ITU/ BDT «Training and Trials on Network
Planning Tools for Evolving Network Architectures»
Architectures»
June 44-8 2007
Moscow, Russian Federation
Business Planning and Modeling
Oscar González Soto
ITU Consultant Expert
Strategic Planning and Assessment
June 2007
ITU/BDT Network Planning/ Business Planning - O.G.S.
slide 1
Business Planning and Modeling
Content
• Role of Business Planning today
• Basic business concepts
• Telecom business modeling
June 2007
ITU/BDT Network Planning/ Business Planning - O.G.S.
slide 2
Business Planning and Modeling
Role of Business Planning
– Forecast solutions, costs and revenues
– Evaluate future Cashflows, NPV, IRR, ROI, etc.
– Perform “What-if” analysis for optional alternatives on Volume of
customers, customer mixes and services domains
– Perform benchmarking with “best in class” operators
– Decision making on strategy and actions in competition
based on quantified evaluations
– Recommend alternatives and actions to ensure success
June 2007
ITU/BDT Network Planning/ Business Planning - O.G.S.
slide 3
Business Planning and Modeling
Definition of business plan
A Business Plan presents the calculation of the financial indicators
that enable the managers to evaluate the financial performances of an
entreprise in order to take decisions.
A Business Plan summarises the results of the planning process:
• the objectives to reach ( subscribers demand, sales)
• the description of all activities requested by the project;
• the future revenues expected from the project;
• the planned expenses (investment and operations);
• the accounting statements and the financial indicators
characterising the profitability of the project.
June 2007
ITU/BDT Network Planning/ Business Planning - O.G.S.
slide 4
Business Planning and Modeling
Types of business plans
plans
Strategic Business Plan for evaluating a strategy:
• aid for making internal decisions for the whole company
(strategic guidelines at the national level, all markets)
Tactical Business Plans for specific projects :
• aid for making internal decisions for a particular area, or a
market segment: IN, mobiles, IP
Short term Business Plans for management control :
• aid for monitoring the implementation of projects
• preparation and follow-up of budgets,
June 2007
slide 5
ITU/BDT Network Planning/ Business Planning - O.G.S.
Business Planning and Modeling
Iterative process for evaluation
Strategic objectives, strategic guidelines
modifications
Marketing planning
modifications
Network planning
modifications
Operations planning
Human resources
planning
modifications
Business Plan
Evaluation
June 2007
ITU/BDT Network Planning/ Business Planning - O.G.S.
slide 6
Business Planning and Modeling
Interaction between analysis and business plan
Business Plan
Analysis
Costs models
Revenues
Financial indicators
Evaluation
Sensitivity studies
SWOT
Pricing
Service portfolio
Technologies used
Action plans
what parameters to improve, how to adjust models
June 2007
slide 7
ITU/BDT Network Planning/ Business Planning - O.G.S.
Business Planning and Modeling
Business model structure
Demand
Human
Resources
Tariffs
Corporate
Customers
Revenue
Ordinary
Customers
Revenue
CAPEX
OPEX
Evaluation with Ratios and financial indicators :
NPV, IRR, pay-back, EVA, ROCE
June 2007
ITU/BDT Network Planning/ Business Planning - O.G.S.
slide 8
Business Planning and Modeling
Services Revenues calculation
Customers Services
Telephone
connection fee
rental fee
local calls
ld calls
idd calls
Mobiles
Leased
lines
Data
Video
Added
value
services
Total Revenues
June 2007
slide 9
ITU/BDT Network Planning/ Business Planning - O.G.S.
Business Planning and Modeling
Expenses calculation
Customers
Services
Network
construction
operations
extension
Customer Care
provisioning
repairing
call center
CAPEX
June 2007
Labour Costs
Marketing
Billing
Administrative
& general costs
OPEX
ITU/BDT Network Planning/ Business Planning - O.G.S.
slide 10
Business Planning and Modeling
Financial Statement
Income Statement:
Net income = revenues - expenses
Balance Sheet:
Company capital = Assets - liabilities
Cash flow statement :
Cash balance = Inflows - outflows
All fundamental financial indicators are carried out
with the elements of these 3 statements
June 2007
ITU/BDT Network Planning/ Business Planning - O.G.S.
slide 11
Business Planning and Modeling
Financial indicators calculation
The most useful economical indicators are :
- Net present value (NPV)
- Internal rate of return (IRR)
- Discounted Payback period (DPP)
- Net cash flow (NCF)
- Discounted cash flow (DCF)
- Operating income
- Revenue per service/service class
June 2007
ITU/BDT Network Planning/ Business Planning - O.G.S.
slide 12
Business Planning and Modeling
The purposes of the accounting statements
Income statement
to analyze potential profit
is the profit enough ?
Balance statement
to analyze the financial structure
how to finance the development
enough / too much equity ? Enough/ too much debt
Cash-Flow statement
to make payments at every due date
to have the right cash at the right time
June 2007
slide 13
ITU/BDT Network Planning/ Business Planning - O.G.S.
