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  • Writer's pictureMGMUS

What Does the Red Sea Crisis Have to Do With Your Receivables?

In today’s fluid risk landscape, the shipping industry is frequently reminded of the cost of doing business globally. The threat of damage and destruction to all ships, especially the frequently-targeted container ships and their cargoes, looms large and the downstream financial effects are still unfolding. As Houthi rebels persist in their attacks, these impacts should be brought to light.

The more obvious effects are the approximate 3,300 nautical miles over an additional 10 days or more transit time, which increases transit costs, ties up vessel fleet and equipment, and can wreak havoc on berth schedules at destination. Importantly, it affects the timing of collections, which is critical to managing cash flow. There are effects on shipping lines’ collections, receivables, and cash flow to consider. An often-underestimated impact is higher DSO* and uncertainty with forecasting cash flow. For some charges, the clock on shipping customers’ credit terms starts on the sail date from the origin port, and there is a standard number of days applied for most customers. Even if the number of days provided to customers for credit remains unchanged, we expect that the extended transit time will effectively delay payment by an equivalent number of days due to customers’ expectation to pay later.

As a result, DSO will take a hit to the tune of 10 or more days for shipments on the affected trades. This delayed cash flow may not be insubstantial given the number of bookings utilizing these trade lanes. For those customers whose credit terms begin on the date of container availability at destination, DSO will not be impacted from the longer transit. In this case, DSO may still look healthy even though collections are completed later. In either case, credit terms beginning at origin sail date or at destination arrival date, cash flow suffers.

*Days Sales Outstanding, a measure of the average number of days that it takes a company to collect payment after sale.


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