9 management and control of finance

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9 MANAGEMENT AND CONTROL OF FINANCES

9.1 AIMS OF THE LECTURE

a) To outline the role of finance to a shipyard.

b) To explore various financial aspects in a shipyard operation.

c) To examine methods of controlling costs.

9.2 THE ROLE OF FINANCE TO A SHIPYARD

The operational activities of a shipyard are very much dependent on the availability of its

financial long term support. This is mainly due to the fundamental characteristics ofshipbuilding industry which is labour intensive and slow yielding business.

Finance plays important role to a shipyard at least in the following six sectors: investment,materials, marketing, administration, facilities, and wages.

a) Investment

Investment can be defined as putting a certain amount of money to purchase of capital goods goods which are not consumed but instead used in future production, with an expectation offavourable future returns.

In the shipyard context investment can be divided into business investment and projectinvestment.

Business investment

Business investment is the investment that is used for starting the business such aspurchasing of property, production machineries and equipment, building shipyard facilities

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etc; or expanding and modernising the industry such as renewing the production facilities,implementing new production systems, providing training and updating the skills of thehuman resources, and even purchasing new property.

Typical characteristics of business investment are that the payback period of the

investment is taking rather long (ten to twenty years). Project investment

Project investment is the investment that is used particularly for carrying out a certainproject in this case is shipbuilding, especially for starting up of the project, whichsometimes needs a reasonable amount of working capital.

The payback period on the investment of the project can be expected in a shorter of time(one to three years) depending on how long is the project last.

b) Materials

Shipbuilding relies very much on the availability of the materials, therefore in order to ensureits smooth operation shipyard has to make effort for the availability of ship materials. Torealise the effort the role of finance is very much needed.

Materials should be available prior to the start up of the production processes, therefore theyhave to be ordered and purchased in advance, and during the ship production process the flowof materials should be well maintained. To support this shipyard has to plan its financial flowand control its budget carefully.

c) Marketing

The Chartered Institute of Marketing defines marketing as 'The management processresponsible for identifying, anticipating and satisfying customer requirements profitably' .

Marketing requires co-ordination, planning, implementation of campaigns and a competentmanager(s) with the appropriate skills to ensure success. Therefore in order to achieve itsgoals marketing needs sufficient financial allocation from the organisation.

For a shipyard marketing include identifying the market trend for ships, approaching thepotential customers, promotion through various means etc.

d) Adminstration

Administration is activities involved in managing a business, organisation, or institution.Administration deals with most of the management aspect of the organisation both internallyas well as externally, and acts as the supporting unit to all other sectors of the organisation.

As complementary to the production administration requires capable staff, and sufficientfacilities and finance to run the activities.

e) Facilities

Finance is needed for the operation and maintenance of the facilities. For the payment of theconsumption of energy and other consumable supplies such as electricity, fuel, gas, water,


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electrodes, lubrication etc. Fcovering the cost of depreciat

f) Human resources

The role of finance in humaprovision of training, safety,

9.3 BUDGETING

A budget is generally a list of

In the shipyard context it caconsists of estimation of allpredicted revenues that will b

Traditionally the budgeting tathe introduction of a numberdepartments can contribute tbudget, prior to the completio

a) Estimating theexpenditu

Expenditure is an outflow ofis a cost that is "paid" or "rem

In the context of productionand indirect expenditure.

Direct expenditure

Direct expenditure is the expspecific product or performin

Examples of direct expendituthe labour costs associated wi

or preventive and also breakdown maintenon.

resources mainly for the payment of wagealth, and welfare.

all planned expenses and revenues.

n be refer to the financial plans made ondirect and indirect expenses of shipbuildin

received from the projects being carried ou

sk is compiled by the Finance Department.of contemporary software tools, numerous

heir anticipated expenses and income figurn of its final planning.

e

oney to pay for an item or service, or for aitted", usually in exchange for something of

process expenditure can be categorised into

nse that can be traced directly to or identifieone particular service.

re would include: the raw materials used toth the work performed.

.

ance, and also for

s, but also for the

an annual basis. Itg projects, and the.

t present, owing topeople in differents to the corporate

ategory of costs, italue.

direct expenditure

d with making of a

build the ship, and


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Indirect expenditure

Indirect expenditure is the expense that spends on the general activities and not on directproduct or direct labour costs. It is sometimes also called overhead cost.

