Shipping, being 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, the consulting firm explains.
“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,” Moore Stephens said.
The firm attributes this to the fact that 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.
As a result, the actual day-to-day operation of what is effectively the middle and back offices of shipping companies ends up 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,” Moore Stephens adds.
Hence, it is essential for shipping companies to have robust and routinely audited systems in place to ensure that risks are managed appropriately.