23.10.2024 | Tax

A recent US port strike ended last month after a tense negotiation between dockworkers and shippers, stabilising the supply chain and avoiding a long-term fallout. But the days of gridlock and uncertainty, which threw the shipping industry into turmoil, could have finally plunged the economy into potential disaster, with ripple effects worldwide. Here, Andrew Diver, Head of Tax at accountancy firm Beatons, offers advice to shipping companies on how to protect their finances from disruption.

The recent port strike in America followed long-simmering tensions between the International Longshoremen’s Association (ILA) and port operators, which boiled over when contract negotiations hit a wall.

The standoff led to a massive queue of ships waiting to unload their cargo, sparking fears of a nationwide supply chain bottleneck.

The situation grew dire as the strike stretched into its third day, with a growing queue of ships off the coast of major US ports and the real possibility of a far-reaching ripple effect on retailers, manufacturers, consumers and markets around the world. Fortunately, that scenario was averted.

But the strike has served as a reminder of the fragile nature of our global supply chain.

So what—if anything—can businesses in the logistics and shipping industries do to protect themselves from the consequences of a repeat performance?

Mitigating risk

While port strikes and other disruptions to supply chains can be hard to predict, companies can take steps to manage the risks associated with them.

From a business point of view, this might 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, there are also ways to protect yourself, including:

• Strengthen cash flow management

Cash flow management is one of the most critical areas for shipping companies during a supply chain disruption.

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.

In a nutshell

Careful financial planning, regular risk assessments, and robust cash management systems can help this industry to weather disruptions and maintain operational stability.

And, with the right approach, companies can protect their bottom line even in times of uncertainty.