Shipping is a cash-driven business, and the combination of large, frequent and often short-notice receipts and payments does not sit well with private equity firms when considering cash management.
Over the last two decades, the industry has moved from one populated by owner-managed businesses with cash payments authorised by owners, to a corporate one with companies growing and turning to external sources for equity funding.
Despite the private equity industry taking a keen interest in the shipping space, significant cultural and knowledge gaps are frequently only coming to light for both the investor and the shipping company once an investment has been made.
This is because due diligence processes are typically focused on the economics of the market, the individual track records of the management team and the ships themselves from a technical specification and operational perspective. The actual day-to-day operation of what is effectively the middle and back offices of shipping companies is often scrutinised to a much lesser degree.
An understanding of the cash flows associated with running a shipping business is critical, receipts are often lumpy and irregular, payments inconsistent from month-to-month, widely spread in terms of size, frequent and payable on presentation of pro-forma invoices as opposed to final invoices. In addition, late settlement can cause vessels to be delayed or even detained.
Due to the nature of the movement of cash , the industry is at a high risk of unauthorised and/or erroneous payments . . It is essential for shipping companies to have robust and routinely audited systems in place to ensure that risks are managed appropriately.
Operating a ship is also an expensive business. Mechanical breakdowns occur on even the best maintained vessels, causing significant cash flow challenges. In addition, the rising cost of complying with environmental regulations in the wake of new regulations governing exhaust gas emissions, and incipient legislation covering the installation of onboard ballast water management systems should not be under-estimated.
However, managing and controlling risk exposure is not simply a matter of compliance. In an industry where reputation has real commercial value, proper risk management adds value and enables businesses to protect stakeholders’ interests and gain competitive advantage
Moore Stephens has considerable experience in helping businesses to put risk management systems in place. We provide a bespoke internal audit service that will assist management and stakeholders in protecting their exposure to the risks associated with a cash-intensive business. Our Service Organisation Reviews take due diligence to a new level, while other services include Sarbanes Oxley risk assessment and compliance and a comprehensive maritime document and accounting database solution.
To find out how Moore Stephens can help you get better control of the risks your business faces, please contact us.
Shipping & transport