Budgeting Process in Ongc
Budgeting Process in Ongc
Budgeting Process in Ongc
SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE DEGREE OF BACHELOR OF BUSINESS ADMINISTRATION
INDEX
PAGES
Chapter 1 Introduction ONGC Budget Chapter 2 Research Methodology Chapter 3 Data Analysis & Interpretation Chapter 4 Recommendations Chapter 5 Conclusion Bibliography 1-14 15-54 55-56 57-67 68-69 70
sought to deregulate and de-license the core sectors (including petroleum sector) with partial disinvestments of government equity in Public Sector Undertakings and other measures. As a consequence thereof, ONGC was re-organized as a limited Company under the Company's Act, 1956 in February 1994.
ONGC: Financials
ONGC posted a net profit of Rs. 167.016 billion (2007-08), the Highest ever by any Indian Company Net worth Rs. 699 billion Practically Zero Debt Corporate Contributed over Rs. 300 billion to the exchequer
World Class
Dedicated to excellence by leveraging competitive advantages in R&D and technology with involved people Imbibe high standards of business ethics and organizational values Abiding commitment to safety, health and environment to enrich quality of community life Foster a culture of trust, openness and mutual concern to make working a stimulating and challenging experience for our people Strive for customer delight through quality products and services
Future Plans
ONGC looks forward to become an integrated energy provider, with: New Discoveries and fast track development Equity Oil from Abroad Downstream Value Additions & Forward Integration Leveraging state-of-the art technology and global best practices New Sources of Energy Production from small and marginal fiel
ACHEIVEMENTS
Ranked as the most respected Public Enterprise in India in 2007 Business World Survey, with 19th position in the league of the most-respected Indian Corporate(s). Rated Excellent in MOU Performance Rating for 2008-09 by the Department of Public Enterprises, Ministry of Heavy Industries in Public Enterprises, GOI.
Oil Industry Safety Directorate (OISD) has selected Ahmedabad Asset and MRPL for the year 2008-09 (as number one in Group-4 category (Oil & Gas Assets) and Second in Group-1 Refinery category respectively).
Topped the visibility metrics in Indian Oil and Gas Sector and the only PSU in the top 10 list of Indian Corporate newsmakers.
Golden Peacock Global Award 2007 for Excellence in Corporate Governance 2007, for the 3rd consecutive time, conferred by World Council for Corporate Governance.
Bagged the coveted winners trophy of the maiden Earth Care Award for excellence in climate change mitigation and adoption under the category of GHG mitigation in the small/medium and large enterprises.
Conferred with Infraline Energy Excellence Award for its services to the Nation in Oil & Gas Exploration and Production category.
COMPETETIVE STRENGHTH
Strong intellectual property base, information, knowledge, skills and experience Maximum number of Exploration Licenses, including competitive NELP rounds. ONGC has bagged 85 of the 162 Blocks (more than 50%) awarded in the 6 rounds of bidding, under the New Exploration Licensing Policy (NELP) of the Indian Government.
ONGC owns and operates more than 15000 kilometers of pipelines in India, including nearly 3800 kilometers of sub-sea pipelines. No other company in India, operates even 50 per cent of this route length.
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Financial Position
The fiscal 2007-08 was yet another year of growth and success for the company, which along with other group companies excelled in its endeavors. ONGC has come out with laudable improved performance, despite various odds against it in the year 2007-08. It has achieved the highest ever Sales Revenue of Rs. 601,370 million and Net Profit of Rs 167,016 million during 2007-08. That reflects an increase of 5.7% and 6.8% respectively. The total Net Worth of the company has increased with healthy 14%.
