Micawber’s dilemma: Part one

Shipowners are in the default condition of the shipowning trade – no money.

This is the normal state of the business. An Ancient Greek shipowning proverb has it that occasional “years of fat cows” are interspersed with many more “years of thin cows”, and if we remember the Bible story of Joseph interpreting Pharoah’s dream, the thin cows eat the fat cows, and are still hungry. Joseph’s advice was to store up the surpluses from the years of fat cows, of course, but that is not what most shipowners actually do. They are much more likely to buy another ship or three.

Those who made like the foolish virgins, or like Pharoah without the benefit of Joseph’s excellent advice, and did not save up for the hard times, now have ships, but no money, and some of them have already departed the business, leaving their ships behind them, of course. Indeed, keeping in mind that the thin cows eat the fat cows, and are still hungry afterwards, we may be amongst the prudent virgins, or Pharoah after listening to Joseph, and have laid up reserves, perhaps in the form of investments outside shipping, and by now our ships have eaten those up anyway, and there is still no sign of anything to cheer us up.

Yes, it’s darkest before the dawn – but this isn’t anywhere near dawn yet! So what can we do to get by, whilst spending the smallest possible amount of cash?

So long as our cash operating costs are less – even by five dollars a day – than our time charter or time charter equivalent revenues, we are in Mr Micawber’s happy position – “ Income one pound, expenditure nineteen shillings and sixpence, result happiness!” If we are in Mr Micawber’s unhappy position, “Income one pound, expenditure one pound and sixpence, result misery!” then we need to get our cash operating cost down.

That’s obvious. But, sadly, few owners think about cutting their cash operating costs in a sensible way. Across the oceans of the world, ships are pottering around with their officers having their pay cut – and often being told this news in particularly thoughtless ways – and those officers are being told that whatever spares and stores they have indented for cannot be provided. Ship’s agents are getting chased for the cheapest possible terms and every item on the disbursement account is getting haggled over and disputed. “Why is there wharfage charged on the lube oil?” “Because it was supplied at the wharf” and so on, and on, and on. Basically, we react to running out of cash by telling people to write on both sides of the paper and use the stubs of their pencils, whilst de-motivating them as thoroughly as possible.

I suggest that one reason for this is that people don’t look carefully enough at where their costs arise. Oddly, this is particularly true of East Asian shipowners, who one might think would be the most alert to accounting issues.

There are broadly two schools of thought when it comes to the management accounting – not, repeat not, the financial accounting – of operating costs. There is the ‘traditional owners’ approach’ and there is the ‘shipmanagers’ approach’.

The traditional owner accounts for expenditure ‘per ship’, all right, but he does so by lumping things together in a pot with the ship’s name on. Things that don’t have a ship’s name on get called ‘overhead’, and the first rule of management accounting is that there ain’t no such thing as unallocated overhead.

The shipmanager deploys a better accounting package. He has to, because for him, cash flow is everything. To quote Mike Steele, when he was running Wallem, back around the time of the mid-80s recession, “It’s all about living on the float”. But the shipmanager is not interested in the true understanding of operating costs; they are not, ultimately, his costs. He is interested in making the numbers look small, when marketing, and in getting the cash in before it goes out, all the time. The nuts and bolts get counted, all right, but nobody looks at the piles they get put in.

There’s very little to suggest that either of these approaches has changed very much since the 1970s. This is perhaps because in our business we learn by ‘sitting next to Nelly’ – we learn on the job, by watching others, and where we do receive formal tuition in the mysteries of our craft, the tuition tends to regurgitate the same old stuff.

The founder of Unilever, Lord Leverhulme, famously said, “I know half my advertising isn’t working, I just don’t know which half.” How much of your operating cost is wasted? You don’t know. You know some of it is, but you don’t know which bits are.

You were surprised when I wrote “five dollars a day” not “fifty dollars a day, because you don’t know your operating costs to within five dollars, and you know that you don’t. Yes, I am going to come up with some practical advice to help you stay in business… you need to read the next installment.

Andrew Craig-Bennett

Andrew Craig-Bennett works for a well known Asian shipowner. Previous employers include Wallem, China Navigation, Charles Taylor Consulting and Swire Pacific Offshore. Andrew was also a columnist for Lloyd's List for a decade.


  1. “Basically, we react to running out of cash by telling people to write on both sides of the paper and use the stubs of their pencils, whilst de-motivating them as thoroughly as possible.”
    So far, so very sadly familiar. A lot of reactions to this crisis have been of the knee-jerk, fear-based type; falling back onto old assumptions rather than taking 5 minutes to stop, step back and think of the long-term. Everyone repeats the mantra “shipping is a cyclical business and things will come round again”. I’m a bit sceptical of this; yes, the industry will bounce back, in time, but with so many technological advances and disruptions, the industry that bounces back will be a very different one from before. The players who bounce back will be the ones who best anticipated these advances and disruptions.
    I look forward to the next instalment….

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