting needs to be forward looking because the very basis of accounting for most companies, that they will continue as a going concern, requires forward thinking and analysis. Preparing budgets and forecasts is a core Finance skill. Some are better than others at building relationships outside of finance and get better insight, but that skill is a basic finance skill. Finance usually sits in the middle of the information flow for any company because Finance monitors cash flow, so building relationships is even easier. So I don’t think being forward looking alone makes a CFO strategic.

Other articles encourage CFOs to go beyond the traditional Finance work areas. This is also somewhat puzzling advice for a CFO because is seems to be part of their job to begin with. A CFO is a member of the senior leadership team and often one of the main outside and inside faces of management. Most of us have worked with a variety of functions as we moved up the ladder earlier in our career. A few of us even came over from other functions and hopped over to Finance.

With all of that good experience, trying to run other functions can be disruptive to the team. Everyone already has one clear boss, the CEO. They really do not need another boss. A good CFO will keep the company accountable to the goals everyone is shooting for, especially the financial goals, but be someone that enables success, not trying to run everything and make some sort of success themselves. You’re often in the role of risk control and doing reality checks if goals are being missed, so the CFO is often trying to overcome the bearer of bad news role that is natural to them.

This type of advice varies with the size of the company and what stage it is in, of course. In a smaller, earlier stage company, the CFO (if they are even called that) often have all of the admin functions under them. It is not uncommon for IT to report to the CFO as well. However, as a company grows and becomes more mature, you typically have several clearly defined functional heads. The CFO role usually gets more complicated as well, first with VC fund raising or with investor relations if the company is public. Treasury and fund raising consumes a lot of time as well. So there is limited usefulness in trying to do every function under the sun while CFO. A well structured expansion of roles can work well as part of career progression towards becoming CEO. I don’t think it is the best option when that is not the case and even when it is the intent, the CEO must back it and be clear about why it is happening.

That does not mean that the CFO cannot be deeply involved in areas outside of Finance. You can help the sales team close deals and reduce currency risk via hedging and ensure smooth revenue recognition by getting the contracts right day one. That only happens when you have a good working relationship with that team. You can help Purchasing in negotiating contracts with suppliers. CFOs make excellent bad cops and you might be able to bring financing contacts to the table that can ease the pain of pushing out terms. You are usually the natural ally for IT and the Legal department. Your COO will probably greatly appreciate any help you can give to drive down costs and help in choosing a location for a new plant. CFOs are often made the leaders of large, corporate-wide initiatives, so there is plenty of opportunity to lead teams with other functions under you.

All of these sorts of activities will make you a better CFO. You will make better informed decisions and your team will also make better informed decisions. Communication will increase and improve. You certainly will be much better regarded and that will make difficult tasks easier. So I suggest that you get out of your Finance department comfort zone and expand your horizons. When you complete that big, strategic M&A , you will be able to integrate and get synergies much easier because you work better with all your company’s functions.

I don’t think all of this will make you the “strategic” CFO your boss and the Board is looking for. You’re probably a pretty good CFO but somehow might be missing the “strategic” designation.

I think to have a proper understanding of what is meant by strategic, you need to go to the root of the word and then go from there. From what I can tell from some quick research, the use of the word strategy in a business context only became popular sometime in the 1960’s. Until then, it was meant only in the context of war. The root is a Greek word that means General or battle leadership.

Wikipedia has a good compilation of the meaning of strategy, from a pure definition standpoint to several noted military strategists and writers such as Carl von Clausewitz and B.H. Liddell Hart. The definitions can be boiled down to using all available and appropriate military resources to achieve political goals.

Sun Tzu said in The Art of War “If you know yourself and you know your enemy, you will not lose one fight in a hundred.”

I prefer Miyamoto Musashi’s discussion of strategy in his Book of Five Rings. His Earth Scroll (the first of his 5 scrolls) contains a long discussion on strategy. He even discusses strategy in business (in the 16th century, well before the 1960’s commonly described as the beginning of using strategy in business):

“In the way of business, there are cadences for making a fortune and cadences for losing it. In each way, there exist different cadences. You must discern well the cadences in conformity with which things prosper and those in conformity with which things decline.”

That is quite a profound statement by someone who was mainly known as a sword master. He tells his readers that a businessman needs to see the rhythm in their business and when you can prosper and when you would tend to decline. If you think about it, the CFO sits in the middle of everything as cash converts to reporting and is analyzed. That gives you the base for understanding the cadence of your business, but only by going outside your own department will you fully comprehend the cadence as numbers tend to lag reality. They are easier to see patterns in, but getting in front of the patterns normally comes from something more outward looking like Sales or Purchasing. So it is not being multi-disciplined or leading many departments that matters, it is understanding the rhythm of your business and when you need to act.

Musashi lists 9 things to keep in mind when trying to be strategic:


1. Think of that which is not evil.
2. Train in the way.
3. Take an interest in all the arts.
4. Know the way of all professions.
5. Know how to appreciate the advantages and disadvantages of each thing.
6. Learn to judge the quality of each thing.
7. Perceive and understand that which is not visible from the outside.
8. Be attentive even to minimal things.
9. Do not perform useless acts.”

I think these are all very valuable if you want to be a strategic CFO. He again stresses the need to keep a broad mind and not just learn sword fighting (finance in our context), not to do evil or useless things, and pay attention to details and learn to look beyond just the outside. I find the instructions to not think of evil things and not to perform useless tasks to be advice that all leaders should consider. Don’t step over the legal or moral line when plotting strategy of the consequences may derail all the company’s plans and you will put yourself and your career in jeopardy. Don’t do useless busywork, spend your time on actions that add value.

Musashi’s advice to learn the ways of other professions was meant more in the 4 professions framework he used (warrior, the peasant, the artisan, and the merchant) but in his own life he certainly farmed and mastered several arts himself. He was a big believer in doing instead of just reading or thinking about something, and he thought that the path to master the way of strategy was not just by becoming good at fighting with a sword. It was a primary activity, but not the only one. I first read his book when I was in my late teens when I first started sword fighting, and it is an excellent book to help make you better at that. However, once I finished school and started my career, I found his advice to be much broader than just sword fighting and he intended it to be broader.

In the context of a large company, Musashi gives good advice on strategy as well:

“Regarding grand strategy, you must be victorious through the quality of the people you employ, victorious through the way in which you utilize a great number of people, victorious by behaving correctly yourself in accordance with the way, victorious by ruling your country, victorious in order to feed the people, victorious by applying the law of the world in the best way. Thus it is necessary to know how not to lose to anyone—in any of the ways—and to firmly establish your position and your honor. That is the way of strategy.”

He makes it clear that you can take knowledge of individual combat and apply it to larger fights, but you cannot rely on just your individual victory. Rather, you need to take the same foundation you developed to win a sword fight yourself, against one of more enemies, and then use the greater resources your army gives you to win a bigger fight. If you are good yourself, think of what you need others to do to leverage your strengths and their own strengths. He says you need good quality people and then you need to lead them well.

