In project finance, the model used to close the deal is rarely the one that guides the project through its operating life. After financial close, the focus moves from structuring and negotiation to performance, compliance and forecasting. That is where the operational model comes in.
What an operational model is
An operational model is a financial model used after financial close to monitor, manage and forecast the performance of an asset or project. A deal model is built to support the transaction: pricing, structuring and negotiations with lenders. An operational model is different in three ways:
- It is dynamic: it brings in actual financial data and adapts to real changes
- It looks forward: it supports reforecasting and scenario analysis
- It serves stakeholders: it meets the reporting needs of lenders, investors and regulators
Why the deal model is not enough
Deal models are often built to tight timelines and shaped around the transaction. They typically:
- Lack the structure to bring in actuals or historical data
- Contain calculations that only mattered up to financial close
- Are not designed for regular updates or stakeholder reporting
Carrying on with a deal model after close can lead to inaccurate forecasts, inefficient reporting and a higher risk of errors and miscommunication.
What to consider when building an operational model
Moving from a deal model to an operational model is a strategic decision as well as a technical one. These are the main modelling considerations.
Bringing in actuals
Historical financial data from the accounting systems has to fit the model’s structure. That means:
- Building interfaces for data imports
- Converting accounting data into a form the forecast can use
- Reforecasting from actual performance
Cleaning up calculations from the deal
Parts of the model used to close the deal, such as structuring assumptions or placeholder debt schedules, must be removed or replaced. That means:
- Finding and removing sections that are no longer needed
- Fixing the debt terms and repayment profiles as signed
- Updating the depreciation and tax calculations
Improving the reporting
An operational model has to meet the needs of several stakeholders. That means:
- Calculating metrics such as the DSCR so they take account of historical actuals
- Aligning outputs with what lenders and investors monitor
- Building in checks and audit trails, particularly where inputs are reforecast
Testing and validation
People need to trust the model. That means:
- Checks that validate the historical data
- Comparing forecasts against actuals
- Making sure data rolls forward properly from period to period
Learn to do it on our course
Our Deal Model to Operational Model Mastery course is a hands-on course on making this transition. You learn to:
- Understand the structural and functional differences between deal and operational models
- Apply best practice techniques to convert a model accurately and efficiently
- Bring in actuals and historical data from accounting systems
- Adapt a model to the signed debt agreements and to stakeholder reporting
- Test the model thoroughly so it keeps its integrity
It is for analysts, managers and associate directors, for sponsors, advisers and lenders, and for anyone who updates, reviews or builds operational models. See the course page for dates and prices.
For a preview, watch our webinar When is an operational model not an operational model?