It’s no secret that the commercial maritime industry is facing several changing market conditions. There are whispers of pending economic headwinds, biomass resource challenges, and persistent inflation across the board.
Furthermore, as the Federal Reserve maintains its course of quantitative tightening by raising interest rates, the cost of borrowing continues to rise.
These impacts are having and may continue to have a large impact on your business. Implementing a strategic mindset and using best practice management tools will add value to your business and help you successfully navigate today’s and tomorrow’s challenges.
The Power of an Advisory Team
Many commercial fishing operations are owned by an individual or as a partnership. These are successful business models that are nimble and often provide the success that these enterprising individuals are striving for. A downside of these lean entities is that owners frequently lack the opportunity to seek multiple viewpoints or to brainstorm with other vested partners.
Over the past few years, a popular method among top-tier business owners has been to create an Advisory Board. This board allows owners to achieve the benefits of many expert viewpoints while maintaining their ownership structure.
An Advisory Board can be a structured or unstructured method for business owners to engage outside experts to discuss the subject business in detail. These boards can be comprised of spouses, bankers, accountants, lawyers, subject matter experts, or other professionals who can fill knowledge gaps in desired areas.
For the board, you want individuals who not only have experience but expertise (an individual focused on your industry and an expert in theirs). It should be noted that this board acts as an advisor only and the decisional power remains with the owner.
As you assemble your Advisory Board you want individuals who are competent in their field of expertise, are good listeners and critical thinkers, feel comfortable sharing their feedback, and have the capacity to take on this role.
Advisory Boards are most effective with the following guidelines:
- Consist of two to four members in addition to management.
- Establish, maintain, and re-evaluate strategic objectives to maintain board focus and deliver the most value to the owner.
- Review accurate and timely business financial reports.
- Set clear key performance indicators (KPIs) to quantify performance over time to achieve a specific objective.
The Advisory Boards that I have served on resulted in positive outcomes for the business owners. I have seen them used as opportunities to navigate challenging economic times (similar to what is currently being experienced in the fishing industry) and as opportunities to train new or younger partners by creating a space where they can learn best practices from business professionals such as bankers, accountants and lawyers.
These meetings are also an excellent way for heirs apparent to build their personal brand with the business professionals, extending the credibility established by the current owner over the years to the future owners of the company. Advisory Boards have also enabled owners to achieve purposeful results achieving greater satisfaction and often better performance.
Decision-Making with Financial Statements
Prior to starting a career in banking, I owned an agriculture business. This experience taught me that most business owners, myself included at the time, prepare their business financial reports mostly for tax and banking purposes. As a sole proprietor, preparing financial reports felt like an unnecessary expense that didn’t generate any revenue.
Business owners typically have a gut feeling about which activities are profitable and how the year is going. Practice can yield positive results; however, it can also allow problems to go unnoticed for too long.
Business financials consist of a Balance Sheet, an Income Statement, and a Cash Flow Statement. The Balance Sheet is a summation of all your financial decisions: the earnings you retained, the assets you purchased, and the funds you distributed for spending. The Income Statement, also known as a Profit and Loss or P&L, is a snapshot in time of the profitability of the operation for the period of the statement. Often you will see an Income Statement produced for the month, quarter, year-to-date, or year-end.
The Cash Flow Statement shows a summary of the amount of cash flowing into and out of your company. The statement is broken into three parts: Operating Activities—cash flow generated from the business operations, Investing Activities—cash flow from purchasing or selling assets (for example, permits, quota, or vessels) and Financing Activities—cash flow from financing (cash used paid to pay down debt or cash received from assumed debt).
These financial statements working together can provide business owners with important information to assist in decision-making. A critical part of using financial statements for decision-making is that the information needs to be accurate and timely.
Without a combination of accurate and timely financials, information loses its relevance and its power to assist in impactful and informed decisions. In the past decade, I have witnessed strategic business owners use financial statements to make better informed decisions which typically placed them in the top performance quartile amongst their peers.
Over the years, I have worked with borrowers who use their financial statements to look for meaningful ways to impact their business. Some examples I have seen include:
- Using financial statements to better understand their fixed and variable costs from operations and made quota lease decisions based on that knowledge, leading to stronger profitability for the operation.
- Using the cash flow statement to gain insights into the correlation between inventory and profitability. For example, a borrower I worked with discovered that his approach of processing and holding fish to sell later was deteriorating financial performance. The cash flow statement helped him account for all the associated costs of this approach and shed light on a persistent cash shortage.
I see many similarities between my experience in agriculture and commercial fishing. Both industries are capital-intensive and often there is little control over prices received from the processors (commodity pricing). Borrowing costs are projected to remain elevated above prior historical lows. Given these economic conditions, owners should consider the return of a capital investment weighted against the cost of borrowing. Through this lens, fishermen can grow in a sustainable manner, making capital investments into their businesses for their future growth and success.
Business risks continue to increase. To help navigate these risks, the use of Advisory Boards and decision-making informed by accurate and timely financial reports can greatly improve the future of your business, setting you up for success.
Bankers and other business professionals with expertise in this line of business are adept at looking over an operation and identifying potential areas of inefficiency and risk. You want to work with someone who understands your industry, who you can reach by phone, who understands the volatility of maritime, and who is committed to this industry.
The Peoples Bank Commercial Maritime Team will be at the Pacific Marine Expo at Booth 1221. Stop by to meet us and see how we can be of benefit to you and your operation.
Brett Cheney, based at the Peoples Bank Ballard Financial Center, is the Commercial Market Team Leader for King County. He has over a decade of financial services experience and specializes in lending to the maritime and commercial fishing industries.