Musashi says “It is necessary to know ten thousand things by knowing one well. If you are to practice the way of strategy, nothing must escape your eyes.”

His advice goes back to this theme quite often. He tells you to see, not just look. To understand and use your understanding in a broad way.
“You should not have a predilection for certain weapons. Putting too much emphasis on one weapon results in not having enough of the others. Weapons should be adapted to your personal qualities and be ones you can handle. It is useless to imitate others. For a general as for a soldier, it is negative to have marked preferences. You should examine this point well.”

With this advice, Musashi tells us that we should not have only one weapon or way to solve problems and not just to blindly copy others. He tells us to be versatile and open to what is the best technique for the problem in front of us. Far too often a CFO will try and use numbers to win, and sometimes it takes something different than numbers. Even if you don’t like leverage, borrowing money might be the right thing to do.

Finally, Musashi makes it very plain what the purpose of strategy is, to win.

“Generally speaking, when people contemplate the heart of warrior thought, they consider it simply a Way in which a warrior learns to be resolute toward death. But this is not actually the essence of the Way: what distinguishes the warrior and is most basic in the Way of the Martial Arts is learning to overcome your opponent in each and every event.”

“The true Way of swordsmanship is to fight with your opponent and win.”

“Your real intent should not be to die with weapons worn uselessly at your side.”

If you want to be a strategic CFO, you must be able to help or make your company win. There are no shortcuts or avoiding this. You may not have to leave your opponent on the ground bleeding to death or already dead like Musashi did, but you do need to win.

Business can be very black and white. There are winners and losers. No company consistently wins over time without the right strategy and culture. I will address company culture in a blog in the future, but the management team needs to be able to develop a winning strategy and execute on it.

I think there is nothing more that you boss hopes for more from his CFO is for them to help him be a winner. No one likes to lose, so the basic risk control and proper reporting skills of a good CFO are appreciated, but not losing is not necessarily winning. A winning strategy might be to survive a down cycle, to understand the market cadence that says you cannot prosper right now so you save resources for when you can, but more often winning is marshaling your internal resources and leveraging the external resources you have available to you.

Musashi says the heart of strategy is winning. He says to fight with what you have, not to leave weapons unused. No company is limited to only Finance tools. A strategic CFO knows how to enable or lead other functions when they are needed to win.

Assuming that you agree with me that the heart of strategy is to win, then you might be wondering what you can do to become a strategic CFO and to become a winner. I can tell you that I personally am not 100% sure how to answer that question from my own experience. I have done well at the various companies I have worked at and in all cases we grew and won. However I know that I am still on the path, I have not arrived at the destination. I do think that the advice that Musashi gave on this is quite good.

“See to it that you temper yourself with one thousand days of practice, and refine yourself with ten thousand days of training.”

When you are not doing, you need to be practicing. Develop skills, develop staff, debate and fight practice battles with your team and the senior management team. Experience helps. When the moment comes to execute and you need to make a decision that leads to victory, if it is something you have practiced or at least thought of in advance, then you will be quicker to act and more likely to make the right choice. Even practicing choosing helps.

This has just been the broadest overview on what strategy is and how you can use that understanding to be more strategic in your career. I plan on delving deeper into this topic in future entries in my blog and try to use some specific actions and examples I have encountered in my career. For those that care about my hobby posts, I will also go deeper into Musashi and how his book can make you a better sword fighter. I have a few other topics I want to discuss first, but feel free to contact me and ask to move up these discussions.

Strategy Books (all of which I personally own or have visited)

Website with an online, free copy of The Book of Five Rings

The Book of Five Rings

Books, either in paper or on Kindle (all links go to Amazon.com)

The version I quote here:

The Complete Book of Five Rings

The Complete Book of Five Rings – Kindle version

The translation I first read

A Book of Five Rings: The Classic Guide to Strategy

A Book of Five Rings: The Classic Guide to Strategy – Kindle Version

An account of Musashi’s life

The Lone Samuari: The Life of Miyamoto Musashi

Fictionalized versions of Musashi’s life

Musashi

Musashi – Kindle version

Samurai Trilogy [blue-ray]

Eve Online – My pirate empire

https://zkillboard.com/character/258455591/

Shocking news, for years I was a hardened criminal, leading a large, organized gang of fellow criminals. So wanted that if I stepped into more civilized areas of the Galaxy, I was almost immediately hunted down by local law enforcement. I ran a large extortion racket and also murdered and plundered for no reason other than to see the world burn.

Luckily for me, all of this was inside a massively multiplayer online game (MMO) called Eve Online. The very first link that starts this entry is a link to a killboard. Eve is a harsh game and if anyone that already plays Eve happens upon this post, killboard stats are almost required to show that what I am saying is not complete BS. To give you an idea of what the game is like, most Eve players will see my 95% success ratio and think that I suck. They will look at what ships I was flying when I was blown up and make fun of me.

To take a big step back, a MMO is a type of computer game where you are playing with many other people at the same time. Probably the first successful game of that type was Ultima Online. The first one that really took off and made a lot of money for its creators was Everquest. And probably the biggest and most famous game of that type is World of Warcraft. Most of the games of this type are fantasy based, but there are a few science fiction ones like a star wars game.

Eve Online is very different that most other MMO games. The differences are what appealed to me the most, but it does take a certain mindset and type of player to make it enjoyable. Eve is very much a sandbox style game where the economy is in the hands of the players as much as possible (and every year CCP, the company that is behind Eve, adds even more player control to the economy). It is one giant shared universe (there actually are two universes, one main one and one just for China). Most MMO divide their games into different “instances” and you tend to play on one server and only interact with the other players on your server. You are all playing the same story and what you do in your subsection of the story does not effect the other players. Not so for Eve, since it is all one universe, what happens at any one place effects everyone. If you go to the main trade hub and buy up all of one component, it will not be available to anyone else until players restock it.

Eve is also much harsher than other games in that the base game in Eve is focused on player vs. player combat with real consequences. In many other MMO, if you die you just respawn somewhere else and do not lose much or any of your equipment. In Eve, if you ship is blown up, then it is gone and all the equipment attached to it is either destroyed or attached to your wreck and you can only recover it if you or your side controls the battlefield. Otherwise it gets looted by the winner.

These main elements – player controlled sandbox, one shared universe and game focus on PVP with consequences are what both make Eve very interesting to play and very hard to play at the same time. If you make a mistake, you can lose everything you may have worked months to accumulate. Since there are many areas of the shared universe where there is no law enforcement at all, you either need to be extremely careful or very strong (usually as part of an organized group) or you will die and lose all of your assets. People can scam you. Players can steal from you. All is allowed in the game.

I have not played the game seriously with lots of time in it for several years. I played pretty steady for almost 5 years, but once I moved to China it became a lot more difficult to coordinate time zones and the Great Firewall. Plus Eve is the type of game that can take up a lot of time and I was spending that time on work and now I am spending my free time on other hobbies. Even so, I keep an eye on what changes in the game and did rejoin to play for a little while last year.

