Entrepreneurship involves risks. NedSense operates in a highly dynamic and international environment. As a consequence, managing and controlling risks requires that specific characteristics have to be taken into account. The following section identifies the main risks which could affect achievement of the business objectives of NedSense .
Competitive position The company aims for a top three position in all CAD/CAM/ERP segments in which it operates. In view of this ambition, the ability of NedSense to distinguish itself from its competitors in the market is of great importance. That is why NedSense focuses on professional markets and on providing its customers with integrated software solutions. Reliability, improving productivity, sustainability, user friendliness and a low cost of ownership are important elements in this strategy.
NedSense is the only company that offers fully integrated software solutions for the textile and fashion industry on a global scale. As a global player, NedSense is forced to comply with the global needs and requirements of its customers, which could result in investments and start-up costs to open new locations worldwide.
Exposure to economic developments A large part of NedSense sales relate to income from selling software licenses, as well as providing related services such as maintenance, support and training related to the company’s proprietary software solutions. Sales of software licenses and related consultancy services are mostly non-recurring. On the other hand, the income from maintenance and support contracts is mainly recurring business. The non-recurring income is in particular strongly exposed to fluctuations in the economic conditions, while this applies to a much smaller extent to recurring income.
Software development Software development is a very important critical success factor for NedSense . The innovation-focused policy comes with specific risks which are inherent in investing in the development of new technologies and new functionalities. These new developments must not only meet operating requirements, but will also have to find a place in the market to result in value creation. Software development demands specific and continuous attention to result in successful new product launches.
Seasonal influences Historical data indicate that sales are typically not spread evenly throughout the year. NedSense realises an important part of its sales and profit in the fourth quarter. If sales in the fourth quarter do not rise to a level that is significantly higher than the preceding quarters, this will have a relatively strong negative impact on the full-year results of NedSense .
Spread of sales NedSense has an extensive worldwide client base. As a result of the spread of sales and the related results, the company’s overall results depend only to a small extent on the realisation of (some) major orders. NedSense usually records only a limited number of very large orders per year, which large orders mainly relate to sales of ERP software solutions. These relatively large orders have a direct impact on the realised sales and the result.
The geographical spread of the sales of NedSense contributes to the stability of the total income flow.
Illegal copying of software Safeguarding the authorised use of software solutions is of great importance to NedSense . In practice there is always some danger that the software developed or distributed by NedSense is copied illegally. With the help of an authorisation code and a hardware key-lock, NedSense has limited the risk as much as possible. NedSense cannot estimate the loss of sales by unauthorised use and illegal copying of the software developed by NedSense or distributed by NedSense for third parties.
Economies of scale NedSense is an international organisation with an extensive worldwide network of sales and distribution offices. NedSense has specialised internationally in supplying the textile and fashion industry with software solutions in the field of automation of design, production and resource planning. The textile and fashion industry represents a relatively small niche market within the greater market for ICT products and services. The international structure of NedSense , whereby the company aims to provide the best possible service to its (local) customers, is sometimes at odds with the actual size of the various sales and distribution offices. The international operations are generally complex and demand much attention from the management. International sales and distribution organisations have a relatively high cost structure, due to the limited possibilities that exist for exploiting economies of scale on a global basis.
Third-party software For a number of products, NedSense depends on third-party support software. This support software consists, amongst other things, of operating systems and specific programming languages, as well as separate modules which are being used. The adequate functioning of the software developed by NedSense therefore (partly) depends on the adequate functioning of third-party software. By applying application and module tests, NedSense aims to obtain the earliest indication of possible technological problems.
Risk of product defects New versions of NedSense ’s complex software programs may contain undetected errors or bugs which, despite testing, will be discovered only after a product has been installed and used by customers. To date, NedSense ’s business has not been materially adversely affected by the release of new products and releases.
Software platform The programming languages, techniques and platforms used by NedSense have to match and must continue to match the technological developments and requirements of its clients. NedSense has made significant investments in recent years in making its software compatible with Microsoft operating environments. NedSense must continue to invest to keep up with the latest technological developments.
International operations The activities of NedSense are exposed to the risks of operating internationally, such as currency fluctuations, general economic developments in certain countries, meeting the requirements of various tax and legal regimes, organisational aspects, unexpected changes in local legislation and regulations, limited protection of intellectual property, varying terms of payment by debtors, trade restrictions and changes in import and cargo rates.
NedSense carries out part of its activities outside the Euro zone. These activities mainly take place in the United States and the Asia/Pacific region. The management monitors the currency positions and follows a restricted hedging policy, which cover transaction risks, rather than translation risks. The developments in exchange rates of various foreign currencies, especially the US dollar, may therefore affect the result and the financial position of the company.
