Article:

Rethinking the shipping finance function of the future

26 May 2021

Supporting growth in the shipping and marine services industry

When you are running a thriving and fast-growing business in the shipping and marine services sector, a review of your financial operations may not feel like a priority. Nevertheless, getting your house in order before the pursuit of growth, whether that be organic or by acquisition, is vital for any shipping CFO. These actions will help ensure that the necessary support is in place to meet the demands of potential future lenders or investors.  The most successful shipping CFO’s will invariably have the support of a strong and dynamic finance function. 

Counter-intuitively, finance functions are often perceived as an overhead and as such, there is an understandable desire to keep them ‘lean’. However, this is a ‘race to the bottom’ - poor quality financial information delivered at sub-optimal timing can lead to weak decision making. At best, this might mean that decisions are taken later than they should; at worst, that the wrong conclusions are being reached altogether.

Ensure that your finance function is aligned with the needs of your tier one management 

A sophisticated management team will often be focused on the shipping business’s normalised operational cash flow and earnings growth potential. They will be monitoring revenue growth, margins and the ability to turn profit into cash.  Where there are significant tangible assets engaged in the activities of the business (such as ships) then management will also be regularly reviewing market values, debt to equity ratios, useful economic life and potentially residual  values for recycling as well as lending covenants for bank debt.

There is heavy reliance on the CFO and the finance team to deliver high quality management information, together with relevant key performance indicators (KPIs) on a timely basis. Clearly, the finance function has an important role to play in accurately reporting past performance but successful leaders will be more focussed on the future, closely reviewing income, operating costs, profit, operational cash generation and overall liquidity against forecasts and budgets. The models used for budgeting and forecasting must be robust and integrated with the rest of the finance system. Are your business’s people, systems and processes geared up to deliver to the diverse and sophisticated set of stakeholders in the shipping industry?

The common pain points

Management information produced by in-house finance teams does not always meet the requirements of an effective management team, in terms of timeliness, frequency or detail and this often goes un-checked as management may not be aware of what could be made available. The financial information is often historic, rather than focused on re-forecasting future results as conditions change. The value of relevant and timely management information as a tool to shape and guide the strategic direction of the business is not always fully appreciated. A successful shipping CFO must provide the information and insights that can drive valid business decision making and, ultimately deliver growth.

Your in-house finance teams may be facing new technical accounting challenges for example the need to account for a corporate finance transaction, applying new accounting policies such as needed with IFRS 16: Leases to bring many charters on balance sheet and even dealing with a different GAAP, which may depend on the preferences of a lender or significant investor. With many shipping groups having companies in multiple jurisdictions, the preparation of the consolidation may prove challenging, the treatment of foreign currencies on consolidation being one practical example. Beyond that, your existing finance team may not have experience in preparing consolidated accounts, accounting for goodwill and intangible assets, complex financial instruments (like derivatives or hedging tools, such as forward freight agreements or interest rate swaps) or deferred tax provisions.

Some smaller companies may not have faced before the rigour of a statutory financial audit, which may be required following a refinancing or a change in ownership, perhaps with the injection of equity from a Private Equity investor. As a result, the management information and annual statutory financial statements may be carrying significant, recurring accounting errors, for example, concerning the treatment of revenue streams or the valuation of assets. If not picked up during due diligence, these ‘skeletons’ may lead to a number of problems such as valuation challenges, negotiation difficulties in the completion of a future refinancing or M&A transaction and even to pressures in meeting recently established lending covenants. A successful shipping CFO, and their team will recognise that accuracy and quality are a minimum requirement for success in this regard.

Building an effective finance function with external support throughout the business lifecycle

Clearly, shipping CFOs and finance teams face a number of challenges when it comes to providing the required management information to the Board and/or the investors. The most successful CFOs will consider all of the options available to them. One solution that is set to become more prevalent as an integral part of the ‘Finance Function of the Future’ is the outsourcing or ‘co-sourcing’ of all, or part, of the back-office finance and compliance function.

The options for professional external support are numerous: from fully outsourced accounting and back-office services, a co-sourced solution, whereby certain undertakings are conducted externally, all the way through to tailored ad hoc advisory services at key points in the financial year. The shipping industry is familiar with the use of outsourced providers such as third-party ship management and also commercial pools for income. There is no fixed model for outsourcing– every business will have its strengths and weaknesses. Utilising external resources and expertise to address those weaknesses can add flexibility and agility to the finance function in a cost effective manner that will be key to meeting these new demands. Additionally, the use of an outsourced solution can assist in de-risking the challenge of staff recruitment and retention.  

Companies in the shipping and marine services sector tend to be internationally focussed by their very nature and thus are faced by many challenges in dealing with compliance in a variety of jurisdictions. Having an advisor in place that is able to support across multiple jurisdictions is crucial; whether that be top-down from a centralised head office or on the ground in each location, an advisor with real international credentials will prove to be invaluable.

Whatever your requirements, never forget that your external advisers can be there to act as a business partner and a trusted advisor to support you along your journey. They should be on-hand to help you develop a finance function that is bespoke, highly effective and pursuant to the commercial needs of the business. In selecting an outsourced finance business partner, it is important that the provider not only has high a quality accounting and finance skills set but also has a proven track record and expertise in working alongside other businesses in the shipping industry. 

Finance and accounting technology systems

The finance and accounting technology (ERP system) that you rely on in your shipping business should certainly be assessed on a regular basis, even if that is just to check whether the most recent updates to the software have been incorporated. It is vital to ensure your accounting systems are able to cope with any issues such as anticipated alterations in reporting requirements, a changing group structure, potential new revenue streams and the likely increased demand for complex and forward looking financial information.

Your advisers can help you ensure that existing systems are being utilised to their full potential and that manual ‘work-arounds’ are eliminated, or at the very least minimised. They should also support you to embrace technology driven solutions that improve quality and free up your finance team to focus on value-adding tasks related to financial modelling, forecasting, monitoring of KPIs and growing the business.

Your advisers can bring a fresh and independent perspective to accounting policies and financial statements. They will be able to undertake a balance sheet health check that could, for example, identify any assets held at incorrect valuations or accounting treatments that misrepresent reported income. They should help the shipping CFO to ensure that financial reporting is sufficiently robust to meet the expectations of management and key external stakeholders as well as ensure the smooth running of future financial audits.

If you have any questions, please get in touch with a member of our team or contact Gareth Jones or Richard Greiner.

Maximising productivity from your finance function

If you are a company in the shipping and marine services sector looking for further insights and ways to leverage technology and maximise productivity within your finance function, visit our ‘Rethinking the Finance Function of the Future’ hub.