Business Planning and Modeling
Income statement
OPEX
Revenues
-
CAPEX
+
EBITDA
Depreciation
Taxes
-
Earning before income taxes,
depreciation and amortization
--
EBIT
Earning before interests,
and income taxes,
Net Income
June 2007
ITU/BDT Network Planning/ Business Planning - O.G.S.
slide 14
Business Planning and Modeling
CAPEX: Capital Expenditures
CAPEX contribute to extend the fixed assets, and they
are depreciated over an economic life time
CAPEX are necessary for extending the business or
for improving the range of services provided by the
operator.
Examples :
• Purchase of land & buildings,
• Network construction
• Purchase of information systems (hardware & software )
June 2007
ITU/BDT Network Planning/ Business Planning - O.G.S.
slide 15
Business Planning and Modeling
OPEX=
OPEX Operations Expenditures
OPEX are expenses which don't contribute to extend the fixed
assets, and consequently are not subject to depreciation
OPEX are necessary for running the company,
- Technical operations (switching, transmission, local loop,..)
- Commercial operations (marketing and sales)
- Administrative operations (support,..)
Examples :
- Labor costs for operations,
- Travelling expenses, periodic administrative costs,
- Rental of equipment, rental of cars, rental of buildings
- Interconnection fees
June 2007
ITU/BDT Network Planning/ Business Planning - O.G.S.
slide 16
Business Planning and Modeling
Income statement
Cost of
sales
Total
revenues
Operating
expenses
Gross
margin
(sales)
Depreciation
Income
EBITDA
from
operations
Taxes
Interests
EBIT
Other
incomes
June 2007
Dividends
Net
income Retained
earnings
slide 17
ITU/BDT Network Planning/ Business Planning - O.G.S.
Business Planning and Modeling
Cash Flow
Revenues, funds
Inflows
Cash
balance
Out
flows
June 2007
IRR
NPV
CASH FLOWS
OPEX
CAPEX
Working
Capital
changes
ITU/BDT Network Planning/ Business Planning - O.G.S.
Taxes
slide 18
Business Planning and Modeling
INFLOWS and OUTFLOWS
Customers
Shareholders
Sales of services
Increase of equity
(operating income)
(capital increase)
Banks, lenders
Increase of debt
(credit, loans)
INFLOWS
cash flow
OUTFLOWS
Labour
costs
Training
Technical
Network
& admini&
equipment strative
Tax
expenses
Staff
Suppliers
June 2007
Service
providers
Government
Debt
repayment
with
interests
Dividends
Shareholders
Banks,
lenders
slide 19
ITU/BDT Network Planning/ Business Planning - O.G.S.
Business Planning and Modeling
Rules for Equipment Depreciation
Residual Value
Delayed depreciation
100%
Linear depreciation
x% RV at Yn
Accelerated
depreciation
Years
0
Y0
June 2007
Yn
ITU/BDT Network Planning/ Business Planning - O.G.S.
Ym
slide 20
Business Planning and Modeling
CashCash-Flow and components over time
Financial evaluation and cash flow
3000
2000
1000
Capex investment
KEuro
Opex
0
Capex extension
Y0
Y1
Y2
Y3
Y4
Y5
Y6
Y7
Y8
Y9
Y10
Capex substitution
Residual value
-1000
Revenues
Cash flow
-2000
-3000
-4000
evaluation period
June 2007
slide 21
ITU/BDT Network Planning/ Business Planning - O.G.S.
Business Planning and Modeling
Business domains and trends
Illustration case for customer categories and revenues
Growing Volume
3-8%
Small& Medium
Enterprise
8%
SOHO (1-2 people)
10-20%
High-End
Residential
>3000
Operator
300-500
70-120
60-80
Growing revenues
Large Corporations
0.5- 1%
30-55
60-70%
feasibility
as a
function of
mix of
categories
L-E Residential
Classes Of
Customers
business
Revenues/Month (Euro)
“Customer stratification should be analyzed per country”
June 2007
ITU/BDT Network Planning/ Business Planning - O.G.S.
slide 22
Business Planning and Modeling
Full capacity cost
Cost per unit
Importance of Modeling
Economy of scale per technology and size
u1
u1 = a1+ B1 / S
u2 = a2+ B2 / S
u2
m1
m2
X
M1
t1 = a1 S + B1
t2 = a2 S + B2
t2
t1
m1
m2
X
M1
Equipment size
M2
M2
Equipment size
Impact by occupancy or fill-in degree
June 2007
slide 23
ITU/BDT Network Planning/ Business Planning - O.G.S.
Business Planning and Modeling
Importance of Modeling: Deployment Strategies
C: Balanced between COOP
and demand satisfaction
Equipment Deployment:CAPEX
Solution B
(Once for all)
B: High risk,
CAPEX
and OPEX
Solution C
(Optimized)
Solution A
(yearly)
Demand
forecasts
A: High OPEX by installation
costs risk to satisfy demand
Years
Major impact on CAPEX and OPEX
June 2007
ITU/BDT Network Planning/ Business Planning - O.G.S.
slide 24
Business Planning and Modeling
Key Factors in competition:
competition: Business feasibility
Feasibility space highly dependent on country size and economic level
Revenues per
customer/year
(ARPU)
Preasure by payment capability,
churn or regulation constraints
Business Feasibility
area:
r1 $
r2 $
Preasure by
required NPV and IRR
n1
n2
Volume of Customers/type
Business feasibility area limited by positive NPV and payment willingness
June 2007
ITU/BDT Network Planning/ Business Planning - O.G.S.
slide 25