Working capital management The item trade debtors is relatively large in size compared to the other current assets of NedSense . NedSense gives much attention to debtors’ payment performance through permanent debtor management. Insolvency of debtors of the Dutch operating companies is partially covered by a credit insurance policy from Atradius Credit Insurance N.V., as well as through the use of letters of credit or down payments upon the signing of contracts.
Risk management and internal control
The Board of Directors is responsible for the internal control and the management of risks within the company and for the assessment of the effectiveness of these control systems. Such control systems were set up to identify and subsequently manage risks, which could endanger the realisation of the objectives of the company. It should be noted that no single (control) system offers an absolute guarantee against material inaccuracies or losses.
NedSense aims to ensure that its risk management activities are in line with the best practices laid down in the Code Tabaksblat (the Dutch Corporate Governance Code). The risk management model developed by NedSense is intended to present a practical framework to support the objectives and the assessment of risks and anticipated rewards as identified by the company. The model distinguishes three areas which are subject to particular attention for analysis purposes, these being:
- External factors (i.e. the company’s operating environment on both a macroeconomic and industry level) with the consequential strategic risks;
- organisational structure with the consequential internal risks;
- primary and supporting processes with the consequential process and reporting risks.
The main aspects of the formulated risk management model are:
- clearly defined responsibilities regarding risk management;
- operational management, together with the various members of the local management teams, assess main risks affecting the company concerned and review these main risks;
- continuous assessment of the quality and effectiveness of the internal controls;
- the Board of Directors monitors the major risks of the group and sees to it that adequate control measures are taken;
- internal assessment is made of the performance of all Managing Directors of the operating companies and members of the local management teams with regard to, among other things, their responsibilities, the quality and effectiveness of the internal controls and the process of financial reporting.
The policy of NedSense remains aimed at the continuous guarding and improvement of the internal risk management processes, in order to further optimise the quality and effectiveness of these processes and their safeguarding, and adapt these where necessary.
System of internal controls
The internal control system contains all elements of internal control and contributes to discipline and structure. The following control measures form part of the internal control system of NedSense and serve to secure reliable financial and reporting processes, while also securing an adequate risk management.
Planning & control cycle The planning & control cycle starts with drawing up a budget for each operating company. The main control variable for NedSense is the net result before taxation, the Earnings Before Tax (EBT). The Managing Directors of the operating companies have a certain level of autonomy with regard to achieving the budgeted EBT within the agreed framework. Other important control variables are net sales, gross margin and operating result. In addition, NedSense controls and manages its operating companies on the basis of a number of company-specific key figures, which may vary per operating company. The operating companies report monthly in accordance with a fixed reporting format. Meetings of the Board of Directors with the Managing Directors of the operating companies are held on a monthly basis. These monthly meetings are used in particular to discuss the operating developments and the required subsequent adjustments to the budgets, in addition to the financial developments.
NedSense Accounting & Reporting Manual The NedSense Accounting & Reporting Manual contains guidelines regarding the accounting principles that have to be adhered to, as well as instructions regarding the filling out of the reporting forms to be used within the NedSense organisation.
Audit Committee The Audit Committee consists of two Members of the Supervisory Board and guarantees an independent supervision of the process of risk management from the supervisory responsibility of the Supervisory Board. The Audit Committee concentrates on the quality of the internal and external reporting, on the effectiveness of the internal control measures and on the functioning of the external and internal auditors.
Internal financial and operational audits In connection with the monitoring and safeguarding mechanisms, internal audits are planned and conducted each year, aimed at securing the quality of the main operating processes and reviewing connected business risks. These internal audits cover the financial reporting (financial audits) and the existence and functioning of operating policies and procedures (operational audits). Due to changes in the organisation, the internal audits conducted in 2006 were limited.
Protection of intellectual property rights NedSense tries to protect its intellectual property rights as far as the company believes this to be economically viable. Protection of intellectual property is done through the registration of trademarks, by using confidentiality agreements and non-competition clauses in agreements and by using hardware key-locks and/or embedded software codes in NedSense ’s software to protect it against illegal use.
Directors’ regulations All Statutory Directors of the operating companies have signed a copy of the Directors’ regulations. These regulations with regard to their limits of authority identify in which cases the board of the operating company require prior approval from the Board of Directors for certain decisions, depending – amongst other things – on the nature or the size of certain business.
Code of conduct and whistleblower procedure In compliance with the Dutch Code on Corporate Governance, a code of conduct and a whistleblower procedure were implemented in 2005. The procedure serves to ensure that any alleged infringement of the existing policies and procedures may be reported without the person making the report suffering any negative consequences of his action.