The Importance of Financial Management to the Oil and Energy Industry

Financial management is crucial to the oil and energy industry. It is so because such an industry requires massive investments in fixed assets and heavy industrial machinery. It takes quite some time before the oil and energy companies can recover their investments and earn profit. The exploration of oil takes several years. Construction of power plants also takes a lot of time.

Therefore, sound financial management is needed to ensure all company processes are working according to its strategic investment plans. If you’re looking for expert help for your company’s financial management capabilities, you might want to check Michigan CFO Associates and other similar sites. Hiring one allows you to make better financial decisions for your company.

To learn more, here are some points to ponder on the importance of financial management to the oil and energy industry.

1. Financial Management Is Key To Making Profits

The primary importance of financial management to the oil and energy industry is that it’s a core factor to profitability. The company should be able to forecast its performance and profits. An oil and energy company should have sound fiscal governance to earn profits. It is attainable if the company has a good foundation in the three pillars of effective financial management.

Here are the three pillars of effective financial management:

• Strategic Planning – This refers to the company’s planned activities on how it can achieve its long-term vision and goals, and at the same time, hit its short-term objectives as it goes. The company’s leaders should have a clear picture of how it earns more profit – from exploration, production, transportation, supply, and distribution.
• Decision-making – Financial management is vital in providing the company’s executives with the information they need to make decisions about its operations and the execution of the plans.
• Controlling – Financial management is vital in providing the information and tools the company needs to ensure that the activities of all departments are helping the company attain its vision within the budget. It is also a way to assess how company activities help its employees boost productivity.

From beginning to end, financial management plays an essential role in the company’s goal to earn profits. It provides the long-term direction of revenue-generation and cost control efforts, as well as the control of daily tasks and activities to achieve specific objectives.

2. Cost-Effectiveness And Cost Efficiency

Financial management is crucial to the oil and energy industry to attain cost-effectiveness and cost-efficiency. Traditional financial management used to view cost and effectiveness as a dichotomy of tradeoffs. It implies that bringing down costs would also necessarily bring down operational effectiveness. But innovative finance managers have shown that they can bring down costs yet at the same time increase value-adding activities.

In the past, efforts to bring down costs were prioritized in transactional finance like accounts receivable, accounts payable, and other essential accounting tasks. But financial management can do so much more if it can create more value-adding activities. These include optimizing capital structures, financial planning and analysis (FP&A), internal audit, controllership and financial risk management, and tax planning.

Cost-effectiveness is an important objective. If an oil and energy company can bring down its costs significantly, this will contribute to its bottom-line and help achieve higher profit margins. At the same time, these efforts should not pull down the production capacity, performance, and productivity of the company.

In cost efficiency, even among those identified as necessary costs and expenses, financial management should help if there are still many gaps and inefficiencies.

3. Improved Decision-Making

The oil and energy industry is a capital- and asset-intensive industry. It requires long-term investments in highly-expensive fixed assets, heavy types of machinery, and industrial equipment. In most exploration projects, the time frame to achieve the return-on-investments (ROI) is quite lengthy. Some explorations don’t hit oil until five or 10 years. Some don’t find anything at all.

At the same time, the oil and energy industry is sensitive to economic instability, market uncertainties, and price volatility. Oil prices may be affected by political events and economic developments in many parts of the world. Sometimes, oil and energy prices can be highly unpredictable.

It makes financial management all the more valuable to the oil and energy industry. Financial management will provide the company leaders with the decision-making framework and inputs on how to guide the financial and operational trajectory of the company. At the same time, financial management will enable leaders and managers with the information, analysis, reports, and tools that they need to make sound and timely decisions.

Financial management will give company leaders both the long-term view of the financial trajectory, as well as the slice of actual daily financial performance and the monthly or quarterly close of period reports. They must make sound and timely decisions, considering political uncertainties, market instabilities, or temporary price movement volatilities.

4. Effective Control On Operations & Expenditures

The traditional view is that financial management is a factor that can enable a company to have effective control over operations and expenditures. Sound financial management can help managers improve their operations in the company. It will also help managers align their expenses with the budget limits set for the periods involved. It will contribute to the company’s profit margins in the long run.

5. Timely Disclosure Of Reports To Investors

Financial management can also help create accurate and timely financial reports and statements. The board of directors and portfolio investors of oil and energy companies would feel more assured if they receive accurate, periodic, and verifiable financial reports and financial statements. They will use the data and leverage ratios in these reports to evaluate the current performance and future of the company.

Some oil and energy companies are publicly-listed in stock exchanges. They often have to meet regulatory requirements to disclose their financial data and reports. So to comply, they need help from financial management experts.

In addition, it also helps improve market awareness and confidence in the present and future profitability and viability of the company. The timely release of financial reports and statements can receive a favorable market response. It can further push the stock market prices of oil and energy companies higher. It further improves the capital structure of the company.

Conclusion  

Financial management is valuable to the oil and energy industry. Sound financial management ensures that companies optimize the pillars of fiscal governance. It enables the company to achieve and track cost-effectiveness and cost-efficiency. Financial reports and statements are also crucial in controlling operations and decision-making. Investors and creditors alike rely on accurate and timely financial reports to evaluate the company’s continued viability.