Financial modeling is imperative for any business: it allows its users to understand the company’s current positioning and future trajectory. Company executives, in particular, use models to draw data-driven conclusions on the best direction to take their business.
However, in order to create an accurate model, finance professionals must have a firm grasp on the industry issues and trends that affect a company, in addition to details on how the business itself operates.
Evaluating companies in the telecommunications industry requires an understanding of the metrics and issues that affect every company in this sector—from the smallest startups to the largest corporations.
Here, we’ll cover what financial modeling is, what it’s used for, as well as the unique issues encountered by analysts creating models for telecommunication companies.
What is financial modeling?
Financial modeling is a highly sought-after skill in financial analysis because it helps stakeholders understand some of the most important considerations for the future of the business.
By combining accounting, finance, and business metrics, as well as assumptions about a company’s future performance, analysts can create a high-level view of a business’s current finances and future financial performance. Business leaders can then use these models to inform the decisions that shape the future of their company.
Consequently, financial models require the analysis and calculations of huge amounts of data. Modelers use this information to draw up income statements, balance sheets, cash flow statements, and more in pursuit of their end goals.
These scenarios are often created in Excel due to the freedom and flexibility that this platform offers. Of course, this tool is not without its disadvantages. However, advances in financial modeling intelligence allow analysts to create these tools in innovative modeling software (more on this later).
What are financial models used for?
Financial models have a wide range of uses for company executives, as well as individuals assessing the health of a company for investing and other purposes.
But in general, executives and investors alike use modeling to test new scenarios before they take place and compare businesses to similar ones in their industry.
Internally, business leaders use models to inform their decision-making process for things like:
- Budgeting and forecasting
- Acquiring or selling new businesses and assets
- Prioritizing ongoing projects and other initiatives
- Allocating company resources
- Raising capital
- Entering new markets
- Evaluating the impact of new government regulations
In the constantly-shifting telecommunications industry, financial models help successful companies keep up with breakneck changes in the market and in technology.
Building financial models for telecommunication companies
Telecommunications is an integral part of any modern community’s infrastructure — especially in an era where almost everything has been digitized. It helps connect people to the world at large by breaking down words, voice, video, and audio into data that can be sent to virtually anywhere in the world.
Wireless communication, in particular, has risen in demand over the last few years. Today, the United States ranks third highest in its number of smartphone users, with about 260 million people making up the nation’s mobile communication market.
People depend on the work that telecom companies perform and the services they offer. This demand has resulted in the industry’s overall long-term, stable growth—although individual companies themselves may be affected by factors like government regulations and current affairs. This leads to some volatility within the industry.
Telecommunication companies must also take into account the large amount of capital needed to run their businesses. Recent technological advances mean that a company’s current offerings can become obsolete overnight, regardless of how much they might have spent to update their technology, expand their network, or set up additional infrastructure to handle perceived demand.
Exhibit A:Client, Hart Telephone Company (HTC) utilizes Synario’s interactive visualization tools to project and gauge financial health based on telecom industry governance. Their Debt Service Coverage Ratio (DSCR), has a fixed floor of 1.45 to ensure the feasibility of repaying existing debt obligations. Similarly, HTC designed a Debt/EBITDA ratio forecast with a ceiling set at 3.25 safeguarding against poor or inadequate cash flow and to confirm long-term stability (or diagnose instability). This quick and easy exercise helps HTC prove and communicate its sustainability to industry regulators, demonstrating that they are far exceeding industry standards and can responsibly manage any additional funding.
This exhibit is derived from sample figures for illustrative purposes
As a result, the telecom industry becomes a pay-to-play one, and companies that can’t afford to adapt end up dropping out of the running. This is why it’s imperative that telecom companies manage their finances well. Business leaders do this with the help of telecom financial modeling.
However, there are several obstacles that finance professionals face when putting together an accurate model for companies in the telecommunications industry.
The unique issues encountered in telecom financial modeling
Financial models require a large amount of data to forecast the future of a company accurately. One of these points, revenue, can complicate things for telecom financial analysts.
Why? Unlike in other industries, telecom revenue largely depends on two main factors: the company’s subscriber base and capital expenditures. These two independent variables have a significant impact on a telecom company’s bottom line. If an analyst’s assumptions are off by even a little, this can dramatically impact the overall model, as well.
Because most telecom companies don’t have much to show in the way of earnings, finance professionals must look to numbers like average revenue per user (ARPU) or subscriber growth to gauge the value of a business.
Additionally, modelers must take into account a telecom company’s fixed costs. It takes huge amounts of money, not just to update their infrastructure, but to maintain it as well. These costs affect a business’s net revenue, so they must be accounted for in every telecom financial model too.
As mentioned earlier, changes in government regulations create room for unpredictability as well.
Some telecom companies may receive regulatory protections and privileges that reduce competition and create pseudo-monopolies. However, these regulations can change in the blink of an eye, due to new laws and guidelines, mergers and acquisitions, or new technology that hasn't been addressed by current laws yet.
We can even see a glimpse of this today, as companies like Facebook grapple with government organizations over never-before-addressed issues like data privacy laws.
Global events can also complicate the telecom financial modeling process. Just look at the coronavirus pandemic and its impact on how we conduct business and life over the internet.
You might have seen how companies like Zoom benefited as remote work and learning forced families, company leaders, and educators to reassess how they address business meetings, online lesson plans, and more. Current events reveal our reliance on telecom companies, especially those with offerings like video conferencing services and high-speed wireless internet connection.
The stock market supports this notion, too. Zoom and Slack experienced jaw-dropping increases in stocks in Q2, while telecom companies like AT&T that lacked the resources to support their customers reported poor market performance.
Unforeseen changes like these throw even the most accurate financial models out of whack and require analysts to revisit any assumptions they’ve made in their current models.
Transform how you build telecom financial models with Synario
In today’s society, time is of the essence for business leaders and company executives.
Advances in technology have created a fast-paced environment that rewards quick decision-making. Oftentimes, companies that can pivot quickly or capitalize on new opportunities are rewarded for their immediate action.
As a result, company leaders must be able to assess business decisions quickly and accurately based on the latest data. This pressure demands quick work from the analysts that build financial models as well.
However, designing models in Excel prevents finance professionals and business leaders from taking advantage of new opportunities as they present themselves.
Because the software wasn’t created specifically for financial models, analysts must often create new spreadsheets and data tables from scratch every time a new model is needed.
However, Excel is a complicated program, and not everyone has the knowledge base needed to master it. Some analysts routinely experience issues creating templates from scratch, while those that do run the risk of messing up a formula or calculation that could potentially affect the entire model.
This can result in analysts presenting inaccurate information to business leaders and other stakeholders, which can have disastrous consequences for the company.
Synario’s intelligent financial modeling platform simplifies the modeling process for telecom industry financial analysts.
Build financial models with confidence, with an unlimited amount of scenarios that lay out every possible option for your company. Make changes to your models at the drop of a hat, for newly-updated scenarios every time new data becomes available.
By getting rid of the grunt work involved in updating models in Excel, Synario allows you to focus on your conversations with business leaders and other stakeholders. Effectively communicate the results of your findings and answer their most pressing questions with clarity, rather than wasting your time ensuring that your data and calculations are correct.
With Synario on your side, you and your leadership team can make business decisions in record time.