A recent US port strike ended after a tense negotiation between dockworkers and shippers, stabilising the supply chain and avoiding long-term fall out. But the days of gridlock and uncertainty could have plunged the economy into potential disaster. Here, Andrew Diver, Head of Tax, offers advice to shipping companies on how to protect their finances from disruption.
The recent port strike in America around contract negotiations sparked fears of a nationwide supply chain bottleneck and the real possibility of a far-reaching ripple effect on retailers, manufacturers, and consumers and markets around the world.
Luckily, that scenario was averted. But the strike served as a reminder of the fragile nature of our global supply chain.
We have taken a look at what businesses in the logistics and shipping industries could do to protect themselves for the fallout of a repeat performance.
This could include building stronger relationships with suppliers, diversifying supply chains and partnerships, developing a risk management plan, strengthening contractual agreements and monitoring trends.
But from a financial point of view, these are the best ways to protect yourself:
- Strengthen cash flow management
Prolonged delays can tie up working capital in inventory or cause unexpected costs.
Companies should ensure that their liquidity is managed effectively, with sufficient reserves to absorb short-term disruptions. These reserves provide flexibility to cover unexpected costs such as increased shipping fees, expedited transportation, or higher inventory holding costs.
This can be done by forecasting cash flow more accurately, adjusting budgets to account for potential delays, and revisiting credit lines to ensure availability during critical times.
Shortening the collection cycle for receivables and negotiating extended payment terms with suppliers can improve cash flow too.
Equally, businesses can negotiate longer payment terms with suppliers to reduce cash outflows during disruption periods, giving them more flexibility to manage operational costs.
- Leverage technology and data analytics
From an accountancy viewpoint, integrating data analytics into financial reporting ensures that companies have a clearer view of where costs are rising.
This allows companies to make informed decisions about rerouting, resource allocation, or contractual negotiations.
- Insurance and financial protection
Insurance is an essential tool in managing risk. Shipping companies should explore specialised insurance products that cover supply chain disruptions.
Business interruption insurance, marine insurance, and supply chain risk insurance are all available to protect against losses from events such as port strikes.
From an accounting perspective, companies need to ensure they are fully aware of the extent of their coverage and regularly assess whether their insurance policies are adequate given their exposure to supply chain risks.
The premiums paid should be balanced against the financial losses that might be incurred in the event of a strike or similar disruption.