Your Operating Model and Capital Plan

You now have the pieces: a revenue model, a sense of the numbers, possible sources of finance and a preferred ownership structure. This lesson brings them together into two practical tools. Your operating model describes how the enterprise will work day to day. Your capital plan describes what you need to buy or build, when, and how you’ll pay for it.

Together, they show whether your opportunity can actually run, and they form the core of the business case you’ll build in the next chapter.

The operating model in six parts

An operating model answers six questions about how the enterprise works.

• Inputs. What materials, resources or services come in, from where, and how reliably?
• Process. What happens to them? What steps turn inputs into products or services?
• Outputs. What comes out: products, services, by-products and any waste?
• People. Who does the work, what skills do they need and how are they organised?
• Place and equipment. Where does the work happen, and what equipment is needed?
• Partners. Who do you rely on: suppliers, customers, processors, regulators and advisers?

If you can describe each of these clearly, you have an operating model.

Follow the flow

A useful way to test your operating model is to follow three flows through it.

Follow the material. Start where the material is generated and trace it through collection, delivery, processing, storage, sale and use. Where could it get stuck, contaminated or lost?

Follow the people. Who touches the material at each step? Who manages, sells, maintains equipment and keeps records? Are there enough people with the right skills?

Follow the money. Where does money come in, such as gate fees, sales or services? Where does it go out, such as wages, fuel, equipment, rent and loan payments? When does each happen? Many enterprises fail not because they are unprofitable, but because money goes out before it comes in.

Following these three flows often reveals gaps that a plan on paper hides.

Start small, design to grow

Your operating model should describe your first stage, the smallest version that proves the idea works, while showing how it could grow. A compost pilot might start with one waste stream, a small site and a few staff, with a clear path to adding streams, equipment and products later.

Designing for growth from the start avoids costly changes later. Choose a site with room to expand, equipment that can be added to and systems that can scale.

Building a capital plan

Capital is the money needed for things that last: land, buildings, equipment, vehicles and the setup costs that come before the enterprise earns anything. A capital plan lists what you need, when you need it and how you’ll pay for it.

Build it in phases.

• Phase 1, pilot: the minimum needed to prove the model, such as a small site, basic equipment, permits and initial training.
• Phase 2, launch: what’s needed to operate at a viable scale, such as more equipment, site improvements and working capital to cover the first months.
• Phase 3, growth: expansion, such as new product lines, larger equipment or additional sites.

For each item, note the estimated cost, when it’s needed and what it enables. Then link each phase to the sources of finance you identified in the last lesson.

Don’t forget working capital

Working capital is the money needed to keep the enterprise running while you wait for revenue. Staff must be paid and fuel bought before customers pay their invoices. Underestimating working capital is one of the most common reasons new enterprises run into trouble. Plan for at least three to six months of operating costs in your launch phase.

Phasing reduces risk

A phased plan has three big advantages. It reduces the amount of money at risk before the model is proven. It lets you learn from each phase before committing to the next. And it makes financing easier, because each phase can show results that support the next request.

The Sunshine Coast’s circular economy grew this way: one project at a time, each building on the last.

Honest limits

Operating models and capital plans are estimates. Obtain current quotes for major items, identify exclusions and allow for uncertainty. Set contingency using the maturity of the design, site conditions and risk assessment, with input from people experienced in comparable work.