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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 of
shipbuilding 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 of
favourable future returns.
In the shipyard context investment can be divided into business investment and project
investment.
Business investment
Business investment is the investment that is used for starting the business such as
purchasing of property, production machineries and equipment, building shipyard facilities
Figure 9.1 The roles of finance
FINANCE
MATERIALS
INVESTMENT
MARKETING
ADMINISTRATION
FACILITIES
HUMAN
RESOURCES

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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 the
human 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 certain
project in this case is shipbuilding, especially for starting up of the project, which
sometimes 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 ensure
its smooth operation shipyard has to make effort for the availability of ship materials. To
realise the effort the role of finance is very much needed.
Materials should be available prior to the start up of the production processes, therefore they
have to be ordered and purchased in advance, and during the ship production process the flow
of materials should be well maintained. To support this shipyard has to plan its financial flow
and control its budget carefully.
c) Marketing
The Chartered Institute of Marketing defines marketing as 'The management process
responsible for identifying, anticipating and satisfying customer requirements profitably'.
Marketing requires co-ordination, planning, implementation of campaigns and a competent
manager(s) with the appropriate skills to ensure success. Therefore in order to achieve its
goals marketing needs sufficient financial allocation from the organisation.
For a shipyard marketing include identifying the market trend for ships, approaching the
potential 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 internally
as 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 sufficient
facilities and finance to run the activities.

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


electrodes, lubrication etc. For preventive and also breakdown maintenance, and also
covering the cost of depreciation.
f) Human resources
The role of finance in human resources mainly for the payment of wages, but also for the
provision of training, safety, health, and welfare.

9.3 BUDGETING
A budget is generally a list of all planned expenses and revenues.
In the shipyard context it can be refer to the financial plans
consists of estimation of all direct and indirect expenses of shipbuilding projects, and the
predicted revenues that will be received from the projects being

Traditionally the budgeting task is compiled by the Finance Department.
the introduction of a number of contemporary software tools, numerous people in different
departments can contribute their anticipated
budget, prior to the completion of its final planning.








a) Estimating theexpenditure

Expenditure is an outflow of money
is a cost that is "paid" or "remitted", usually in exchange for something of value.
In the context of production process
and indirect expenditure.
Direct expenditure
Direct expenditure is the expense that can
specific product or performing one particular service.

Examples of direct expenditure
the labour costs associated with the work performed.



REVENUE
For preventive and also breakdown maintenance, and also
covering the cost of depreciation.
n human resources mainly for the payment of wages, but also for the
health, and welfare.
is generally a list of all planned expenses and revenues.
In the shipyard context it can be refer to the financial plans made on a
consists of estimation of all direct and indirect expenses of shipbuilding projects, and the
predicted revenues that will be received from the projects being carried out.
Traditionally the budgeting task is compiled by the Finance Department. At present, owing to
the introduction of a number of contemporary software tools, numerous people in different
departments can contribute their anticipated expenses and income figures to the corporate
budget, prior to the completion of its final planning.
expenditure
money to pay for an item or service, or for a category of costs, it
is a cost that is "paid" or "remitted", usually in exchange for something of value.
n the context of production process expenditure can be categorised into direct
is the expense that can be traced directly to or identified with making of a
specific product or performing one particular service.
expenditure would include: the raw materials used to build the ship, and
r costs associated with the work performed.
EXPENDITURE
+
Figure 9.2 Budgeting
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For preventive and also breakdown maintenance, and also for
n human resources mainly for the payment of wages, but also for the
made on an annual basis. It
consists of estimation of all direct and indirect expenses of shipbuilding projects, and the
out.
At present, owing to
the introduction of a number of contemporary software tools, numerous people in different
igures to the corporate
pay for an item or service, or for a category of costs, it
is a cost that is "paid" or "remitted", usually in exchange for something of value.
can be categorised into direct expenditure
be traced directly to or identified with making of a
the raw materials used to build the ship, and
BUDGET

