Companies brace for Strait of Hormuz cost shock as accounting questions mount

A possible Strait of Hormuz cost spike is pushing companies to review their contracts as higher oil, freight, tariff, and supply chain costs raise accounting questions about revenue, receivables, inventory, and cash flow. 

When shipping, fuel and materials costs jump, businesses face a question that sounds simple but can be difficult to answer: Who pays? 

For companies with flexible contracts, the answer may be the customer. For companies locked into fixed prices, the added cost may cut directly into profit. And for finance teams, the issue does not end when an invoice goes out. 

Accountants say companies need to decide whether a surcharge can be booked as revenue, whether customers are likely to pay it, whether inventory is still worth what the company paid for it and whether once-profitable contracts have turned into money losers.

Contract language becomes a pressure point 

Many companies are taking a fresh look at force majeure clauses, the contract provisions that can let a business pause, change or renegotiate its obligations after major events outside its control. 

The clauses drew close attention during the COVID-19 pandemic, when shutdowns, labor shortages and supply disruptions made it difficult for companies to meet their contracts. They resurfaced when tariffs raised costs for importers. Now, concern about disruption near the Strait of Hormuz has made the language relevant again.

The Strait of Hormuz is one of the world’s most important oil routes. Any disruption — or even the threat of one — can quickly affect fuel and shipping costs. That can make it more expensive to produce, move and store goods. 

Those costs can move through the economy quickly. A manufacturer may pay more for parts. A distributor may pay more to move goods. An importer may pay more in freight, fuel, tariffs or storage. If those companies cannot raise prices, the extra cost stays with them.

A surcharge is not always revenue

If a company adds a fuel, freight or tariff surcharge to a bill, the business may want to count that amount as revenue. Accountants say the company first needs to answer a practical question: Did the customer agree to pay?

A surcharge that a customer accepts may be easier to account for. A surcharge that a customer dispute may not be money the company can expect to collect.

Aditya Patil, global controller at MindBridge, said companies first need to know whether the contract has actually changed.

“Just because a customer of mine comes and says, ‘Let’s renegotiate, let’s come back to the drawing board and discuss,’ that does not immediately trigger contract modification,” Patil said. “There’s no contract yet.”

The accounting can change as the business facts change. A signed deal may be a contract modification. A lower expected payment may be a price concession. A disputed invoice may become a collection problem. A contract that looked profitable when it was signed may become a loss if costs rise above the agreed price.

“You have to pretty much assess it at every single stage,” Patil said.

The invoice may be the first warning sign 

The first place stress may appear is accounts receivable — the money customers owe but have not paid.

A company may bill a customer for higher costs. But if the customer delays payment, disputes the charge or has its own cash problems, the accounting changes. The company may need to set aside more money for expected losses, which can affect earnings and investor disclosures.

Some companies may respond by changing payment terms. They may require cash in advance from higher-risk customers, offer discounts or agree to share added costs to preserve important relationships. 

Inventory can create a second problem. 

If a company bought goods at higher prices because fuel, freight, tariffs, or materials became more expensive, it still needs to ask whether it can sell those goods for enough money. If demand falls, customers cancel orders or goods lose value, the company may need to write down the inventory.

Shipping delays can make that analysis harder. Patil said companies need to know when ownership transfers to the customer and who bears the loss if goods arrive late, are rejected or lose value while in transit.

Cash can tighten quickly

Higher costs can also put pressure on cash flow and debt. 

Many small and midsize companies borrow money to buy inventory. If costs rise, goods move slowly and customers resist higher prices, profit margins can shrink quickly. That can make it harder to meet debt requirements or, in more serious cases, continue operating. 

Investors may see the pressure in several places: higher credit-loss reserves, inventory write-downs, new contract disclosures, expanded risk factors, management comments about cost pressure and shrinking gross margins. 

The broader point, accountants say, is that force majeure language can no longer be treated as a routine contract provision. After the pandemic, tariffs, sanctions, conflicts, and shipping disruptions, companies are paying closer attention to who bears the cost when supply chains are disrupted.