COST AND BUDGETING PRACTICES IN SHIP MANAGEMENT COMPANY
INTRODUCTION
Ship management companies fall into two main categories, one being a ship-owning company that manages its own ships and offers the same services to the other ship owners. The other types are companies that have no ships of their own and solely provide ship management services to the ship- owners: Whichever type it is, the function of shipping management is the same and it falls under five main headings (ICS, 2006); Crew, Technical, Storage, Insurance and Operations.
Operating in the international business, company’s activity follows both national and international law and regulations. The company operates vessels under the supervision of global actors such as classification societies, finance providers, marine insurance companies, shipping related non-governmental organizations which regulate commercial management.
Shipping is a risky business by its very nature that runs within a complex and ever changing market set up having variables in both income and expenditure. Ship management is a highly competitive and a cost- conscious arena of which one of the most prominent objectives is the cost optimization.
Normally ships are owned by credits and a financial risk is always possible. The company is also very sensitive for changes of the national and international policy. Those alterations and risks require the company to handle a continuous risk assessment and management process. Additionally, shipping is a complex business – with a substantial exposure to financial, commercial, political and physical risks – that requires skilled management. Ship management – again unsurprisingly in a cost-conscious business such as ship ownership – is a highly competitive business sector, especially in respect of management fee levels (Drewry, 2006).
The company is looking for securing revenue to survive in a challenging business. To control revenue flow, they need reduce the cost and increase the income. Increasing the income is not possible whereas reducing the cost is much more available in general. Reduction of the capital, operation and voyage costs is generally not applied due to the economic considerations. For that reason, to secure cost savings, the ship owners are looking for instruments to control expenses of additional crew travels, stores, spares, repairs, shipyard, port agency bills and extra insurance fees (Drewry, 2006).
ANALYSIS OF REVENUE AND COSTS
The commercial ship management is “getting the income in’’ and the technical ship management is ‘‘keeping the hardware/seagoing operation going’’. Administration is a set of activities in support of
commercial and technical managements.
The main elements in ship management
(Drewery, 2006 p.2)
In shipping there are two factors to provide earning income; freight rates secured for the ca
iage of cargo and hire earned from chartering out the ship. In some extraordinary cases, the revenue may be secured from selling ships(Drewry, 2006).
Whoever has responsibility for commercial management, the success or otherwise of the venture will hinge on two key factors; (i) an ability to ‘read the market’ and (ii) an element of luck. The latter may sound disconcerting to those not closely involved with shipping markets but the truth is that shipping markets are some way from being transparent. Hence, interpretations have to be made based on incomplete or imperfect information. This creates a mix of speculation and sentiment to go with the underlying ‘realities’. Sentiment is not something suited to ‘mathematical models’ (Drewry, XXXXXXXXXXThis is why the ship management companies work on “cost reduction” rather than” gaining or increasing income” which is very variable and hard to forecast.
Cost Factors in Ship Management
The following are the key cost in ship management;
Commercial Management:
Freight development-negotiating and securing charters
Cargo booking and ship scheduling
Technical Management (Cost side based on the Voyage Estimation)
Crew cost
Bunkers & lu
icators consumption and cost
Hull and engine maintenance costs
Insurance costs
Capital costs
Administration costs (Distribution of overhead for each voyage)
Voyage costs for ports, agency, pilotage, cargo handling, canal transits, etc.)
Administration;
Financial control and accounting
Operating cost is main part of spending for the ship owner responsibility.
It is not possible to negotiate for capital cost except initial stage which is related the financial markets’ fluctuation. Most part of the voyage costs (port disbursements, canal and seaway transit costs) are dependent to tariffs and not negotiable. The Bunker prices follow the fixture of the market and provide a little opportunity to bargain. Some elements of operating cost (manning and insurance) are not negotiable. But the others (Repairs and maintenance; stores, spares and supplies, administration and management) are more flexible to negotiate for cost reduction.
Table 1: Operational Expenses Proportion
Crew costs
48%
Administration
18%
Stores
16%
Insurance
13%
Spare &Repairs
5%
Marfin Management Company made a study on Operational Cost and Daily Overall expenses for ships (Albertini, 2011).
The biggest portion is the crew cost and it is not flexible for bargain. Insurance also has a very limited chance to negotiate for cost. Except company staff salaries, all other administration aspects (office rent, transportation, and communication, stationary) are in the procurement and purchase. The stores and Spare & Repair cost are almost 19% of the operational expenses.
These are all related maintenance and repair policy and finally procurement/purchasing activities. If we separate non-flexible factors (crew cost and insurance), the remaining cost factors are directly related to maintenance, repair and procurement/purchasing.
Discussion Management and Administration Overview
The best management of ship management showed that the followings are assumed as the core tasks of ship managers by shipping companies (Germanischer Lloyd2013).
Technical management
Quality and safety management
Crewing
Financial management
Procurement
The financial management is an essential to survive and it is mainly dependent to the initial credit agreements. Technical management including Crewing and Quality & Safety management is an inevitable function to continue commercial operations and the cost of all this functions are approximately fix exempt some minor changes.
Although low operational costs are a key differentiator for ship managers, there is no immediate effect of good cost control and the budgets assigned are still significant with a trend to rise. Tighter regulations and new international maritime conventions on safety, manning and the environment exert pressure on budgets ().
In a study on cost optimization “Services and Operations” of the shipping companies is analysed at a second level as shown in the Figure 4. One of the core processes of the product (Door to Door and Port to Port) is namely “Sea Voyage and Berthing”. The ship management is also analysed at a second level in the Figure 5. This is a very important entity for the availability of the fleet vessels and hence for the schedule keeping of a line (Lyridis et al, 2005).
Figure. The Services and Operations of the Shipping Company
Budgeting and Recommendations
The impact of information technology which continues to become more sophisticated and quickens the pace of the decision-making process. It extends all parts of the shipping company organization and in many companies has resulted in layers of management structure - especially in the middle management range - being eliminated. The application of information technology has shortened the decision management procedures and resulted in quicker decisions thereby making the company more competitive.
At the same time the structure tends to be much smaller with authority devolved to encourage more accountability of personnel at all management levels. The profit center concept has been developed through strong budgeting management techniques. The devolution of executive authority has involved cross border structures and in so doing yielded tax benefits and lower wage scales. The development of computerized technology has greatly facilitated this devolution and change.
Improvement in the maritime regulations and respective strict applications naturally increase the cost. So, more measures should be taken to optimize the cost.
CONCLUSION & RECOMMENDATIONS
The success of the company is closely related to the finance, budgeting and accounting. The close relationship should be established between all departments for better planning and conducting acquisition activities.
The nature of the maritime business is a volatile and generally not a transparent. The success of a company is dependent upon co
ect decisions to provide smooth operation of the organization. As a result it is understood that income /profit of a shipping company is variable in the shipping business which generally operates in a “diseconomies of scale” system. That makes the companies to be very keen on the cost reduction.
More importance should be devoted to the middle managers who play crucial role in budgeting and cost reductions. The close connection and information between company and ships will be rather important. This will provide better control of activities and cost. The close relations of the company and the ships will also improve the decision making processes.
The company’s biggest challenge of ship management could be stated in the following five areas; Crewing (88%), Technical Management (62%), Financial Management (%50), Quality and Safety (%27) and procurement (12%) (Germanischer Lloyd 2014).
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