Effective Budgeting for a Changing Telecom Landscape

Presented By: Patrick Powers, CPAPrincipal

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

• 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

• 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.

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

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:– 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• 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?