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FRONTIER BASINS
India is bestowed with 26 sedimentary basins; spread over 1.78 million square kilometres offshore areas, with a prognosticated hydrocarbon resource base of 21 billion tonnes that has been established as proven reserves. Seven basins are presently producing, rest being exploration, awaiting listing on the hydrocarbon map of India. Of the nineteen onland, seventeen are categorized under Frontier Basins, which either have indication of non shows or have perceived prospectivity by analogy with other similar petroliferous basin and these basins are least explored and in the knowledge building stage of exploration. These frontier areas hold the potential to contain vast hydrocarbon accumulations and discoveries that could make the difference between self-sufficiency in energy sector area. The frontier basins of yesteryears are the producing basins of today and the frontier basins to be converted as producing basins of the future. The history of frontier basins, erstwhile NRBC, dates back to the inception of ONGC entrusted with the stupendous task of carrying out exploration for both hydrocarbons and the hereto non-producing onland sedimentary basins of India a spectrum that reveals in the geographical disposition (from the northern state of Jammu and Kashmir to the southern) or geomorphology (from the high mountainous areas of Spiti to the plains of Ganges extensional basins like Gondwanas to compressive regimes like Himalayan Foothills as young as the Karewa Basin to as old as the Proterozoic Vindhyan Basin) or logistics(the populated areas of the Zanskars to the densely populated and well connected areas of civilization in northern India). It is such diversity of challenges that the frontier basins thrives in its pursuit of hydrocarbons difference between Indias self-sufficient in energy sector and economic bankruptcy
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INTRODUCTION
Management is declared efficient if it accomplishes its objectives with minimum efforts and costs. The various activities within a company should be coordinated by the preparation of plans of actions for future periods. So, planning has become the primary function of management these days. Most of the planning relates to individual situations and individual proposals. However, this has to be supplemented by continuous comparisons of the actual performance with the planned performance. These detailed plans are usually referred to as budgets. Budget is one of the essential tools available to the Management for Planning and Control of organizations operational and financial activities and helps in regulation of expenditure in consonance with organizational goals/ objectives. In an organisation like ONGC, where operations are enormous, nature of the business complex & expenditure involved are huge; the Budget assumes a very special significance. It sets forth both Physical and financial targets, intended to be achieved considering the organisational objectives in a given time frame with respect to various activities viz.: Exploration, Drilling, Production, R&D, JV operations etc., spread over different Assets, Basins, Plants, Institutes, JV Groups. It is with respect to the significance of budgetary control in the management of a business enterprise that the project, Budgeting system in Frontier Basin of ONGC was undertaken. The project focuses on various aspects that are involved in the budgetary control system. This project report intends to give a brief overview of the budgeting system being practiced in Oil and Natural Gas Corporation Ltd. The report also gives an insight of the performance of ONGC for the past five years. An analysis of the performance has been made by finding out the variances (actual vs. target). This analysis will help the company to know the areas where major variations have been detected. It will provide a basis for future budgeting programme. Finally, based on the findings from the study, certain conclusions have been drawn and recommendations for the performance improvement are given.
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OBJECTIVES
The project on budgeting systems has been undertaken while keeping the following objectives in consideration. 1. To learn and understand the budget forecast, activity planning, preparation of budget, monitoring and controlling of budget. 2. To analyze variance of actual performance with the target set. 3. To highlight the key areas where action needs to be taken. 4. To analyze the past budgets.
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LIMITATION
1. Time Limitation 2. Exposure limitation in production area 3. Unable to visit store location physically due to far off location 4. No physically job at evaluating is in software form
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BUDGETING
Definition
A Budget is a financial and/or quantitative statement prepared prior to a given
period of the policy to be pursued, the work to be done and the expenditure to be incurred during that period, for the purpose of achieving a given objective. The process of preparation of budgets is called Budgeting. A Budget is a comprehensive and coordinated plan expressed in financial terms for the operations and resources of an enterprise for some specified period in the future. Simply put a budget is a formal statement made based on past experiences to analyze and monitor the future expenditure and revenues from specific activities. It helps to coordinate the activities of the organization. A good budget is characterised by the following:
a) b) c) d) e)
Participation: involve as many people as possible in drawing up a budget. Comprehensiveness: embrace the whole organisation. Standards: base it on established standards of performance. Flexibility: consider changing circumstances. Feedback: constantly monitor performance. Analysis of costs and revenues: this can be done on the basis of product lines, sections
or cost centres
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CIMA - The Chartered Institute of Management Accountants is a leading membership body in UK that offers an internationally
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The budgetary process is a significant tool of financial control vested with the management of a commercial entity. This control mechanism becomes more prominent for a flagship Navratna Public Sector Undertaking (PSU) like ONGC. The budget exercise incorporates the entire gamut of plan and non-plan activities during the budget year. Since the Company is a Government of India (GOI) undertaking, plan budget of the Company forms part of the plan budget of GOI through its administrative ministry i.e. Ministry of Petroleum and Natural Gas (MoP&NG) The importance of budgetary controls has increased in the present context when most of the producing fields in the Company have entered the maturity phase. As a result, while the production levels are under pressure, the intensified secondary method of production tends to be accompanied by rising recovery costs. This poses a bigger challenge with regard to establishing effective cost control mechanism in the entire spectrum of activities. Another area of major concern is increase in rates of all oil field services and equipments with increase in Exploration and Production (E & P) activities by all E & P operators across the globe due to prevailing high prices of crude oil.
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Compels management to think about the future and forces management to draft detailed plans for achieving the targets of each section and operation;
b) c)
Promotes coordination and communication within the organization; Clearly defines areas of responsibility and ensures that in-charges/ managers of work centers are responsible for the achievement of budget targets for the operations under their control;
d)
Provides a basis for assessing the performance of the organization at various levels through a variance analysis. Budget is a yardstick against which actual performance is measured and assessed;
e)
Deviations from budget can be investigated thereby enabling remedial action to be taken on an ongoing basis based on the variances observed;
f) g)
Motivates employees by participating in the setting of budgets; and Improves the allocation of scarce resources.
