Effective Budgeting for a
Changing Telecom
Landscape
Presented By:
Patrick Powers, CPA
Principal
MTA Annual Conference
March 2 & 3, 2010
Importance of Budgeting in the Telecommunications
Industry
• Rapid technology changes.
– Increase in the need of capital expenditures to keep up with
ever changing technology.
• Changes in revenue streams due to the decline in both access
lines and minutes of use on both ILEC and CLEC networks.
– Continued wireless competition.
– Many companies are looking to create and offer more
services to meet competition (i.e. bundled services).
– Continued competitive pressure – CATV, Satellite.
Importance of Budgeting in the Telecommunications
Industry (Continued)
• Need for telecommunications companies to accurately allocate their
resources whether dedicating funds to capital expansion or
managing expenses to keep in line with revenues.
• Need for boards and managers to be informed of the company’s
current situation be better able to adapt to the ever-changing market
conditions and be able to make well-informed rather than rash
business decisions.
• Need for companies to not only monitor compliance on a current
basis, but project compliance with loan covenants into the future.
• Need for long term cash flow modeling vs. short term perspective.
Importance of Capital Budgeting
• With ever-changing technology in the industry, the need for
appropriate capital budgeting is more important than ever.
• Capital budgeting appropriately allows management to lay out
their strategic plan for expansion or new service offerings.
• Allows management to see where cash flow demands will be
needed in the future and allows for the accurate allocation of
company resources.
• Ability to addresses debt financing options.
Traditional Budgeting – The Perception
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Painful annual ritual.
Irrelevant and time-consuming data-entry project.
Inefficient and ineffective.
Review of last year audit numbers which are plugged into a
spreadsheet and factored out by some blanket multiplier.
• Twisted into wishful thinking or distorted reality.
• Too much focus on capital assets and not enough on
operations.
• Too much focus on operations and not enough on capital
assets.
Traditional Budgeting – The Process
• Traditionally, budgeting has consisted of the following
functions:
– Trends are based on retrospective look-backs and
historical events.
– Revenue and expense projections are based on blanket
growth rates.
– At times prepared too late to provide any real in depth
analytical value of future operations.
Traditional Budgeting - The Issues
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No communication of assumptions or cost drivers.
Lack of incorporating different inputs in the budgeting process.
Dependence on complex spreadsheets.
Budgeting function is an isolated event often only including
select individuals.
• Budgets are reviewed in total rather on a segment or activity
basis.
• No real depth analysis on cost drivers, allocations, or
variables.
• Annual budget never receives any follow-up or accountability.
Budgeting Constraints
• Unfortunately, effective budgeting is a direct correlation to time,
effort, and continuous monitoring.
• The quality of the Company’s budget can be only as good as the
information that was used to derive the results:
– A budget is a factor of historical data and the application of cost
drivers.
– An effective budget will only be as valuable as the time spent on
evaluating these drivers.
Historical
Data
Cost
Drivers
Projected
Budget
Budgeting – The Goal
• Budgeting, overall, can:
– Be one of the most valuable tools for businesses if carefully
planned, implemented and reviewed.
– Help define the Company’s strategic goals, efficiently and
effectively allocation the Company’s resources, and
successfully plan for long-term operations and success.
– Help to educate your employees in areas they can impact
your bottom line.
– Help prevent rash, “slash and burn” cost cutting
techniques.
What Changes Can be Made?
• Transition from traditional budgeting models to effective
budgeting models
Traditional Budgeting
Integration of Key
Efficiencies
Effective Budgeting
Effective Budgeting
• Effective budgeting can...
– Bring cohesion for effective and informed decision making
by incorporating:
• The Company’s strategic goals, objectives and vision.
• Benchmarking and performance metrics.
• The Company’s people and resources.
– Collectively integrates the company’s managers, workers,
and stakeholders to focus on:
• The Company’s strategic goals.
• The means to achieve these goals.
• The current progress towards that achievement.
Integration of Key Efficiencies of Effective Budgeting
• In order to transition from traditional budgeting techniques to
effective budgeting, one should consider these key
efficiencies:
1. Make Budgeting Part of the Corporate Culture.
2. Integrate Strategic and Operating Plans.
3. Start the Budgetary Process at the Top....and the BOTTOM!
4. Drive Collaboration between Functions.
5. Adapt to Changing Business Conditions.
6. Base Budget off of Model Business Drivers.
7. Incorporation of Benchmarking Information.
8. Be Timely, Accurate and Accountable.
Key Efficiency #1 – Budgeting and Corporate Culture
• Importance of the “Tone at the Top”.
