Posted: March 24th, 2023
Budget and ISM Code
Budgeting is essential in every company because it enables the management to make better financial decisions by planning its revenue and expenses. This exercise is vital in my company, notably amidst plans to purchase a small fleet of ships for the proposed shipping division because it would help the team determine the viability of the project and assess whether enough resources are available to purchase the assets. Therefore, part one of this assignment focuses on budgeting, notably the information required about the vessel and its importance, details of typical costs included in the budget estimate of the daily operating expenses, and an explanation of how the company would monitor the costs during vessel management.
Main Information that Would be Needed about the Vessel and Importance of Each Factor
Purchasing a fleet of ships would require collecting numerous information about the vessel, such as the intended use. Different types of ships perform different functions; some carry cargo while others are designed to carry passengers. Moreover, some ships are designed to navigate international waters, and others make local trips only with varying navigation frequencies. Literature shows that operational requirements are essential to consider when building or purchasing a ship. It allows companies to purchase ships that meet their basic desired specifications such as deadweight, speed, range, capacity, stability, and freeboard (Ship design, construction, and operation, 2008). Therefore, it would be vital to gather information on the vessel’s intended use to ensure the company purchases the correct type of ship that matches its uses.
The second information that would be needed about the vessel would be safety standards and capabilities. Before purchasing a fleet of ships, the company should assess the asset to ensure it has updated and working safety features to protect crew members and sail without mishaps. The team should also research the vessels’ safety ratings to decide the best fleet to purchase.
Besides use and safety standards, the team should also gather information about the vessel’s carrying capacity and fuel consumption. The ship’s carrying capacity may be measured in tonnage, which is vital in assessing the commercial shipping fee. In this context, evaluating the tonnage would help the team determine ships with an adequate carrying capacity to transport the iron ore over specific routes. The team should also consider the size of container shipping, which is vital in promoting economies of scale by lowering operating costs.
Typical Costs Included in a Budget Estimate of the Daily Operating Costs
Operating costs are an essential component of the company’s budget estimate because they enable the management to assess its costs and asset management efficiency. As the literature shows, the operating costs consist of fees required to manufacture and deliver a product. The operating costs can be divided into manufacturing and general expenses, which are further subdivided into other categories such as direct, fixed, administrative, marketing, distribution and selling, research and development, and financial interests (Dimian et al., 2014). In the target company’s context, operating costs would consist of the general day-to-day expenses associated with purchasing, running, and maintaining the purchased fleet of shipping vessels. Some of the costs that would be included in the budget estimate are crew wages and travel, ships management fees, lubricants costs, spare parts, drydocking fees, hull and machinery and protection and indemnity (P&I) insurance premiums, maintenance and repairs, and certification costs (Greiner & Stephens 2011). These costs, such as insurance premiums, may vary from one shipping vessel to another while others are constant for each ship.
The identified daily operating costs would be categorized differently and vary in the cost range. For example, crew wages and travel would be classified as administrative expenses. This operating cost would range between $2,000 to $4,000 depending on a crew’s job specification. The crew wages and travel may also be valued on a voyage, hourly or monthly basis depending on the company’s policy.
The other cost in the budget estimate would be ship management fees, grouped as an administrative expense. This cost may fall into three categories; fixed, operating, and voyage costs (Ship management costs 2021). The focus of the budget estimate would be the operating cost which consists of crewing, maintenance, repairs, spare parts, docking fees, hull and machinery, administration, and P&I insurance expenditure. The ship management fees would range between $10,000 to $15,000 per ship, depending on the type of ship.
How to Monitor the Costs During the Management of the Vessel
Besides estimating operating costs, it is vital to monitor these expenses to help the company gain an accurate performance view and identify spending issues. One of the firm’s strategies to monitor these costs is through instant financial reconciliation. The management can gather, match and categorize some of the identified day-to-day costs and determine the spending pattern in some of these operating costs components. Financial reconciliation also entails comparing two or more records to check the consistency. This strategy would help the firm identify differences in financial records and take appropriate measures to ensure proper financial harmonization. Essentially, there are several benefits associated with using this approach to monitor the company’s operating costs. Financial reconciliation enables the management to identify and highlight negative financials and discover any fraudulent financial activities. Nevertheless, this tool may also be prone to risks such as potential financial sabotage by employees in charge of the accounts.