The game is so open ended, that it can be hard to explain it fully. What I’ll try and do is give a brief summary of my “career” in Eve and use that as an example of some of the things you can do.

I started a character called Myrdin Potter in 2006 (I think) and my original idea was to be an industrialist/trading character. I played solo for quite a while, running through the automated content available and slowly learning the game. I was approached quite often by people trying to get me to join their player groups (called corporations) but wanted to develop my character more before making a real commitment. I finally was approached by the Ceo of a corporation called Diplomatic Disruption and I joined them.

The game immediately changed for the better. Everyone has a different personality but Eve Online is meant to be played as part of a group. So I encourage anyone who wants to try to join a corporation sooner rather than later.

Our group did asteroid mining together and also ran the automated missions which are two ways to earn ISK, the games currency. Then another corporation declared war on us and what was a safe and well patrolled area by local law enforcement became a war zone for us. We were inexperienced and easy targets. However, I had chosen my corporation wisely and we pulled together as a team and learned how to fight. The combat against enemy went from us losing to us winning and killing them. The war ended and now I had the thrill of combat as part of my game play.

As I was living in Singapore at the time, I had a lot of hours where I did not overlap with others in my corporation and spent a lot of that time going into low security areas looking for trouble. Eve has three main security areas – High, low and 0.0. High security has space cops that will attack you if you attack other players. Low security has no cops, but if you attack other players your security rating is reduced. Eventually you cannot enter high security again. Finally, 0.0 has no security at all and there are no consequences to PVP other than the results of the PvP itself.

While looking for trouble, I ran into a small corporation that was mainly Greek players that were pirates. They chased me all over the place trying to kill me and we chatted in “local” as they chased me. Eventually we made a truce and I started flying with them hunting down other players.

Things snowballed from there. My corporation formally joined with theirs first as allies and then eventually as part of an Alliance. We were able to broker some living space in 0.0 and I tried living out there for a while. 0.0 is the area with the most content and gameplay possibilities but your assets are always at risk from other alliances that can come and take your space away. The group that had given us living space was pretty weak and not long after we were out there another group came and defeated us time and time again and kicked us out of the area and I return to low sec. The game design is quite good in that some systems have a resource that you get via “moon mining” and some locations are quite valuable. That make other groups want them which leads to conflict.

At this point, our Alliance (which was called Chain of Chaos) went to war with another pirate group over a system called Antem. After a long, several month effort we defeated them and drove them away. Moving to Antem was a big change as it was connected to the main grouping of low security systems and it had decent moon mining resources in the area. We eventually ran into another low sec Alliance called Rooks and Kings (search for their videos on youtube) and had many epic fights against them (their video don’t show when we beat them).

I then spent years controlling that space, first as the number 2 in the Alliance and finally running the whole thing. I went from being a soldier to being a fleet commander with several hundred other players depending me to make the right choices and give the right commands in combat. My skills that allowed me to rise up in my finance career worked well in the game and commanding fleets helped me to think quicker and make decisions faster.

I had years of fun in the game and still recommend it. Some days, when I am lying sleepless and jet lagged my pirate blood starts boiling and I want to go back to ruling space fairly but with an iron fist and a gang of blood thirsty pilots on my voice chat and waiting to kill whatever I pointed them at. I not only fought, I also mined and built ships, from the smallest all the way up to capital ships. I ran space stations and moon mined. I hunted and killed other players and I destroyed other corporations, often costing them years of investment.

Game play examples:

I think the easiest way to see what the game is like is via these two videos. The first captures the immersion you can get while playing the game (these videos are all on Youtube. For readers in China, search for Eve Online in Youku and you can find the same videos):

“I was there”

This second one is a good proxy for what fleet combat is like:

Retribution Trailer

And as a bonus video, one celebrating the sandbox nature of Eve Online

Butterfly Effect

And one more showing my Alliance beating Rooks and Kings in small gang PvP

Responding to a comment letter from the SEC

imageThere is a particular circular logo that always worries even the most experienced CFO. It is a simple logo and it means that the SEC has looked at your filings and has some questions. If the letter is something as serious as a Wells Notice, then you need to engage with your outside counsel right away and I can’t really give advice as I am not a lawyer.

Comment letters are a lot more common. You can expect that your filings will be reviewed every 2-3 years and every special filing you make (like an S-1) will draw a comment letter every time. They are common, and the typical result is improved disclosure the next time you do a filing. A bad outcome is the need to restate which can have significant personal and valuation of the company repercussions. A disaster is a Wells Notice and a full legal investigation.

When I first started, responding to a comment letter was much more difficult and you needed to rely much more heavily on your auditors and your lawyers as they had many examples of responses from their client base and you typically had nothing except for anything you had done yourself or within your company in the past. Ever since the SEC made comment letter responses available online, you should be much more capable of answering them yourself or with a lot less help from your outside advisors.

Here is my general advice on what to do when you receive a comment letter.

As a general comment, you are dealing with very experienced accounting and legal professionals at the SEC. The team that reviews filings and comments on them tend to be very experienced accountants and lawyers who read and comment on filings for a living. Their letter is reviewed by even more experienced staff before it is sent to you. The SEC monitors trends and usually every year there are specific areas of accounting and disclosure that get extra questions for just about every filer that it applies to. Unless you do actually have a very severe issue, there pretty much is no intent to “get you”. I have found 100% of the SEC staff I have worked with over the years to be professional and courteous and generally helpful where they can be helpful. They tend to be pretty flexible where they can be.

Expect an iterative process. There was one pretty long letter that I responded to that the SEC accepted all my answers the first time, but usually is takes 2-3 rounds of replies with more questions.

The first thing you need to do is read it through at least once. You don’t need to fully understand or do any deep research at this point, but make sure that you and your Controller have read the comment letter and have a general idea of what is in it and what the main questions seem to be. You will be very quickly involving others in the process, and they will be relying on you, so make sure that you know how serious the letter appears to be. It usually is pretty easy to identify the most important questions, as the examiner normally makes them pretty clear. There might be a question or two that are trickier and if answered the wrong way will cause a spiral into more questions and a much higher chance of restating.

Now inform your boss and the audit committee. This should be done quickly, your process of reading and getting a general understanding should not take long at all and you need to treat every comment letter with a sense of urgency. It is a good idea to inform your lawyers and auditors immediately and I advise that you copy legal counsel on your communications where appropriate as it is possible that the comment letter will result in legal action against your firm or you personally. The SEC does not allow you to use them as a direct legal defense and your work on replying to a comment letter can be discoverable if not protected. If you are not sure what that means and how to protect yourself and your company, seek legal advice.

I always have a very strong sense of ownership of what we file. I have always found that my reporting is better after I get and respond to an SEC comment letter. You will be engaging and using outside help, but you own the comment letter responses just like you own the filings you did. Do not allow the outside advisors to take over the process. They are not always on your side. If something needs to be restated, or if more serious issues come up, they may also have the agenda of protecting themselves. Remember that auditors commonly get sued as well if accounting issues come up from an SEC review. That means that they are very much on your side until they are not. Chances are pretty good that it will not be an issue but do remember that they have their own priorities and that may mean protecting their business just like you are trying to protect yourself and your company.