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Indirect expenditure
Indirect expenditure is the expense that spends on the general activities and not on direct
product or direct labour costs. It is sometimes also called overhead cost.
Examples of indirect expenditure would include: sales activities, research and development
activities, 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 of
capital 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. After
being 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 be
explained as follows:
Investment revenues
Investment revenue is the amount earned from the money invested on the business. The rate
of the investment revenue is known as return on investment (ROI) that is the amount of
revenue 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 total
payment of the ship been built, and if it is repair or maintenance work the income is the
payment 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 out
a 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 or
members. Financial institution can take a form of commercial bank, trading bank, investment
bank, project financer etc.
Certain percentage of interest is charged for funds borrowed from a financial institution
dependent on the scheme applied.
The time period for borrowing the funds also vary ranging from short term (less than three
years) 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 or
preferential), and investments in limited partnerships.
When the firm is just started the number of investors are usually limited and the amount of
share being invested is usually high, but when the firm has grown and become public
company, the shares are sold in the stock market and public at large can take part in it by
purchasing the shares.
To provide evident of its accountability the company has to publish its audited financial
statement annually to public.
c) Loans and grants
The needs of finance for a shipyard either for investment or running a project may also come
via 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 with
interest, at some future point (s) in time. Usually, there is a predetermined time for repaying a
loan, 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 interest
rates and long term payment scheme is the most applicable. For working capital sometimes
comercial 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 other
organisation for special purposes to an eligible recipient. Grants are usually conditional upon
certain qualifications as to the use, and maintenance of specific standards.

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

- International organisations
Grant from international organisation usually comes through the channel of central
government, because usually the grant is awarded under the collaboration umbrella of
the international organisation and the central government, and the central government
that distributes the fund.
Most of the grants awarded by the international organisation are for the projects that
have social and political purposes.

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Examples of these international financial organisations are: the World Bank, Asia
Development Bank, Islamic Development Bank, and other international foundations.
- Central government
Grant from central government is usually allocated to the projects that have national
impacts, or to be used nationally by the central government. Examples of such project
are: building of navy vessels, building of oceanography vessels etc.
- Local government
Grant from local government is usually awarded to the local organisation to carry out
projects for the purpose of the local government. Examples of this grant are: grant for
building pioneer inter islands ferry by provincial government, building a river
ambulance etc.

9.5 EXPENDITURE
Expenditure is an outflow of money to pay for goods or service. For a shipyard the
expenditure it has to pay would cover: the materials and ship equipment being bought, the
wages of the human resources, the operation of the facilities, and the services it obtains from
other parties.
a. Materials
Materials for shipbuilding and ship equipment are purchased by the shipyard from steel mill
and manufacturers or from certain distributors.
For the materials and equipment imported from abroad shipyard usually has to open a letter
of credit or LC to a bank that is the source of repayment of the transaction (meaning that the
exporter will get paid with the redemption of the letter of credit) before ordering them from
the manufacturers. In this case that means the shipyard has to pay in advance for the goods it
purchases, unless it has very good relationship that the payment can be paid upon the
reception 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 has
been loaded on board; and cost, insurance and freight (CIF), a term indicating that price
includes cost, insurance and freight.
For materials and equipment bought locally various payment schemes could be applied
dependent on the type and quantity of the goods being bought, and the agreement has been
set. In order to obtain the maximum benefit from the payment scheme shipyard has to
consider well all the possibilities and their consequences.
b. Labour
Labour means all the human resources involves in the operation of the shipyard including the
sub-contractors. Therefore labour expenditure can be defined mainly as wages paid to
workers during an accounting period on daily, weekly, monthly, or job basis, plus payroll and
related taxes and benefits. But there are some other expenditure related to the human
resources such as the costs of training and welfare.



