Operating Model
AdvancedAn operating model is a financial model that projects a company's detailed operations, such as revenue drivers, costs, staffing and capital spending, and links them to its income statement, balance sheet and cash flow statement.
An operating model forms the core of many financial analyses. It focuses on how the business actually works, translating operating assumptions into financial results.
A typical operating model includes a revenue build based on business drivers, cost forecasts split into fixed and variable costs, headcount and salary plans, capital expenditure and depreciation, working capital assumptions and a debt schedule. These feed into an integrated set of three financial statements that balance and reconcile.
For example, a retailer's operating model might forecast new store openings, sales per store, staff per store, rent, inventory levels and the investment needed for each new store, producing projected profits and cash flow for the next five years.
Operating models are used for budgeting, strategic planning, valuation, fundraising and acquisitions. They often serve as the base for more specialized models, such as discounted cash flow, leveraged buyout or merger models. Good operating models are clearly structured, with assumptions separated from calculations.
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