Now that your boss and the Audit Committee are informed, you should have also formed a small team to actually answer the comment letter. You need to divide up the comments and delegate them to the people best able to answer the questions (and this may be you). Personally, I think the company should write the first draft of all the responses but you may not have the expertise. If you do not, remember it because you have a skill set hole in your company that may need to be fixed later after the comment letter process is done.

Now that the SEC has made other comment letter responses public, you should be able to find the same questions answered by other companies. There is no rule against using other responses word for word. No such thing as plagiarism or copyright when reviewing SEC submissions. If you check competitors or similar companies and they have identical questions, then you know that those questions are focus areas for the SEC this cycle. Look at the answer(s) that the SEC accepted in the past and consider if the same answers or something very close also applies to you.

I cannot emphasize this enough. Prior SEC filings are a huge resource and you should absolutely use them to guide your answers. There are no prizes for brilliance and answering every question yourself with completely original answers.

Dire warnings aside about making sure you understand the risk that outside advisors may have their own agenda, your auditors are a very good resource. If you are using a Big 4 firm, then their SEC advisory group will have people that recently worked at the SEC. They probably have other clients who have received comment letters from your examiner and have more personal read on his or her style. When it comes to very technical accounting questions, your technical partner can be a big help in drafting a response that cites the correct and most compelling parts of GAAP.

I personally like my responses to be direct and to the point. Sometimes your advisors like to toss in introductory phrases like “we respectfully submit”. I never answer like that. Many times the comment letter asks you to enhance your disclosure in the future. Unless the suggestion has some fundamental error in it (which I have never found in any comment letter I have received), the correct response is to say that in future filings you will do what is requested. List out what was requested and what you agreed to. When the SEC asks for support for your current accounting, provide it in a straightforward manner. Your examiner will have several open files and comment letters they are responsible for. The more clearly you write and the more simply you write, the easier you will make it for them.

One final resource is the examiner themselves. Sometimes their questions are not very clear. You are allowed to call them up and talk to them. Like your written answers, you need to be careful what you discuss with them, but as I said earlier, they are not out to “get you”. They are limited in what they can answer. You cannot run a response by them, all responses must be submitted in writing and they can only respond in writing. However, they can clarify what a question means. You can call them and let them know that you are on a tight deadline for a filing and that you would appreciate them working as fast as possible. Sometimes it can help to have a personal relationship when they have to make a final call on an accounting item. If you are more than just text on paper, maybe something will go your way. I know that it even helps me to respond when I have a voice to go with the words on the paper.

Before you send in your response, give it one last read through. Make sure all responses follow the standard format of repeating their question and then responding. Make sure you are sure the questions are actually responded to. Double check the wording to make sure it is direct and clear. Make sure each one has enough detail but not too much that it clouds your answer. If you see an answer that disagrees with a disclosure request, ask yourself why you are not just agreeing to the additional disclosure. Sometimes if you agree then you are actually agreeing to accounting that you do not think is right, but normally fighting over disclosure requirements is just not worth it.

There is an almost certain chance that you will receive another comment letter on your responses that focus on the questions that either were not fully answered or where the examiner disagrees with you or feels that there is insufficient support for your answer. If they disagree, then you are starting to have a problem. You need to be extremely careful with any question in the second set of comments because those are the ones that the examiner is most interested in.

Hopefully you will make it through the response process with nothing more than agreeing to improve disclosures in future filings. Don’t forget to actually improve disclosures when you agree to it. It should be part of your reporting checklist to ensure that you disclose what you agreed to and how you agreed to.

30 years of SCA fighting

I joined the SCA when I was 18. I am in the home stretch to 50 now. So have been fighting for over 30 years. I think I was knighted about 8 years in. Probably could have happened sooner but the editor between my brain and mouth was not as good back then. And, I am sure, some people were just jealous about how handsome I was.

Well, that couldn’t have been true, so better editing is what I will go with.

I consider myself to be a pretty solid knight. Never won a Crown but I have lived and travelled all over the place and I have always given a good account of myself. I try and follow the spirit of the people that taught me and teach anyone who asks. I guess that includes sharing some stories and advice here.

I expect that I will write a lot about the SCA on the blog. It stands for the Society for Creative Anachronism. You can find out the basic information at http://www.sca.org . It is very hard to explain exactly what the club is because it is different for each person in it, but the basics are it is a Middle Ages recreation club. Not quite like the Civil War reenactors because it is very rare that even the theme or the start of a battle is the same as a historical one, but some members of the SCA are as serious about every little detail of the clothes they wear as anyone in any other history group.

For me, the heart of the SCA is that it allowed me to become a knight. My main love is armored fighting. Armored meaning wearing armor and fighting with swords and other medieval weapons. The weapons are made of rattan (a type of wood that is slightly flexible and breaks in a much safer fashion than other types of wood) and the combat is full force and blows are hard enough to dent steel (well at least 16 gauge steel, and maybe 14 gauge. 12 gauge is pretty safe.). The fights are real in that they are not choreographed or decided in advance and it is not just a touch kill system like modern fencing. There still is a certain amount of “counting coup” in the fighting as a hard blow to the head or torso kills your opponent and it is highly unlikely that one such blow on an armored opponent would have actually killed them but the rules do work well enough.

So here is the start of some stories and advice and I will slowly add my thoughts into this blog and may not stick to Thursdays for hobbies only and might post further SCA items on other days.

The first question I get asked quite often by people just starting is how do you learn to fight and get good? I can assure you that I was no athletic standout. I played only house league hockey and baseball growing up and am to this day not the most balanced and smooth fighter out there.

There is a pretty simple answer to that question. You need to actually fight to get good and the sooner you start and the more you do the better you will get.

My personal example is this. I found the SCA in Montreal at a war gaming tournament I was running in my CEGEP days. I was 16 and 17 in CEGEP (community college) so I am not 100% sure how I am stuck on me joining when I was 18, but I guess it is because it was the summer between CEGEP and university that fought for the first time.

My qualification bout was my very first fight ever. I had joined the SCA and managed to get my hands on the known world handbook and the basic armor standards, I had found a place in Montreal that sold rattan and bought enough for a sword. The recommendation then was to split a piece in half and use it, with a little carving, to make a cross guard. So I did that. I did not carve the hand grip.

I made a heater shield out of plywood and attached leather straps to it using some soft leather I had. I made carpet armor and modified hockey equipment to protect my shoulders, elbows and knees. I used hockey gloves to protect my hands. I had no helmet and there might have been one in the entire shire. I walked around in my backyard holding my shield and tried to imagine what actual fighting would be. I hit the tree in my front yard turning it into a pell and tried to swing like the “snap” was described. I did this for weeks, every day, getting ready for the very first event I was going to. Master Tearlach was coming and he was going to run qualification bouts.