ORGANISE
REVIEW
DEFINE
Workers wages can be paid in many ways dependent on
reasons, and level of hierarchical po

In modern countries usually the wages are paid through bank services, but in
countries for the middle up level i.e. supervisor to managerial level their wages are usually
paid to their bank account monthly
paid weekly in cash.

Wages of the sub-contractors workers are paid by the individual sub
system, and the shipyard pays

c. Facilities
Facilities are the machineries, equipment, and consumable supplies that are use by the
shipyard to undertake its operation.
The expenditure paid by the shipyard for the facilities being used would cover
the electricity, gas, fresh water, fuel, and other consumable goods; the maintenance of
machineries, equipment, and buildings; the depreciation of the machineries, equipment, and
buildings.
d. Services
Service is an intangible activity performed by individuals or organisation. There
ranges of services delivered to a shipyard both directly and non
production processes such as financial and management audits
legal assistances, training and workshops etc.
The expenditures for services are usually paid as per activity or job basis

9.6 COST CONTROL
Cost control is a method to monitor, evaluate, and ultimately enhance the efficiency of
expenditures in specific areas, such as departments, divisions, or product lines, within their
operations.
Cost control is the measuring step of the financial aspect in the management system.








Figure 9.3 Cost control
ORGANISE
IMPLEMENT
MEASURE
Workers wages can be paid in many ways dependent on the practicalities, custom, security
hierarchical position in the shipyards organisation structure.
modern countries usually the wages are paid through bank services, but in
up level i.e. supervisor to managerial level their wages are usually
monthly via bank remittance, and for the lower level the wages are
contractors workers are paid by the individual sub-contractor using its own
system, and the shipyard pays in bulk as stated in the contract agreement.
Facilities are the machineries, equipment, and consumable supplies that are use by the
shipyard to undertake its operation.
by the shipyard for the facilities being used would cover
the electricity, gas, fresh water, fuel, and other consumable goods; the maintenance of
machineries, equipment, and buildings; the depreciation of the machineries, equipment, and
Service is an intangible activity performed by individuals or organisation. There
of services delivered to a shipyard both directly and non-directly related to the
production processes such as financial and management audits, inspections,
assistances, training and workshops etc.
The expenditures for services are usually paid as per activity or job basis.
Cost control is a method to monitor, evaluate, and ultimately enhance the efficiency of
expenditures in specific areas, such as departments, divisions, or product lines, within their
Cost control is the measuring step of the financial aspect in the management system.
COST
CONTROL
Figure 9.3 Cost control
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the practicalities, custom, security
sition in the shipyards organisation structure.
modern countries usually the wages are paid through bank services, but in particular
up level i.e. supervisor to managerial level their wages are usually
, and for the lower level the wages are
ontractor using its own
Facilities are the machineries, equipment, and consumable supplies that are use by the
by the shipyard for the facilities being used would cover the payment of
the electricity, gas, fresh water, fuel, and other consumable goods; the maintenance of
machineries, equipment, and buildings; the depreciation of the machineries, equipment, and
Service is an intangible activity performed by individuals or organisation. There are wide
directly related to the
, inspections, accreditation,
Cost control is a method to monitor, evaluate, and ultimately enhance the efficiency of
expenditures in specific areas, such as departments, divisions, or product lines, within their
Cost control is the measuring step of the financial aspect in the management system.

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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 related
to the financial aspect of the shipyard can be focussed toward producing the ships in
accordance 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 be
taken 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 unit
of production. Fixed costs, on the other hand, are incurred only once and as additional units
of 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 item
involves in the production process any variance from the budgeted
costs can be easily identified. This is done via good cost recording
system.
Step 2 Diagnose: If variance is identified investigation should be immediately carried out
to ascertain the cause of the variance.
Step 3 Correction: When the cause of variance has been identified then proper action can
be undertake to solve the problem and keep the rest of the costs to
within 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 as
financial 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, the
wages of the human resources, the operation of the facilities, and the services it obtains
from other parties.

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

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