By Foluke Akinmoladun
For a shipping company, its ability to be a going concern, that is, be solvent and profitable into the foreseeable future, is important to its owners, shareholders, agents, staff, crew , customers and the flag nation. To ensure that the company is profitable now and in the foreseeable future, the owners and managers of the shipping company need to operate within a budget. This ensures that they have a marketing plan to forecast revenue and that they have an expenditure budget to forecast expenditure and the difference between both assists to forecast future profit/income.
It is this form of planning that is referred to as budget planning. The use of budget planning as a management tool to control finances is referred to as budgetary control. The financial records and accounting used for budget preparation and budgetary control is referred to as management accounting. When management analyses actual performance and compares it with the budget for the period under review, studies the differences and adjust the future budget to accommodate the issues that caused the variances between the prior period budget and actual performance for that financial year, this is referred to as variance analysis.
A budget is a financial plan for the future concerning the revenues and costs of a business. However, a budget is about much more than just financial numbers. It is also about budgetary control. Budgetary control is the process by which financial control is exercised within an organisation. Budgets for income/revenue and expenditure are prepared in advance and then compared with actual performance to establish any variances. Managers are responsible for controllable costs within their budgets and are required to take remedial action if the adverse variances arise and they are considered excessive.
The main purpose of budgeting is therefore to provide a financial framework for the decision-making process of the management team of the ship owning company. The budget considerations for a ship management company will be different depending on the management functions it is carrying out for the ship owner whether it is crewing or operations for example.
Budgets are thus used to; control income and expenditure, establish priorities and set targets in numerical terms, provide direction and co-ordination so that the shipping business’ objectives can be turned into practical reality. This is in addition to, assigning responsibilities to budget holders (managers) and allocate resources, communicate targets from management to employees and importantly, motivate staff from captains to crew to agents and to improve efficiency and monitor performance. Whilst there are many uses of budgets, there are a set of guiding principles for good budgetary control in a business.
In an effective budget system, managerial responsibilities are clearly defined – in particular the responsibility to adhere to their budgets. Individual budgets lay down a plan of action and performance is monitored against the budget. Corrective action is taken if results differ significantly from the budget once the reasons for the variance are noted. Departures from budgets should be permitted only after approval from senior management and unaccounted for variances needs to be investigated.
Ship owning companies that operate on a budget-driven basis ensure that income and expenditure are monitored against traffic volume carried. In addition, the annual report of the company may show efficiency data such as that for revenue earnings per employee, credit and debt analysis, return on capital, number of employees, traffic volume carried by type, and a range of ship productivity details. Other details may include, budgeted forecast of carryings on the route in the next 12 months by tonnage, segregated into various commodity classifications and country of origin. The maintenance and provision of ships form a significant cost in the ship owner’s annual budget.
Foluke Akinmoladun is a lawyer, accountant, mediator and arbitrator. She is the Managing Solicitor of Trizon Law Chambers and can be reached at: Foluke.A@trizonlawchambers.com