I went to the event and borrowed a loaner helm that Master Tearlach has made. I think it was an army helm with sides riveted to it. Tearlach was a big and pretty scary guy to me, but I have always been able,to overcome that. I squared off for my qualification bout. The very first blow on my shield snapped both straps. I had not known that I would,need much stronger leather for straps. No one had hit me before. Tearlach leant me a shield (and that was the fateful day I started using a Tearlach coffin kite) and I went right back out there. I fought. I swung. I blocked. I took the blows that hit me. I was deemed safe and qualified.

After my qualification bout, Tearlach asked for my sword. With one grip he realized that I had not carved the grip. He didn’t say a thing, he just took a knife, carved it really quickly, and handed the sword back to me.

I fought as much as I could that afternoon, basically whenever I could borrow the helm.

Since then I have fought and fought and fought. Practice, tournaments, wars. Pell work. Sometimes still walking around and imagining it. Hours and hours and hours of pell work. Doing it. Fighting. Not talk about it, not posting on the internet about it, not trying to make the perfect armor before doing it. Crappy carpet armor. Cuirbolli and plastic body armor that I made myself (pretty bad looking but protective). Ugly white helm with Templar red crosses which changed to blue after my first Pennsic friendly fire experience.

The love of battle filing my heart, my blood on fire with the glory and exchange of blows. Dropping into the Void and striking my opponent dead from the heart of emptiness.

So my answer to that question is get your ass out there and fight. Borrow armor. Travel. Make it to tournaments and wars. Be the first in armor and the last out of armor. Never stop. Fighting makes you good. Teachers help and the right form makes improvement faster but fight.

Another question I get often from beginners is now do you hold a sword. To that question, I rely on Miyamoto Musashi.

From The Book of Five Rings, The Scroll of Water

“The Way of Gripping the Sword

You should grip the sword holding the thumb and index finger as though they were floating, the middle finger neither tight nor slack, the ring and little fingers very tight. It is bad to have an empty space inside your hand. Hold the sword with the thought of slashing your opponent. When you slash your opponent, the posture of the hand remains the same, and your hands must not tense up. It is with the sense of just slightly moving your thumb and index finger that you beat back your opponent’s sword, that you receive it, strike it, or exert pressure on it. In all these cases, you should grip the sword with the thought of slashing. Whether you are training at slashing an object or in the thick of combat, the way of holding the sword remains the same—it is held with the intent of slashing your opponent. In sum, it is not good to let the hand or the sword become fixed or frozen. A fixed hand is a dead hand; a hand that does not become fixed is alive. It is necessary to master this well.”

I often go back to The Book of Five Rings and it is my personal inspiration on how to be both a better swordsman and a better person. Musashi is brilliant at describing how to fight and his advice translates very well to SCA fighting.

I also can say that I sometimes shift my grip and hold tighter with my index and ring finger and get the whip and direction change from tightening my bottom fingers, but I much prefer the ring and little finger as my anchor fingers just like Musashi recommends.

The Book of Five Rings is very good and I recommend that any SCA fighter read it. Constantly repeated in it is the advice to do what is written. To practice. To fight. Or in another way, learn how to win.

“The Principle of Combat

In strategy it is by the principle of combat155 that you will know victory with the sword. I do not have to write about the details. The important thing is to train well and learn how to win. This has to do with sword techniques that express the true way of strategy. The rest must be transmitted orally.”

My final topic for this week is on speed in SCA fighting. Many beginners think that speed is really important. They get hit by a blow from an experienced fighter and they think it is all because of speed. Actually, in my experience, it is not raw speed that is the most important but timing and rhythm. Time a shot to match the rhythm of how they move is more important than raw speed that ends up right at someone’s shield.

Again, Musashi says it better than I can.

“ Speed is not part of the true way of strategy. When you say “fast,” this means a lag has occurred in relation to the cadence of things; that is what is meant by “fast” or “slow.” In whatever the domain, the movements of a good, accomplished practitioner do not appear fast. For example, there are messengers who cover forty or fifty leagues at the run in a single day, but they do not run fast from morning till night. Whereas, a beginner cannot cover such a long distance, even if he has the wind to run the whole day.

In Noh theater, when a beginner sings following a good, accomplished practitioner,276 he has the impression of lagging behind and sings with the feeling of haste. In the same way, in the drumbeat for “Old Pine” (“Oimatsu”),which is a slow melody, a beginner has the feeling of lagging behind and having to catch up. “Takasago” is a rather fast song, but it is not appropriate to play the drum too fast. Speed is the beginning of a fall, because it produces a deviation in the cadence. Of course, excessive slowness is also bad. The movements of a good, accomplished practitioner look slow, but there is no dead space between his movements. Whatever the domain, the movements of an expert never appear hurried. Through these examples, you should understand a principle of the way.

In the way of strategy, it is bad to try for speed. I will explain. In places such as a marsh or deep rice paddy, you cannot move either your body or your legs fast. This is all the more true for the sword—you must not try to cut with speed. If you try to cut with a fast movement, the sword—which is neither a fan nor a knife—will not cut because of the speed. You must understand that well. In group strategy also, it is bad to think of hurrying up in order to attain speed. If you possess the attitude of mind of “holding down on the headrest,” you will never be late. If your adversaries act too fast, you apply the opposite approach, you calm yourself and avoid imitating them. You must train yourself well in developing this state of mind.”

Speed is nice but relying on speed and thinking that speed is the way to victory will lose you way more fights than you think it well. Be fast enough, not the fastest.

The Book of Five Rings quotes are from a translation called The Complete Book of Five Rings and it can easily be found via online booksellers. There are other translations and most are good enough. I highly suggest you buy and read the book.

Website with an online, free copy of The Book of Five Rings

The Book of Five Rings

Books, either in paper or on Kindle (all links go to Amazon.com)

The version I quote here:

The Complete Book of Five Rings

The Complete Book of Five Rings – Kindle version

The translation I first read

A Book of Five Rings: The Classic Guide to Strategy

A Book of Five Rings: The Classic Guide to Strategy – Kindle Version

An account of Musashi’s life

The Lone Samuari: The Life of Miyamoto Musashi

Fictionalized versions of Musashi’s life

Musashi

Musashi – Kindle version

Samurai Trilogy [blue-ray]

“Smoothing” your numbers

As you advance up the ladder in your Finance career, it is almost certain that you will arrive at a level of responsibility for the numbers where your judgment become key in determining outcomes. At the same time, you will be confronted with one of the two most common issues – numbers not being smooth or what looks like a temporary operations issues that can be fixed by some smart accounting.

There is no requirement to qualify for sainthood while being a CFO. You are part of the management and public image of the company, and investors and employees are relying on you properly present the historical results of the company and the expected future performance. You do not have to be the most conservative person in the country and report and book every possible downside and flagellate yourself publicly over every single misstep. Honesty is important but you also need maturity and respect for your audience. No one expects that you were perfect or that you will be perfect. Being overly optimistic is not good but being overly pessimistic is also a problem. Your investors will be expecting a fair accounting of results and possibilities so they can make choices in who to invest in. An immature management team that does not promote their company somewhat will result in an additional valuation hit because of a perception that management is not strong and does not believe in their company. Even in bad times, if you are still there with the rest of the management team, you must believe that you are part of the solution.  Therefore, mention the issues but focus on the solutions.

