Maritime Business and Management Issues - Coursework Example

MARITIME BUSINESS AND MANAGEMENT: WORK By Ship Budgetary Control (476 words) The maritime sector is a highly competitive sector that provides the essential services to the society through the economic transportation of the passengers, commodities, and goods. Because there so many stakeholders, it’s vital to have properly laid down a budget in order to achieve various objectives. Some of the principles of the budgetary preparation within the maritime sector include the following. Realistic and Quantifiable; in the maritime sector the budget should be realistic and quantifiable in regard to the trading, operating and financial considerations. The shipmaster should evaluate each of the potential activity in order to determine those activities that can result in the most effective resource allocations (Schinas & Stefanakos, 2012). This can be accomplished through appropriate quantification of the costs and benefits of the various maritime activities. Standardised; in order to facilitate the budgetary process, the managers should use the standardised formulas, forms and research techniques in the maritime sector. In regard to the operating and financial consideration, there should be technological considerations in the automation and specialisation of the vessels such as the tankers, containers and among others (Triantafylli & Ballas, 2010). Additionally, to the development of the massive port terminal facilities so as to support some of the technical requirements of the maritime transportation. Inclusive; maritime sectors should ensure that they observe efficiency and effectiveness by decentralising the budgetary process down to the lowest logical levels of the responsibility. The inclusivity ensures that all the relevant departments of the maritime sector are actively involved in the budgetary process so as all the areas are covered in the budget. In this regard, all the relevant expenses such as insurance, travel, miscellaneous, amortisation, salaries, repair and maintenance, and among others should be included (Bland & Rubin, 1997). This is vital in the streamlining of the operational activities in the maritime sector. Frequent evaluation; the budget should be regularly updated according to the schedule and the standardised manner. In this regard, the maritime sector should evaluate such factors as increasing of the energy and the mineral cargoes so as to promote trade and operations (Brown, 2014). This factors should be inclusive in the budgetary process. Additionally, as part of the financial considerations, the budget should factor in the economies of scale so as to ensure cost effective transportation process. This trend has been greatly strengthened by the containerisation. The Top Five costs in the ship operations include; Insurance, supplies, the general and administrative expenses, maintenance, and fuel. The insurance costs account for approximately 15% of the total costs in the maritime sector. The supplies costs, on the other hand, account for about 10% of the total costs in cost accounting. The personnel (general and administrative expenses) accounts for about 30% of the total costs. This includes costs such as salaries and wages. The maintenance and fuel costs account for about 10% of the total costs. Shipping Derivatives (363 words) Shipping/freight derivatives are the financial instruments whose value is derived from the future levels of the freight rates like the ‘dry bulk’ carrying rates and the oil tanker rates. They include the exchange-traded futures, the “forward freight agreements” and the swaps futures. The container freight swap agreements are the financial futures contract that usually allows the speculation and hedging against the volatility of the seaborne, intermodal container boxes (Kavussanos & Visvikis, 2006). The container freight swaps take the form of the cash-settled agreement usually between two parties that have equal but opposite opinion regarding the future of the market. The two parties agree on the price for every container for the specific number of the containers for the specific route for a specified period. At the expiry of the contract time, the two parties settle the differences in the cash between the pre-agreed contract price and the actual spot in the market price. In the event that the market strengthens; usually the box rates increase making the buyer of the long position to benefit. Conversely, in the event that the market softens, and the box rates end up decreasing, the seller (the short position) benefits. The container freight swaps gives the buyer the right and not obligation in buying or selling the CFSAs at the specific period of time for the agreed number of the containers and specific route (Alizadeh & Nomikos, 2009). Some of the affairs relating to the shipping finance in regard to the aforementioned container freight swap agreement include the limited underwriting capacity, tighter regulatory environment, high volatility, uncertainty of the macroeconomic outlook and the uncertain fleet development. The freight options contracts belong to the category of the path-dependent contingent claims that is known as Asian options (Albertijn, Bessler & Drobetz, 2011). This contact is used in the thinly traded commodity market so as to avoid the problem with the price manipulations of the underlying asset at the maturity. The contract is used to hedge against the volatility in the ocean freight markets. A good scenario that demonstrates the use of the freight options contract is the hedging of the natural gas that has a limited possibility of the storage. Shipping Derivatives (1418 words) Finance leasing or the capital leasing is the type of the lease whereby the leasing company buys the asset for the user and then rents it to them for the specified period of the time. The operating lease is the lease whose term is relatively shorter as compared to the useful life of the asset that is being used. The operating lease usually used in the acquisition of the equipment on the short-term basis. Advantages of Operational Leasing The operational leasing comes with a lot of advantages in terms of the much-needed flexibility especially in the ship financing. The shipping companies can, therefore, frequently replace or update their equipment. With the operational leasing, the shipping company can protect itself from such risks as the risk of obsolescence (Li, 2006). Additionally, with the use of the operational leasing, the accounting for the shipping company is much simpler in that the asset do not have to be included in the balance sheet. In this regard also, the corresponding debt liability do not have to be included or calculated. In the case of the operational leasing in the ship finance, the costs of the materials/equipment are known in advance; hence, making it relatively easier for precise budgeting (Li, 2006). Additionally, the operational leasing shipping company assumes the residual value risk. With operational leasing, the shipping company can be to do negotiation of the discounts especially with the suppliers. Additionally, operational leasing ensures that the mobility of the employees is guaranteed. Other advantages include; only the VAT is paid on depreciation, the operational