• Companies should embrace as well as reward effective
planning.
• Budgeting effectively should include department managers
developing their own plans and goals while management
should be rewarding them for meeting these goals or holding
them accountable for falling short.
Key Efficiency #2 – Integrate Strategic and Operating
Plans
• Companies should clearly communicate the overall business
strategic plan to department managers.
• This aids the department managers in better deriving their
operating budget to the overall strategic plan.
• In turn, accounting and senior management can help translate
their strategic plan into specific cost drivers, i.e. penetration
rates, customer counts, margins needed for certain business
lines.
• Review the operating plan to strategic plan on a regular basis
to see the company’s progress to reaching these goals.
Key Efficiency #3 – Start at the Top....and the BOTTOM!
• Effective budgeting is the ability to plan from the bottom-up
while meeting top-down strategic objectives.
• Top management should provide the initial guidance of their
expectations which in turn department managers create their
plan (from the bottom-up) on how they intend to meet those
goals.
• With this technique, the budget that is created is:
– Supported by the department managers.
– Supported by the senior manager as strategic and
operational goals are in line.
– Supported by accounting and finance.
Key Efficiency #4 – Collaboration Between Functions
• Effective budgeting includes matching operational and
strategic plans but it should also match across functional
areas.
• Department managers should know what other functions are
planning (i.e. plant managers should know about new service
offerings).
• This collaborative planning allows for the different managers to
share in different scenarios with each other (i.e. marketing in
synch with provisioning and other operations).
Key Efficiency #5 – Adapt to Changing Business
Conditions
• Reflect current business conditions as cost drivers rather than
all-encompassing growth rates.
• Include frequent review of how the Company is meeting those
planned expectations or even re-forecasting to match current
operating conditions.
• Enable the Company to adapt to volatile market conditions by
allowing the Company to make informed business decisions or
reallocate resources as necessary.
Key Efficiency #6 – Base Budget Off Of Model Business
Drivers
• Budget should reflect and be based off of a model with formulaic
equations that are tied to business drivers.
– Customer count projections for certain lines of business.
– Overhead and benefits per employee.
• Mere importing historic number and manipulating the past events
may not adequately represent reasonable relationships.
• Dig deep and evaluate the cause and effect relationships between
different accounts and tie those relationships into the Company’s
model (i.e. new bundled service packages and advertising expense
or FTTH project and installers needed).
Key Efficiency #7 – Incorporation of Benchmarking
Information
• Benchmarking – A standard used to evaluate your company’s
performance:
– Your company - historical compared to future.
– Your company compared to other companies within the industry.
• Know your Key Benchmarking Indicators:
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EBITDA
Leverage
ARPU
Per connection metrics
• Revenues, Universal Service Funding, Expenses
• Pay attention to what you can control and also what is out of
your control.
Key Efficiency #8 – Be Timely, Accurate and
Accountable
• Often the Company’s budget is prepared too late and the
information is already irrelevant.
• Models that are based on old and historic data and
assumptions provide no real planning value.
• Timely and relevant information allows the Company to
provide better information to their stakeholders and make
better, well-informed, and faster business decisions.
• Share financial results as compared to budget with all
stakeholders as an accountability tool. Significant variations
from budget should require explanations.
Importance of Budgeting in the Telecommunications
Industry
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In today’s turbulent economy, a company’s ability to not only monitor but
project their revenues and costs has become more valuable than ever
before.
As more and more companies are looking for profit maximization strategies,
hasty, “slash and burn” cost cutting approaches have developed in order to
survive the economic downturn. Budgeting can help minimize these hasty
decisions.
Unplanned cutbacks can have several nonmonetary ramifications including:
– Tarnished company reputation.
– Diminished employee morale.
– Degradation in company communication.
Areas Where Companies Are Looking Forward
• Bundling Services.
• Rate Changes
– Local service, calling features, Internet and video packages.
• Maximizing NECA Settlements
– DSL – are you charging the correct rates?
– Cost vs. Average schedule settlements.
• Cost efficiency in future technology deployed in your networks.
• New Service offerings.
– Green services, IT services, security systems, web development,
wireless services.
Budgeting in Review
• Effective budgeting can be one of the most valuable tools for
businesses if carefully planned, implemented and reviewed.
• A transition from traditional budgeting techniques will give the
Company greater value in the budgeting process as a whole.
• Effective budgeting will allow the company to make better and
well-informed operating decisions rather than hasty and rash
decisions.
Questions?