I can give a specific example from earlier in my career. The GAAP accounting for stock options granted to employees used to make expensing the options optional. This was an option that Silicon Valley companies did not take. Almost no companies expensed options, but Silicon Valley greatly depended on options and fought against changing the accounting. During that time, I believed that they should be expensed. In accounting discussions with other accountants, I would question the basis for not expensing them. Even with my strong belief that they should be expensed, I did not do it in the books I was responsible for. It simply was not the accepted practice and it was proper under GAAP to not expense options. There was absolutely no reason to “punish” my company compared to others just because I could get on my high horse about the proper accounting for options. Once GAAP changed, technology companies either reported non-GAAP numbers without the options expense or they provide the information so outside analysts could do the same. I provided the information just like others in the industry did because investors expected it.

This is actually an important concept to understand. US GAAP is very specific in many ways but judgment is still a key foundation on the accounting that is done. As I explained in an earlier entry on when I would do a prerelease, the SEC and FASB have both put judgment calls firmly on the shoulders of management. As the CFO, you will be making most of the calls. Other management team members including your boss will come to you with transactions they would like to get booked. You can wrap yourself in a holy mantle of GAAP and always say no, or you can listen to what they are trying to do and try and find a solution.

This brings me back to the original choice I started with. The world is random and bumpy. Investors prefer smooth results that fit an easy to understand framework. Closing the books means making a lot of accruals and valuation judgments and it is really easy to smooth everything out. Be very careful here. Sometimes GAAP really does result in smoother results. If you have a constant production base and higher demand at the end of the year and less at the beginning, you can naturally smooth out the unit cost by building inventory at the beginning of the year and thereby absorbing overhead that otherwise might be expensed and then not overdriving production at the end of the year and over absorbing overhead which results in lower unit costs. You essentially borrow the good news at the beginning of the year and repay it at the end of the year. The accounting matches actual production and you do incur a risk of falling costs at the end of the year or dropped demand meaning your working capital investment may not pay off in better over all results, but the results will be smoother.

Then there is the actual issue that sometimes business just doesn’t match arbitrary quarter end boundaries. It really should not make much difference in the valuation of your company is a deal actually closes January 1 instead of December 31, especially if it was supposed to close earlier and you and rest of the management team forecasted it in good faith to close before December 31. It shouldn’t, but it does. Even if your business does not have big contracts, there might be a snow storm or a flood at your main warehouse and you may miss a week of shipments right at at quarter end. Even in a regular quarter, you may run into a shipping bottleneck and customer orders may not make it out in time even though they were ready.

Sometimes the plant operations group misses their cost takeout targets. Could be an operational issue or maybe the market just didn’t correct quite fast enough but should be ok a few months from now. The shortfall easily can be made up via a slight change in inventory valuation.

Believe it or not, sometimes you get too much good news. A big customer moves up an order and suddenly this quarter is way exceeding goals. Currency moves in the right way and your gross margin now exceeds expectations. Of course, now the next quarter doesn’t look quite as good in comparison and you are wondering if you should burn some of the current good news to smooth out the next few quarters?

Finally, you can often see an issue coming a quarter or two in advance. Does it look like your sales team is making the quarter numbers more and more by borrowing from the next quarter? Did you start this quarter with a vacuum of sales and opportunities because most were recognized the quarter before? Did costs go up and a lot of the cheaper inventory from a prior quarter get used up? If so, expect results that are not smooth or within expectations are probably coming soon.

Like all good CFOs, you probably has a few accounting ideas or changes in the back of your mind that you have been thinking about for a while. Maybe just some tidying up of some overaccruals from prior quarters. Maybe a tweak in inventory accounting that you have been considering. Is this the time you should step in and do it?

I was given some very good advice by a boss early in my career when I had the first exposure to being able to suggest accounting changes. He told me “Never solve an operational problem by moving it onto the balance sheet. All you do is make an Operations problem a Finance problem and when it does come off the balance sheet no one will remember that you were a hero in the past.  You defer changes that might be needed and hide the problem so it might not get priority.” This came from someone that I considered to be a very good accountant who had championed a change in accounting that resulted in a better results for a decade into the future. I had also suggested an accounting charge at the start of the planning process (salvage value) that was accepted by him as a good idea to be implemented. The advice was not by someone that was not able to look for better and more accurate accounting, but from someone that had already made that mistake himself and seen others going it in the past and where he wanted to warn me of the consequences.

So now I always replay that advice in my mind when making a quarter end accounting judgment call. Is Sales now asking about bill and hold after the quarter has already ended to handle that inventory that did not make it over the finish line, or was this planned in advance and did the request come in before quarter end and is documented properly? Is cost higher than hoped for and your COO is looking for more expenses to capitalize into inventory to make the target? Did you just figure out that you beat expectations and now you are looking for extra reasons to boost up reserves that you felt were adequate last quarter or even last week?

I have not been afraid my whole career to make sure that our accounting is as advantageous as the accounting in my industry normally is. However, that good advice early in my career when I was at AlliedSignal still sticks to me. I don’t think that any CFO doesn’t know when the are pushing the accounting too hard.

Try to remember that no one really will think you are a hero today. That entry will be in the background and you will not get any credit for it. Remember that your boss and the rest of the management team will not remember why you capitalized those items a year ago, they will just be mad that you are expensing them now. Remember that your integrity is even more on display when you publish the numbers to the outside world. If you push the accounting too hard you could lose standing with your auditors, if there is an operations blow up and a miss and you get sued, it will come out in discovery later. If the rest of the management team gets cynical about the reported numbers, then they may start messing with them without you even getting involved.

Do the right thing for your company. Try and get the best accounting results where it makes sense and is part of a plan in advance. Otherwise, don’t try and fight the random world too much by double entry bookkeeping. Life is not smooth. Expectations do get exceeded or missed sometimes. Make sure that investors who do their work can at least rely on you and your numbers.

——

Some books on the effects of “Number Smoothing”

Confessions of a Wall Street Analyst

The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America

The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron

Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, 3rd Edition

3D printers are not ready for prime time

The news quite often mentions 3d Printers. 3D printer companies were the darlings of the stock market not too long ago. Mainstream press is full of little interest stories of the latest thing to be printed out. Technology websites and social networks have many mentions of the “Maker” movement and that movement includes 3D printing and printers.

I am somewhere in the “tech” scene or at least in a few smaller segments. You can tell that by a few things), but having the username “michael” on the an old school computer technology site (Anandtech) is a good sign of how long I have been involved. I have seen mentions of 3D printers for years and occasionally checked prices to buy a printer, but they were always well over $1,000 which seemed too much to me.