leasing company can give the shipping company the knowledge and the know-how hence facilitating effective and efficient management, the operational company assumes the risks of the repair, residual value and the maintenance, and provides an improved ROA (Return on Asset) without capital budgeting constraint (Lamb, Nobes & Roberts, 1998) Disadvantages of Operational Leasing The ownership retention from the part of the lessor in the operational leasing brings in the potential dangers. For instance, supposing that there is a claim from the third party for the damages or even the environmental pollution, the financier can be exposed to the common and statutory law liabilities that can arise from that claim. Additionally, the shipping company being the legal operator of the asset, the lessee can involve it in the liabilities that can rank in the priority over the ownership claim of the lessor, like the maritime liens. The acquisition of the operational lease expense can be quite cumbersome and complex to calculate. In the event, that the shipping company makes a mistake, this can result in the misstatement making the auditors give a modified audit opinion. Additionally, with the operating lease the shipping company might lose the tax advantages. For instance, equipment can be written off to the zero tax basis. The operating lease do not allow the shipping company to benefit because the lease payments are taken as the expenses. Advantages of Financial Leases In the shipping industry, a financial leasing is known as the bareboat charter (Davis, 2005). Financial leases has the following advantages; Financial leases offer fixed rate financing and thus the shipping company can pay the same amount of the rates monthly. Additionally, in terms of the inflation, the financial lease is inflation friendly (San Miguel, Shank & Summers, 2008). For instance, in the event that the costs increase over the years, the shipping company can still pay the same amount of rates as when they began the lease. Financial leases in ship finance can be used to expand production. It is used to enhance the production capacity while at the same time allowing the companies use the up-to-date equipment without having to face the risk of the purchasing. Tax is an important economic factor in the international transactions and the maritime sector as well. With the financial leases, it enhances the employment and expansion of the investments. The essence of the financial leases is to allow the lessor of the equipment/asset a tax deferral through the utilisations of the capital allowances that is passed to the lessee in the form of the reduced funding costs (San Miguel, Shank & Summers, 2008). In fact, the lessor (ship owner) can, eventually become the legal owner and thereby benefiting from the tax depreciation. Though many lessees avoid the financial leases owing to the balance sheet effect, when financial lease is used in the ship finance, the company can purchase the property, the acquisition costs of the purchased property become an asset and the mortgage becomes the liability. The financial lease is almost similar to purchase because it effectively captures the property ownership but employs 100% financing (Grammenos & Papapostolou, 2012). Despite its detrimental effect on the balance sheet, the financial lease conserves cash up front. The financial leases allow 100% financing. The leased asset/equipment can be used as the main/primary guarantee in the financial leases. Additionally, the financial leases have an advantage in that the monthly or annual payments are usually inclusive of the maintenance, miscellaneous and the insurance expenses (Drewry & Jupe, 2001). This is an advantage to the shipping company (lessee). Other advantages of the financial leases include; the proportionality of the instalments (leasing) with the lessee’s cash flows, the financial leasing usually retains the credit limits that is appropriated for the lessee, it promotes the consistent development of the productive assets, it helps in the financial planning, financial leases allows flexibility in terms of payments, it provides the new financing alternatives, and it provides the possibility of the fixed payments (Drewry & Jupe, 2001). In the financial lease, the majority of the rewards and risks of the ownership usually rests on the charterer. The owner is just the risk financier. Charter usually hire repays the lessor’s cost of the acquisition of the asset plus the interest (Stokes, 1992). All of the operating responsibilities falls on the lessee and accordingly the lessor usually has little to do with the leased asset. Additionally, the most complex form of the financial leasing is the tax based leases. In some government jurisdictions, the governments encourage investment through the provision of the tax incentives like tax credits or accelerated depreciation. This schemes allows the lessees with the large profits; hence, obtaining the tax relief i.e. they pay lower tax bills on the assets (Stokes, 1992). Similar merits can then be transferred on to the lessee by the way of the lower charter hire. Disadvantages of Financial Lease In the calculation of the present value of the future payments by the lessee of the financial lease, the value is reported both as a liability and an asset on the lessee’s balance sheet, in this case the ship owner. The lessee’s net worth is clearly not impacted due to the equal values that offset each other. However, the presence of the additional liability on the financial statement (balance sheet) causes the lessee’s debt-to-equity ratio to increase tremendously (Douglas, 1985). This negative impression in the debt-to-equity ratio can be troublesome in the eyes of the regulator or the investor. This is a disadvantage especially in the ship finance. Financial lease possess the huge risk of the bankruptcy not only for the lessor, but also the lessee. In the financial leasing, the assets are usually leased at a relatively large value something that causes great uncertainties of the risk of the uncertainty (Lu Jing and Li, 2001). For instance, in the case of the international financial leasing for the ship finance, factors such as currency, politics, and the credit risks negatively impacts it. This makes the lessees susceptible to bankrupt. Another disadvantage of the financial lease is that of commitment to the property. Once a lease agreement has been reached, the lessee is generally committed to making the payments for the whole period even in the event that the lessee stops using the property (Lu Jing and Li, 2001). Most of the assets in the financial leases are neither non-cancellable nor impose a very stiff penalty in the case of the earlier termination. Additionally, the overall costs for the asset in the financial lease are higher as compared to the direct purchase of the asset. This is due to the rental payments that must compensate the lessor not only in the financing and acquisition, but also for the owner’s retained risk for the continuing ownership. Therefore, before deciding on the ship finance using a financial lease, thorough cash analysis is important in the estimation of the actual cost differential between purchasing and leasing (Amro, 2011). 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