As the world continues to become ever more digital, companies from all industries need to have a strong digital commerce strategy. However, launching a digital commerce platform can be a complex undertaking, especially for established companies which have built their businesses on more traditional, paper-based processes that are better suited for ‘brick and mortar’ transactions. This is where Netconomy has found its ‘sweet spot’: working with enterprise organizations to adapt and connect their business processes with state-of-the-art technologies to deliver scalable e-Commerce solutions. However, this is a fast-paced industry and the company is having to grow – and plan for that growth – rapidly. According to Andreas Schilk, CFO for Netconomy, “We are working in an extremely dynamic environment. Our customer base has grown significantly in a relatively short amount of time, expanding beyond Austria, Germany and Switzerland into Russia and Croatia. In addition, we are now offering even more services in our portfolio.”
For the first few years, the company utilized a classical budget process: taking a couple of months of the year to create a financial plan for the next year. However, this type of planning process began to be less effective for Netconomy. “The company is developing so quickly and there are so many variables with our business, including multiple currencies and fluctuating exchange rates. A plan we create today typically needs to change by tomorrow,” explained Schilk. The company needed a planning process that would combine risk management with its budgeting and forecasting.
Managing the Risks
Schilk has extensive experience of using Palisade’s @RISK in various business sectors. He knew Netconomy needed a way to plan not only for where it was today, but to create simulations of where it could go in the future, including potential associated risks. “This is exactly the type of problem that @RISK can solve,” added Schilk.
Every month, Netconomy creates a rolling, ‘top down’ 12-month plan for each of its three regionally-based divisions in Austria, Germany and Switzerland. Schilk then calculates distributions for each division, based on a variety of factors including product pricing, daily service rates and capacity utilization. As Netconomy is a service-based business, headcount forecast and personnel-related costs are also critical factors. He then uses @RISK, Palisade’s risk analysis add-in to Microsoft Excel, to simulate three possible scenarios for each division, as well as for the consolidated company to show realistic best case, worst case and median budget figures and the probability of their occurrence. The software runs Monte Carlo simulations to provide a range of probability distributions to represent uncertain variables, then computes hundreds or thousands of different scenarios. For the Netconomy models, they run 10,000 iterations each month, using 5-6 probability distributions, including PERT and triangle distributions.
Once Netconomy has created these scenarios, they compare current scenarios to forecasted scenarios from the previous months and determine if the results fit to the company’s targets. This enables the management team to easily see whether the targets are achievable, and make decisions quickly regarding any potential changes to the plans. “It’s an incredibly flexible approach,” added Schilk.
The graph below shows the development of the company’s rolling forecasts. Each scenario of a monthly forecast calculates the profit and loss, balance sheet and cash flow on a monthly basis for the entire business year.
Palisade’s @RISK software provides Netconomy with transparency and understanding about the risks involved in planning, and therefore facilitates decision-making without guesswork. By running the simulations on a monthly basis, the company is able to identify issues such as capacity shortage/idle capacity, efficiency and the development of the contribution margin before they have a significant impact on the business, potentially saving millions of Euros every year.
“With the help of @RISK, we don’t just wait to react to changes on our business. Instead, we are able to act early and quickly if we notice trends which could harm our business goals,” said Schilk. “In addition, we get full visibility regarding what we can afford, what we can risk and what we can invest. This gives the management team – and the board – much more confidence in our plans and our ability to proactively steer the business.”