By Foluke Akinmoladun
One way to prepare the budget of a shipping company is to focus on responsibility centres. Responsibility Centres are defined based on allocation and use of resources within the organisation. A responsibility centre is an organizational subsystem charged with a well-defined mission and headed by a manager accountable for the performance of the centre. There are four major types of responsibility centres: cost centres, revenues centres, profit centres and investment centres.
In preparing the expenditure budget for instance, factors to look at may include ship maintenance, port dues, crew cost, fuel, port agents’ charges, agents’ passenger/freight commission, ship insurance, etc. The budget must be reviewed continuously to reflect variations in expenditure and revenue. Full use must be made of information technology for efficiency and speed. Budgets may also be produced for capital investment programmes and cash forecasts. Masters can also be involved in budgetary control since they are part of the team that will execute the budget. The Master and his chief engineer are responsible for expenditure (cost centres) and revenue budgets (for revenue centres) formulated on an annual basis and will take into account the cargo to be conveyed and ship operating costs, including fuel, crew, maintenance, port charges.
Another important factor in successful ship management and budget preparation and implementation is adequate financial control to ensure optimum use of the shipping company’s resources. To achieve this there must be disciplined budgetary control covering revenue and expenditure budgets on a service, ship, profit centre, divisional or other convenient basis. Budget control must be formulated with the agreement of those managing revenue production, marketing and services.
Budgetary control focuses on the cash flow forecast and related financial planning to ensure the company develops viably. It includes complex financial activities and financial analysis, with appropriate cash flow projections and an assessment of the liabilities outstanding on a ship.
Budget performance reflects trading conditions and seasonal variations for a shipping company informed by the kind of cargo the shipping company ships and the type of market the company operates in. The success of a shipping company or line depends on the efficient operation of its ships under budgetary control. Various managers of different departments will prepare their budgets based on the budget preparation system that the shipping company has.
When the ship management team compares the budget to actual performance, as referred to in part 1 of this write up, this is referred to as variance analysis. This may be done generally in two steps: a) calculating and recording individual variances and b) understanding the cause of each variance.
The reasons for variances can be either of the following: a) a change in market conditions, which have rendered the standard budgeting practices unrealistic, e.g. short supply of fuel causing suppliers to hike prices or b) budgeting standards followed may be too idealistic in nature, for example, the number of voyages possible in the year was too optimistic in the light of changes in demand c) service delivery may not be up to the mark, e.g. planning may have taken into account a 25 day voyage for crew when the actual time for the voyage due to a change in climatic conditions has made the voyage 21 days.
Not all variances are unfavourable. Variances could be favourable and this will assist the ship management team to ensure that the factors that resulted in the favourable variance continue to be utilised. For unfavourable variance however, the management team can look at the causes for the unfavourable variance and address it in the preparation of the next budget.
In ship business management, the purpose of budgeting is majorly three, as a means to forecast of income and expenditure (and thereby profitability), as a tool for decision-making and as a means to monitor business performance. In managing a ship operations business responsibly, expenditure must be tightly controlled to ensure continued profitability and give room to accommodate the risks that are inevitable in running a shipping business.
Foluke Akinmoladun is the Managing Solicitor of Trizon Law Chambers Nigeria. She is a lawyer, accountant, mediator and arbitrator. She is also a Chartered Secretary and Business Rescue & Insolvency Practitioner.
She belongs to the panel of neutrals of numerous arbitral institutions.She was a onetime Director General of the African Ship owners Association of Nigeria and is a member of the Presidential National Action Committee on Nigeria’s Implementation of the African Continental Free Trade Agreement (AfCFTA) (Transportation stream). She is the secretary of the Lagos Chamber of Commerce (LCCI) Maritime Sector. She can be reached at: Foluke.A@trizonlawchambers.com
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