How to approach updating operating model

Based on the most helpful WSO content, here are some steps and tips to approach updating an operating model:

1. Understand the Basics:

   • Three-Statement Model: Ensure you are familiar with the three-statement model (Income Statement, Balance Sheet, and Cash Flow Statement) as it forms the foundation of most operating models.
   • Logical Flow: Maintain a logical flow in your model to easily check for errors and ensure flexibility. Key lines in the model should flow to output.

2. Gather Data and Assumptions:

   • Historical Data: Tie all historical data to the Quality of Earnings (QoE) and stress test assumptions with management.
   • Assumptions: Sit down with relevant departments (e.g., engineers, operations, supply chain) to gather assumptions. This includes details like hours/people required for tasks, material costs, etc.

3. Structuring the Model:

   • Revenue Breakdown: Break down revenue into categories, usually by customer types.
   • Expense Analysis: Differentiate between fixed and variable expenses.
   • Scenario Analysis: Ensure the model can handle different scenarios (best, mediocre, and bad) to account for various possibilities.

4. Documentation:

   • Clear Documentation: Document your work clearly to ensure others can take over if needed. Avoid hardcoding values; instead, link everything properly to make the model a scenario analyzer rather than a static forecast.

5. Review and Iterate:

   • Stress Testing: Continuously stress test your assumptions and ensure they are logical and correct.
   • Feedback Loop: Get feedback from peers or seniors to refine the model further.

6. Resources and Learning:

   • WSO Threads and Guides: Utilize resources like WSO threads and guides to get insights and tips from experienced professionals.

By following these steps, you can build a robust and flexible operating model that can be easily updated and understood by others.

Sources: Basic Guide Ramping Up On A Company With Public Information Part Two, delete delete delete delete, Structuring and Flow in an M&A Model, How to analyse business models?, Operating Model Critique