One day I noticed this campaign on Kickstarter:

The Kickstarter ended a while ago, you can find the products for sale here:

http://www.drivethrurpg.com/product/166074/DRAGONLOCK-Dungeon-Starter-Set

For those of you too lazy to click the first link, it is plastic terrain used when playing a roleplaying game to build up a dungeon. If you are not familiar with tabletop roleplaying games like Dungeons and Dragons, the players often use 28mm scale miniatures to more easily run the fights that happen within the game rules. I guess you can say they are the
dolls the players use but the players tend to be men so they would at least claim action figures.

If the miniatures are the dolls, then products like Dragonlock are the dollhouses. I have played in a couple of games where the DM had very nice hand drawn maps that were drawn to scale and I have played in a couple of games with folding cardboard terrain, but I had only seen the full out plastic modeled dungeons in pictures from conventions. The existing products are interesting in theory but quite expensive and hard to use because you never seem to have exactly the right combination of pieces to build what you want. A set that is meant to be 3D printed solves those two problems. The cost per piece is small and you can custom print what you need.

I signed up for the Kickstarter and then started researching the current state of the 3D printer market. I quickly discovered two things. There were a fair number of printers below $1,000 today and that reviews on them were all over the map.

I will save myself typing a long description of the different printers out there. Here is a fairly representative list with examples from owners actually using the printers:

http://fatdragongames.proboards.com/board/24/3d-printers

I selected the Wanhao Duplicator I3 V2. I mainly selected it for two reasons. The first is the cost (it was under $300 for me) and the other was the strong user community that could be found in a Google Group. The brand was recommended to me by my friend Gabriel who runs a small drone business in Singapore called Sensory Robotics (www.sensoryrobotics.com ). I had asked him for an inexpensive printer that would meet the specifications needed and he said if I was willing to tinker the Wanhao printers were popular. I was able to find them direct from the manufacturer via Taobao in China for just under $300 shipping included (they are between $350 and $400 in the USA) so I decided to give them a try. The Wanhao I3 is basically a pre-built open source kit printer. It really is not much different in price than buying parts and assembling it yourself, and the design itself is somewhat well tested.

Before I pulled the trigger and bought the Wanhao, I looked through Amazon.com and read the message boards of many of the more popular printer brands. I was quite surprised at the results. For a product that had been sold to consumers for several years and had made it into popular press, reviews were surprisingly bad every printer brand out there.

I am not talking the occasional disappointed buyer on a crusade, I am talking about bad review after bad review. Even even the Printerbot Simple that is recommended by the Fat Dragon, the company that made the Dragonlock pieces, has quite a few bad reviews on Amazon and in the Dragonlock boards. Some printers appear to pretty much never work. Some printers use proprietary printing materials that are much more expensive than standard printing materials. All the printers I researched had very disappointed customers.

Why so much disappointment? Let me explain a little how 3D printers work and what easily goes wrong with each step.

The first is that all of the consumer level printers (under $1,000 and meant to be used at home) are made by smaller companies. The bigger companies that make printers for commercial use all have quite expensive models that are far out of reach of the average consumer. A cottage industry sprung up around some of the older technology that was open sourced by larger commercial companies, and lots of little start-up, mainly of pretty young entrepreneurs were created. Kickstarter still sees 3D printer designs show up on a semi regular basis and two years ago they were very popular on the crowdfunding sites. So that means lots of people with little or no real manufacturing experience started modifying designs or trying new but pretty much untested designs out on the public. Full of Open Source circuit boards and designs that sort of worked but that really were not close to optimal and often had serious flaws.

Before I get to some of the flaws of my particular printer, let me give an overview of the printers and what is done to make a 3D print.

The first thing you need is an actual object to print. This comes in the form of a computer aided design (CAD) file. Typically this is in an .STL format. You can find these files on various internet sites or you can create them yourselves. Many of the people making the files are new to CAD, are using free and not so powerful CAD programs, and probably do not have a lot of 3D printing experience. That means you get a lot of files that very honestly are not set up well to be printed in the first place.

You load the computer design into a program called a slicer. 3D printing is done layer by layer, and a slicer takes the CAD file and slices it into as many thin layers as you have instructed the printer to use. It then generates a series of commands that tells the printer what to do to actually print the device (generally in the form of a printer language called GCODE) and saves that file. A popular free slicer is called Cura. A more powerful but costly program is called Simplify 3D.

Right away, you may have ruined your print. The programs need to have the exact right settings or the code they write does not work. Some files are not well set up to print but an experienced user of the slicer can either change the orientation, break the object into smaller and easier to print. None of this is well documented and the documentation that does exist is written using terms that someone new to 3D printing is unlikely to understand. You even need to measure the diameter of the filament and input it into the slicer program. I hope you have a digital caliper.

Once you have the file ready to print, you then are faced with the printer itself. 3D printers work by melting plastic and depositing it in thin layers. The printer head (the part that melts and deposits the plastic) needs to move in all three dimensions in a consistent and controlled manner. The surface needs to be flat and level to the printhead and the starting distance between the print head and the surface needs to be small but not zero. The basic way of setting the distance is using a piece of paper to slide under the print head and go by feel.  If you are a beginner, you have no real idea what it is suppsoed to feel like.  The surface must have something to help the first few layers of plastic stick. The print head will move in at least two and maybe three dimensions on rods, gliding on bearings or moved by what essentially are large screws, The file with the instructions needs to be read from a memory card or the computer needs to maintain a good connection for what might be 24 hours or even more.

The rods I mentioned about are often held in place by just a little set screw. Shipping the printer has a good chance of working a rod loose or maybe even bending it. The electronics and cabling are so so on average and shipping may jostle a connection loose.

The standard advice for the printer I bought is to take the extruder assembly apart and replace the gear that moves the plastic filament through it with another one. While you are at it, rotate the heating block to give more clearance when it is at the top. Before you print one item, you have already taken the printer apart. I guess I should mention that the wiring in the older models is defective and can cause a fire. Plus it has been determined that the main circuit board does not properly ground the electricity running through it and it causes temperature readings to swing by about 10 degrees when the heater switches on and off. The suggested fix is to solder a wire from one place on the board to another.

I wish that these types of issues are only from a cheaper kit based one like the Wanhao I bought. However, I would be lying if I said that. I could not find one printer aimed at consumers that did not have a large number of design issues and frustrated users.

Now if you ask me if I like the printer I bought, the answer would be yes. Once I learned and worked through some things, I actually was able (very quickly) to print out the Dragonlock pieces with no issues at all and other files as well. A 3D printer is a fun thing to have and my kids like it and want me to print more things for them. However, these are not even close to being a consumer product. Be prepared to spend time scouring the internet for training tips, to be watching youtube videos showing you how to use your computer and software, and generally spending a lot of extra effort to make the device that you paid for work.

Here are a few pictures of what I have been able to do with my printer.  A well known space ship, some Dragonlock pieces (painted and unpainted) and the printer itself.

image image image

How I approach the outlook section in an earnings release

Every quarter, investors pour over actual results and react to a company’s guidance. Before it appears in the press release, I have to work out what is should be. I often see retail investors wonder where the numbers come from and if companies sandbag or otherwise fool around with guidance. So I decided to write a post on the process I have followed to first support the process when I was a Controller and then to help decide as a CFO.