Examples of indirect expenditure would include: sales activities, research and developmentactivities, administrative activities, depreciation, setup activities etc.

b) Predicting the revenues

Revenue is the total amount generated from sale of goods or services, or any other use ofcapital or assets, associated with the main operation of firm during a certain period of time,before any costs or expenses are deducted. Sometimes it also called gross income. Afterbeing subtracted by charges, costs, and expenses it will arrive at net income.

The revenues can be divided into investment revenue and project revenue, which can beexplained as follows:

Investment revenues

Investment revenue is the amount earned from the money invested on the business. The rateof the investment revenue is known as return on investment (ROI) that is the amount ofrevenue divided by the amount invested.

Project revenues

Project revenue is the revenue generated from the particular project has been carried out.

In a shipyard context if the project is a new building that is the income earned from the totalpayment of the ship been built, and if it is repair or maintenance work the income is thepayment of service been delivered, and parts been sold.

9.4 SOURCES OF FUNDS

To meet the needs of finance for a shipyard either for investment purposes or for carrying outa shipbuilding project can be obtained from several sources include financial institutions,investment fund via share issues, and loans and grants from central or local government.

a) Financial institutions

Financial institution is an institution that provides financial services to its clients ormembers. Financial institution can take a form of commercial bank, trading bank, investmentbank, project financer etc.

Certain percentage of interest is charged for funds borrowed from a financial institutiondependent on the scheme applied.

The time period for borrowing the funds also vary ranging from short term (less than threeyears) to long term (fifteen to twenty years).


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b) Investment fund via share issues

Share is a unit of account for various financial instruments including stocks (ordinary orpreferential), and investments in limited partnerships.

When the firm is just started the number of investors are usually limited and the amount ofshare being invested is usually high, but when the firm has grown and become publiccompany, the shares are sold in the stock market and public at large can take part in it bypurchasing the shares.

To provide evident of its accountability the company has to publish its audited financialstatement annually to public.

c) Loans and grants

The needs of finance for a shipyard either for investment or running a project may also comevia loans or grants.

Loans

Loan is defined as an arrangement in which a lender gives money or property to a borrower,and the borrower agrees to return the property or repay the money, usually along withinterest, at some future point (s) in time. Usually, there is a predetermined time for repaying aloan, and generally the lender has to bear the risk that the borrower may not repay a loan.

Since shipyard is a slow yielding business therefore for investment soft loan with low interestrates and long term payment scheme is the most applicable. For working capital sometimescomercial loan is also acceptable.

Loans can came from government or financial institutions.

Grants

Grant is a bounty, contribution, or subsidy in cash or kind given by government or otherorganisation for special purposes to an eligible recipient. Grants are usually conditional uponcertain qualifications as to the use, and maintenance of specific standards.

Grant could be obtained from various sources such as international organisation, centralgovernment, and local government dependent on the characteristics and aims of the project tobe carried out.

- International organisations

Grant from international organisation usually comes through the channel of centralgovernment, because usually the grant is awarded under the collaboration umbrella ofthe international organisation and the central government, and the central governmentthat distributes the fund.

Most of the grants awarded by the international organisation are for the projects thathave social and political purposes.


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Examples of these international financial organisations are: the World Bank, AsiaDevelopment Bank, Islamic Development Bank, and other international foundations.

- Central government

Grant from central government is usually allocated to the projects that have nationalimpacts, or to be used nationally by the central government. Examples of such projectare: building of navy vessels, building of oceanography vessels etc.

- Local government

Grant from local government is usually awarded to the local organisation to carry outprojects for the purpose of the local government. Examples of this grant are: grant forbuilding pioneer inter islands ferry by provincial government, building a riverambulance etc.

9.5 EXPENDITURE

Expenditure is an outflow of money to pay for goods or service. For a shipyard theexpenditure it has to pay would cover: the materials and ship equipment being bought, thewages of the human resources, the operation of the facilities, and the services it obtains fromother parties.

a. Materials

Materials for shipbuilding and ship equipment are purchased by the shipyard from steel milland manufacturers or from certain distributors.

For the materials and equipment imported from abroad shipyard usually has to open a letterof credit or LC to a bank that is the source of repayment of the transaction (meaning that theexporter will get paid with the redemption of the letter of credit) before ordering them fromthe manufacturers. In this case that means the shipyard has to pay in advance for the goods itpurchases, unless it has very good relationship that the payment can be paid upon thereception of the goods. There are two ways of shipping the imported goods i.e. free on board(FOB), this means that the buyer is responsible for all the costs incurred after the cargo hasbeen loaded on board; and cost, insurance and freight (CIF), a term indicating that priceincludes cost, insurance and freight.

