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The oil and energy industry requires a lot of capital and assets. It necessitates long-term investments in high-priced fixed assets, heavy machinery, and industrial equipment. Most exploration projects have a lengthy time frame to achieve a return on investment (ROI).
Fremont, CA: The oil and energy industry relies heavily on financial management. This is because of the fact that such an industry necessitates massive investments in fixed assets and heavy industrial machinery. It takes a long time for oil and energy companies to recoup their investments and turn a profit. Oil exploration can take several years. Power plant construction also takes a long time.
To learn more, here are some points to ponder on the importance of financial management to the oil and energy industry.
Cost-Effectiveness
Financial management is critical to achieve cost-effectiveness and cost-efficiency in the oil and energy industry. Cost and effectiveness were traditionally viewed as a dichotomy of tradeoffs in traditional financial management. It implies that cutting costs would inevitably mean cutting operational effectiveness. However, forward-thinking finance executives have demonstrated that they can reduce costs while increasing value-added activities.
Historically, efforts to reduce costs in transactional finance such as accounts receivable accounts payable and other essential accounting tasks were prioritized. However, financial management can do so much more if more value-added activities are developed. Among these are capital structure optimization, financial planning and analysis (FP&A), internal audit, controllership, and financial risk management, and tax planning.
Better Decision-Making
The oil and energy industry requires a lot of capital and assets. It necessitates long-term investments in high-priced fixed assets, heavy machinery, and industrial equipment. Most exploration projects have a lengthy time frame to achieve a return on investment (ROI). Some explorations do not find oil for five or ten years. Some people find nothing at all.
Simultaneously, the oil and energy industry is vulnerable to economic insecurity, market uncertainty, and price volatility. Political and economic developments in many parts of the world may have an impact on oil prices. Oil and energy prices can be highly volatile at times.
It makes financial management even more valuable to the oil and energy industry. Financial management will provide company leaders with a decision-making framework as well as input on how to guide the company's financial and operational trajectory. Simultaneously, financial management will provide leaders and managers with the data, analysis, reports, and tools they require to make sound and timely decisions.