Helping to decide is important to remember. It is easy to get a little ahead of yourself as CFO during the earnings and forecasting process. Take a deep breath and remember that you are part of a senior management team. Remember that there are two types of forecasts, lucky and wrong, and that the longer period of time being forecasted the higher chance you have of being wrong.

I start my outlook process by asking questions and listening. Of course, I keep up with the business as best I can during the quarter, but the reporting process is where you get to ask questions and explain. Take advantage of that and start to form an idea of the opportunities and threats that are coming up.

I am going to assume that you have a reasonable forecasting system for revenue and cost that you are able to rely on to make management decisions. How the actual forecasting is done is not really relevant (Gaussian Cupola or whatever wizardry is used), you just need something that has proven it works in the past. Units, ASP, expected costs, any expected deviations from your normal SG&A spending. Some form of view on what effect foreign currency is likely to have.

You should use the information from your forecasting system to build a draft forecasted financial statement. This is the raw and preliminary numbers that I rely on to start the judgment process of the outlook I eventually publish. Using that first set of numbers, I start to work through a standard checklist of accuracy items (not judgment yet):

1) Revenue – usually the internal forecast is good at predicting when the goods will ship. What is not considered is when you can recognize it. Double check that. Look at the terms being used and any carry-over from the prior period. Be careful with percentage of completion and double check the reasonableness of the calculation. Make sure that items that require contract analysis have been reviewed and that the terms allow revenue recognition as hoped for. Make sure any inter-company sales are properly treated.
2) COGS – usually you get the latest cost numbers from the factory, but that probably is not what will show up in GAAP. Very often their numbers do not include warranty reserves, equity compensation, inventory reserves and potential equipment write-offs (which may need to go into COGS). If costs are rising or falling there will be a lag as production runs through inventory so make sure that is accounted for. Any inter-company profit in inventory that needed to be eliminated? Inter-company items are often overlooked, so check that again.
3) SG&A – talk through the numbers and see if there are unusual things happening this quarter and make sure the numbers are there. If there is a risk of a large A/R write-off or a large fee that is being paid that quarter that needs to be expensed, make sure it is included. Think about bonus accrual catch-ups, if you are beating or missing bonus targets is there a risk that an adjustment to the accrual will be triggered this quarter. Are there large asset write downs, big A/R wrote-offs that could happen or other such one time items? If so, are they in the forecast (of course, if you are so sure that it will happen, ask why is it not recorded in the about to be reported quarter). These type of forecasts are often just run-rate extrapolations, so make sure any effect of adding or selling a business recently was thought through and recorded.
4) Interest and other charges – normally this should be about the same as prior quarters. Double check to make sure any changes or expected changes are reflected in the numbers. Usually companies do not forecast specific foreign exchange swings but if there already has been a large one or a large one is likely you probably should be modeling here.
5) Taxes – typically this is just a forecasted percentage, but work through the logic of the forecast. Did the country mix change since the prior quarter or since the percentage was last set? If so, you may need a different rate and should let people know to change their rate.
6) EPS – double check the diluted EPS calculation. If you recently added convertible bonds, check to make sure the EPS is on an “if converted” basis. Most people just assume that there only is dilution if the bond is in the money and that is not the way the share count is determined for convertible bonds. If you are close to a trigger point for a large tranche of options to go in the money, consider reminding the reader of that. If they have been outstanding long enough to be vested and around for several periods there may be enough added in to swing the EPS calculation.

That is not an exhaustive list. Companies that sell software and other service type contracts need a robust revenue recognition review process for both actuals and forecasts. The list above is all for accuracy before discussing with the greater team. It is all fine and nice to be a strategic CFO but if the base numbers are all wrong then no one will listen to your business ideas.

If you do find errors during the forecast review, go back and fix what did not work in your process. Double check the actuals as the same people usually work on actual and forecast and if the forecast has an error, the actuals might as well. Reporting is a process and you need process controls and feedback into the process.
I am sure that some people started reading this blog and we’re hoping that I would talk about what system to use, what IT tool I recommend relying on. I am always concerned about over reliance on tools and not enough review and finance judgment being applied. A good tool poorly used just gets you the wrong answer faster. There are quite a few good tools out there and I generally recommend that you use one that works well with your existing accounting and consolidation system. Most of my experience is using the Hyperion suite of tools (Oracle product now but used to be independent), but I have used others as well. Even simple excel spreadsheets can work depending on your business. I do think that if the Excel spreadsheets get too big, the risk of formula errors also grows too much.

So now you have a forecast (I tend to have an income statement and balance sheet ready with a cash forecast from another process as well). You now move to the validation and judgment phase. Share the forecast with a small number of senior executives and start the discussion with them. Do not over rely on email. Call them up and talk through the forecast.

Go through each section with them and make sure they understand what assumptions are being used. Then listen. They know their area of the business better than you. The COO probably just heard that there is a part shortage and production will not be able to hit the cost target or the volume target. The SBU business head might have just come from a customer meeting as has good news. Take notes and ask clarifying questions but now is not the time to be pushing back or disagreeing. If you go into target mode and start arguing why results need to be better, you probably will shut down conversation and miss something.

One of the people you should be talking to now is your boss. The CEO will have even more insights into business conditions and the two of you will be making the public commitment. Review the different options from the management team, weighing factors like personalities, some people are too conservative and some are too optimistic. Reach a conclusion about what you will commit to in the quarter or year to come or whatever period the public outlook will be. Make sure the targets needed to hit the goals are rolled out to the people that need to execute.

One of the last things you need to decide on is the range of expected results you will disclose. You need to pick a range that is typical for the metrics you will be disclosing. I get asked very often if I set the range lower so we can easily achieve it and then “beat” the numbers. In my whole career I have not followed that strategy. It becomes very obvious over time if you do that consistently and analysts will start setting their own much more aggressive expectations. You are essentially lying to your investors about your real expectations and trust in management is often a key metric for investors. You also are advertising less than what you can do and if your competition does not under call as well, you will suffer in comparison.

Never set expectations you know you cannot meet or that would take perfect execution, but do not be afraid to set your own internal goals as the public expectation. If you miss or beat them, know why and explain it. If you set reasonable expectations that a good effort should have achieved and you miss, do not try and hide the fact that you missed. Be honest and outline what will happen in the future to avoid surprises and underperformance. If your internal process to arrive at the number was bad, fix that process. If you set expectations that are way too high, you may get a short term bump in share price but you will be reporting actuals in 3 more months and you will lose in trust much more than what you gained in the short term. Be confident, but not overly rosy or arrogant.

Pay attention to the text explaining the numbers to ensure that there is no disconnect.  If you expect conditions to be tough, make sure the text reflects that.  If you are setting another record, acknowledge it.

In the end, there is no magic formula. You need to do your best and make your best judgment. Make sure your process is robust and repeatable. Be inclusive of your finance team and the senior management team. Don’t sweat it too much, a miss or beat is news for maybe ½ a day if it is a slow news day.

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