The other strategy that the firm may use to monitor costs is by integrating management and accounting software in everyday business activities. This software would enable the firm to seamlessly assess its financial spending and avoid errors from human labour reliance. This monitoring tool would have pros and cons in budget monitoring, like financial reconciliation. For example, Dauda (2021) notes that some of the advantages of this financial tool would include minimized errors due to reliance on technology, enhanced integration, accounting process automation, and information security. However, this tool may also have multiple disadvantages, such as costliness associated with acquiring and maintaining accounting software, the cost of training employees to use the software, lack of data security, and potential technological errors. Therefore, the management should take the necessary steps to mitigate the cons to facilitate effective cost management.
A cost control sheet may also be used to monitor the ship’s operating costs. This tool contains a time plan for each cost component and allocation of cost adjustments as they occur. The company could easily use this tool to monitor its operating costs by comparing the estimated and actual costs and determining the variations. The cost control sheet would be necessary, especially in monitoring overspending and reducing or increasing expenditure in essential components to balance the budget estimate. Benjaoran, Kaewsikhoa, and Tabyang (2012) also note that an entity can take corrective actions to address cost overruns identified in the cost control sheet. Therefore, the sheet would be an ideal tool for identifying flags in the estimated and actual budgeting and informing appropriate preventive and corrective actions.
The cost control sheet has some strengths and weaknesses. On the one hand, the cost control sheet promotes concise reporting. Most notably, the management can easily create and monitor the operating budget because the costs are constantly updated during the period of the vessel’s management and compared against the estimated budget. This tool is also advantageous because it helps to flag financial troubles and promotes appropriate corrective actions. Moreover, the cost control sheet allows progressive billings, implying that the management can monitor different operating costs over a long duration. On the other hand, this tool can be daunting and complex to create and interpret where numerous data is involved. Therefore, the management should complement the strategy with other tools such as graphs that allow practical interpretation and multiple data comparisons.
International Safety Management (ISM) Code
The Key Requirements and Implications of the ISM Code in Terms of the Ship(s) and Company
The second part of this assignment focuses on the ISM Code as it applies to water vessels and shipping companies. According to Mbong and Bygvraa (2021), the ISM code is an international regulatory framework that establishes standards for safe shipping operations and mitigates water pollution. This code is accepted globally and governs the maritime industry, including shipping companies and ship owners. Mbong and Bygvraa (2021) add that the code requires the maritime industries to implement a safety management system to promote effective management practices to prevent shipping accidents. To comply with this regulatory framework, the company must understand and implement the required safety management system.
Requirements in Terms of the Ship(s) and their Implication
The ISM code has several requirements, some of which apply to ships while others govern the shipping company or the shipowner. One of the requirements in terms of the vessel is the maintenance of the ship and equipment (ISM-Code International Safety Management Code). This provision requires adequate ship inspection at appropriate intervals and non-conformity reporting with the potential cause. According to this provision, each vessel should be inspected appropriately to meet the technical requirements as frequently as possible. The management should also examine the ship’s equipment and ensure they are in good condition. If the vessel does not meet this requirement, the company should report the non-conformity and possible causes. The code implies that the company should establish and implement policies and regulations to ensure the fleet of ships is well-maintained according to the applicable rules and regulations.
The other ISM requirement that applies to ships is shipboard operations. This code requires the shipping company to establish appropriate procedures for addressing safety and pollution prevention (ISM-Code International Safety Management Code). Most importantly, this clause requires ships to have a safety management system (SMS) that contains safety and environmental protection policy, instructions and procedures set to ensure vessels operate safely and prevent environmental pollution, procedures for reporting accidents, and preparedness and response to emergencies (ISM-Code International Safety Management Code). This provision implies that the shipping company should develop a checklist of all the preparation plans needed to maintain the ships’ safety and mitigate pollution and assign a qualified crew member to oversee the implementation of each checklist. However, there are a few limitations to this code. Most notably, the company’s primary goal is profit maximization; therefore, the management is likely to overlook some essential pollution aspects in pursuance of reduced operating costs and revenue maximization.