For materials and equipment bought locally various payment schemes could be applieddependent on the type and quantity of the goods being bought, and the agreement has beenset. In order to obtain the maximum benefit from the payment scheme shipyard has toconsider well all the possibilities and their consequences.

b. Labour

Labour means all the human resources involves in the operation of the shipyard including thesub-contractors. Therefore labour expenditure can be defined mainly as wages paid toworkers during an accounting period on daily, weekly, monthly, or job basis, plus payroll andrelated taxes and benefits. But there are some other expenditure related to the humanresources such as the costs of training and welfare.


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Workers wages can be paidreasons, and level of hierarchi

In modern countries usuallycountries for the middle up l

paid to their bank account mopaid weekly in cash.

Wages of the sub-contractorssystem, and the shipyard pays

c. Facilities

Facilities are the machinerishipyard to undertake its oper

The expenditure paid by the sthe electricity, gas, fresh wmachineries, equipment, andbuildings.

d. Services

Service is an intangible actiranges of services deliveredproduction processes such alegal assistances, training and

The expenditures for services

9.6 COST CONTROL

Cost control is a method toexpenditures in specific areasoperations.

Cost control is the measuring

in many ways dependent on the practicalitical position in the shipyards organisation st

the wages are paid through bank servicevel i.e. supervisor to managerial level thei

nthly via bank remittance, and for the lower

workers are paid by the individual sub-contin bulk as stated in the contract agreement.

s, equipment, and consumable supplies tation.

hipyard for the facilities being used would c ter, fuel, and other consumable goods; tbuildings; the depreciation of the machineri

ity performed by individuals or organisatito a shipyard both directly and non-direfinancial and management audits, inspect

workshops etc.

are usually paid as per activity or job basis.

monitor, evaluate, and ultimately enhanc, such as departments, divisions, or produc

step of the financial aspect in the manageme

.

s, custom, securityucture.

, but in particularwages are usually

level the wages are

actor using its own

at are use by the

ver the payment ofe maintenance ofes, equipment, and

n. There are widetly related to the

ions, accreditation,

the efficiency oflines, within their

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a) Why keeping track of spending and income?

Spending and income should be continuously monitored in order that all the activities relatedto the financial aspect of the shipyard can be focussed toward producing the ships inaccordance to the estimated budget.

By keeping tract of the spending and income any sign of deviation from the planned budget(especially the expenditure) can be identified quickly, so that appropriate action could betaken to bring back the financial flow on the right track.

b) Methods of controlling costs

Costs are divided into two types: variable costs, and fixed costs. Variable costs vary per unitof production. Fixed costs, on the other hand, are incurred only once and as additional unitsof production are produced, the unit costs fall.

Production costs can be controlled through the following steps:

Step Method Action

1 Investigative Detect variance of actual cost from budgeted costs

2 Diagnostic Ascertain the causes of variance

3 Corrective Realign the actual cost and the budgeted costs

Step 1 Investigate: Through continuously monitoring the costs being paid to every iteminvolves in the production process any variance from the budgetedcosts can be easily identified. This is done via good cost recordingsystem.

Step 2 Diagnose: If variance is identified investigation should be immediately carried outto ascertain the cause of the variance.

Step 3 Correction: When the cause of variance has been identified then proper action canbe undertake to solve the problem and keep the rest of the costs towithin the planned budget.

9.7 CONCLUDING REMARKS

a) The role of finance to a shipyard can be categorised into three main sectors i.e. investment,materials, and operation.

b) Budget is a list of all planned expenses and revenues.

Total cost = fixed cost + variable cost output


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c) Expenses can be categorised into direct expenses and indirect expenses.

d) The revenues can be divided into investment revenue and project revenue.

e) To meet the needs of finance a shipyard can obtain it from several sources such asfinancial institutions, share from investors, and grants from central or local government.

f) The shipyards expenditure would include:to pay for the materials and ship equipment, thewages of the human resources, the operation of the facilities, and the services it obtainsfrom other parties.

g) Cost control is a method to monitor, evaluate, and ultimately enhance the efficiency ofexpenditures in specific areas. It is the measuring step of the financial aspect inmanagement system.

h) Production costs can be controlled through investigative, diagnistic, and corectivemethods.

9 management and control of finance

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