ITU/ BDT «Training and Trials on Network
Architectures»
Planning Tools for Evolving Network Architectures»
4-
June 4-8 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
plans
Types of business 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 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 5
Business Planning and Modeling
Iterative process for evaluation
Strategic objectives, strategic guidelines
modifications
Marketing planning
modifications
Network planning
modifications
Operations planning
Human resources modifications
planning
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
Analysis Business Plan
Costs models
SWOT Revenues
Pricing Financial indicators
Service portfolio Evaluation
Technologies used Sensitivity studies
Action plans
what parameters to improve, how to adjust models
June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 7
Business Planning and Modeling
Business model structure
Demand
Human
Tariffs Resources
Corporate Ordinary
Customers Customers CAPEX OPEX
Revenue Revenue
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
Leased Added
rental fee Mobiles Data
local calls lines Video value
ld calls services
idd calls
Total Revenues
June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 9
Business Planning and Modeling
Expenses calculation
Customers
Services
Network Customer Care Labour Costs
construction provisioning Marketing
operations repairing Billing Administrative
extension call center & general costs
CAPEX OPEX
June 2007 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 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 13
Business Planning and Modeling
Income statement
OPEX
Revenues
CAPEX
- +
EBITDA
Earning before income taxes,
depreciation and amortization
Depreciation -
EBIT
--
Earning before interests,
Taxes - 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= Operations Expenditures
OPEX
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 Operating
revenues expenses
Gross
(sales) Depre-
margin
ciation
Income
from EBITDA Taxes
operations Interests
EBIT Dividends
Net
Other income Retained
incomes earnings
June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 17
Business Planning and Modeling
Cash Flow
Inflows Revenues, funds
Cash
CASH FLOWS IRR
balance NPV
Out Working
Taxes
flows OPEX CAPEX Capital
changes
June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 18
Business Planning and Modeling
INFLOWS and OUTFLOWS
Customers Shareholders Banks, lenders
Sales of services Increase of equity Increase of debt
(operating income) (capital increase) (credit, loans)
INFLOWS
cash flow
OUTFLOWS
Labour Network Technical Debt
Tax Dividends
costs & & admini- repayment
Training equipment strative with
expenses interests
Staff Suppliers Service Govern- Banks, Shareholders
providers ment lenders
June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 19
Business Planning and Modeling
Rules for Equipment Depreciation
Residual Value
Delayed depreciation
100%
Linear depreciation
x% RV at Yn
Accelerated
depreciation
Years
0
Y0 Yn Ym
June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 20
Business Planning and Modeling
Cash-
Cash-Flow and components over time
Financial evaluation and cash flow
3000
2000
1000 Capex investment
Opex
0 Capex extension
KEuro
Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Capex substitution
-1000 Residual value
Revenues
-2000 Cash flow
-3000
-4000
evaluation period
June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 21
Business Planning and Modeling
Business domains and trends
Illustration case for customer categories and revenues
>3000
Large Corporations
0.5- 1% Operator
300-500
Growing Volume
Small& Medium
3-8% Enterprise
business
Growing revenues
70-120 feasibility
8% SOHO (1-2 people)
as a
High-End 60-80
10-20% function of
Residential
mix of
30-55
60-70% L-E Residential categories
Classes Of
Revenues/Month (Euro)
Customers
“Customer stratification should be analyzed per country”
June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 22
Business Planning and Modeling
Importance of Modeling
Economy of scale per technology and size
Cost per unit
u1 u1 = a1+ B1 / S
u2 u2 = a2+ B2 / S
Full capacity cost
m1 m2 X M1 M2 Equipment size
t1 = a1 S + B1
t2
t2 = a2 S + B2
t1
m1 m2 X M1 M2 Equipment size
Impact by occupancy or fill-in degree
June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 23
Business Planning and Modeling
Importance of Modeling: Deployment Strategies
C: Balanced between COOP
Equipment Deployment:CAPEX
and demand satisfaction
Solution B Solution C
(Once for all) (Optimized)
B: High risk,
Demand
CAPEX Solution A forecasts
and OPEX (yearly)
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
competition:
Key Factors in competition: Business feasibility
Feasibility space highly dependent on country size and economic level
Revenues per Preasure by payment capability,
customer/year churn or regulation constraints
(ARPU)
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