Besides shipboard operations, the emergency preparedness clause also governs operations within the fleet of ships. According to this clause, a firm should recognize potential emergency shipboard situations and develop procedures to respond appropriately (ISM-Code International Safety Management Code). The code also requires the shipping company to establish drills and exercises programmes to prepare for emergency actions and ensure it can react to hazards, accidents, and other ship-related accidents timely (ISM-Code International Safety Management Code). This code implies that the shipping company must have an emergency preparedness policy outlining the procedures that should be taken to respond to emergencies such as accidents and other hazards. While this code is vital, the company may experience challenges implementing the code during the first few years of operation due to limited knowledge of all relevant procedures included in the code.
Requirements in Terms of the Company and their Implication
Apart from the requirements addressing ships’ management, some provisions govern the shipping company’s management. One such clause is clause 3 of the ISM code, which addresses company responsibilities and authority. This clause requires shipping companies to report their details, including the full name and other entity details to the State government whose flag is flown by ship (ISM-Code International Safety Management Code). Shipping companies are also required to document each personnel’s responsibility, authority, and interrelation, ensure responsible resource planning and provide adequate resources for designated personnel to undertake their functions effectively. These requirements imply that the company must have a competent managerial and human resource management team to oversee resource allocation and human resource management. For example, the company should create a chart documenting the ship’s crew members and their functions, such as the sailors, ship operators, the maintenance crew, and those that load and unload cargo. Arguably, this requirement would promote accountability and transparency in the shipping division because each crew member understands their role on the vessel.
Furthermore, clauses 4 and 5 of the ISM code also contain the shipping company’s requirements. Most notably, clause 4 addresses designated person(s) while clause 5 focuses on the master’s responsibility and authority. According to the ISM code, shipping companies should appoint personnel ashore with direct access to the highest management level and the shipping crew to monitor the vessels’ pollution and safety aspects and ensure the ships have an adequate supply of resources and shore-based support (ISM-Code International Safety Management Code). Clause 5 also requires the shipping firm to define and document the master’s responsibility which includes implementing environmental protection and safety policies, motivating the crew to comply with the policy, ensuring all requirements are observed, reviewing the SMS periodically, reporting deficiencies, and issuing orders in a simple, clear and appropriate manner (ISM-Code International Safety Management Code). Essentially, the company is required to have qualified personnel to manage activities on the vessel and ensure the ship complies with the ISM objectives. These requirements imply that the shipping company should have a team of qualified individuals onshore and offshore to monitor the ships’ compliance with the ISM code and ensure the required resources are disbursed to the shipping crew to facilitate smooth operations.
The other requirement that governs the shipping company is clause 12, which addresses company verification review and evaluation. This clause requires the shipping company to conduct internal audits to verify compliance with safety and pollution standards and implement correction actions according to documented procedures (ISM-Code International Safety Management Code). This section also requires the company to ensure the personnel undertaking the audits is independent, presents audit results to all personnel with responsibilities in different departments, and encourages the management personnel to take timely action to correct deficiencies found in their areas (ISM-Code International Safety Management Code). This requirement implies that the shipping company must establish an internal independent audit board to audit its various areas of operations and ensure corrective measures are adopted to address any deficiencies.
Appraisal of Effectiveness
Since the enforcement of the ISM code, there have been numerous discussions on whether this framework has effectively achieved its aims. While some studies conducted in the past argue ISM’s inability to meet its purposes, it is evident from industrial analysis that the code achieves its ambitions to a large extent. For example, Pantouvakis and Karakasnaki (2016) note that the code’s effectiveness has two dimensions; continuous improvement and customer satisfaction focus. Several amendments have been made to the ISM code over the last few years to enhance maritime safety and promote pollution prevention. Moreover, some of the sections within the code foster communication between management and the seafarers, thus increasing customer satisfaction with shipping services. Besides these two dimensions, the effectiveness of the ISM is evidenced by reduced maritime accidents. Pantouvakis and Karakasnaki (2016) note that since the enforcement of the ISM code, human-induced shipping accidents have decreased significantly, probably because of continuous improvement efforts in ships following periodic audits. Nevertheless, there remain concerns over cases of severe accidents and poor relationships between seafarers and managers due to lack of trust. Therefore, while the ISM code has effectively met some of its objectives, continuous improvements are required to enhance some of the areas facing deficiencies.
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