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Objective
The objective of this manual is to:
a)
Facilitate the company in the preparation of its revised budgets, budget estimates and commitment budgets;
b) c)
Facilitate the company in monitoring actual performance against the planned budget; Adhering to statutory requirements with regard to declaring the Companys plans to be included in the GOIs five year plans;
d)
Define the roles and responsibilities of each location, region and Corporate Budget Cell (CBC) vis--vis budget preparation and monitoring.
Scope
The procedures and guidelines provided in this manual are applicable to all the locations within the Company. The following topics have been covered in this chapter:
a) b) c) d)
Budget formulation; Execution and operation of approved budget; Budget monitoring; and Budget for interest bearing personnel advances.
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a)
Schemes/ Lump Sum Turn Key (LSTK) projects; Fixed assets to be acquired (other than intangible assets); Survey expenditure; Exploratory drilling expenditure; Developmental drilling expenditure; Activities related to Joint Venture (JV), capital expenditure; and Research & Development (R & D) expenditure.
b)
Staff expenditure; Manpower cost; Consumption of stores, spares and consumables; Insurance; Power & fuel; Repairs & maintenance; Contractual payments including hire charges; Workover operations; Water injection desalting and demulsification;
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Pollution control; Transport expenses; Other production expenditure; Transportation and freight; Idle rigs; Project overheads; Regional overheads; Headquarters overheads; and Other expenditure.
c)
Natural head-wise budget: This budget includes the total plan and non-plan
expenditure for all assets, basins, institutes, JVs and corporate functions together, each divided into natural heads, viz, capital, stores & spares, contractual payments, manpower and other charges. Capital expenditure in case of non-plan expenditure includes only replacement capital items charged off to revenue. d)
Activity budget: This budget represents the total plan and non-plan expenditure for
all assets, basins, institutes, JVs and corporate functions together. The plan expenditure is further divided activity-wise, viz, survey, exploratory drilling, developmental drilling, capital, R & D expenditure, JVs plan expenditure, etc. The non-plan expenditure is divided into operating expenses (for the Company and JVs) and purchases of condensate, gas and other products. e) Commitment budget: This budget represents provision for long lead procurements and contracts including long term supply orders where delivery of material/ utilisation of services are expected after two years from the end of the current financial year (FY). For example: commitment budget for FY 09-10 prepared in FY 07-08 will include anticipated deliveries/ utilisation of services during FY 09-10 and beyond. f) Operations budget: This budget represents operating expenditure for the current FY, next FY and the FY subsequent to the next FY.
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g) Fund Centre (FC): FC is a structure in the Funds Management (FM) module in SAP that shows the responsibility for managing the application of funds associated with it. It is also used to budget and perform budget availability checking. Under the CRC structure each CRC entity has been identified as a FC in SAP. h) Commitment Item: Budgets are stored in Commitment Items (CI) in SAP. The commitment items in FM module have been mapped with the relevant general ledger codes in the FI module to facilitate checking of fund availability at the time of budgeting. Equipment is an example of a CI. i) Foreign exchange budget: Estimated expenditure in foreign currency is converted in INR at rates given by the Corporate Budget cell and included in the RE, BE and CBE.
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ONGC
ASSETS BASINS PLANT JV SERVICES
PLANNED
NON PLANNED
SURVEY
EXPLORATORY DRILLING
DEVELOPMENT DRILLING
OTHERS
CAPITAL
Activities
STORES
SPARES
MANPOWER
Natural Heads
CONTRACTUAL
Figure 1
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a) b) c)
Budgets to align with the targets set in the Memorandum of Understanding (MoU) signed with the GOI. Budgets to align with targets forwarded to MoP&NG for the purpose of five year planning: Annual budget to be forwarded to MoP&NG
The budgetary process provides flexibility to the managers in their operations and at the same time makes them accountable for cost of operations. At the corporate level, budget allocations to the assets, basins, services, institutes and corporate functions are made on the basis of physical work programme and overall resource generations. The assets/basins, institutes and service chiefs have operational flexibility to provide for the budget items and re-appropriation within the budget items. In line with the internationally accepted accounting methods followed by the Company, expenditure is booked to various activities viz. survey, exploratory drilling and development drilling and budget is presented in terms of these activities, besides capital expenditure. The process of activity cost build up is done at each asset / basin by accepting the allocation cost from various services within the work centre and transfer of cost from one work centre to another to depict the activities in the geographical location where the physical activities are accounted as per requirement.
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Figure 2. Depicts the flow of information and the functions/ personnel involved in the exercise of budgetary control.
Figure 2
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The budget exercise is initiated with the preparation of physical targets which is the responsibility of asset, basins and plants in consultation with the service heads. Physical targets once approved by the respective directors are then forwarded to the CBC for review, consolidation and inclusion in the budget agenda to be presented to the Board of Directors (BoD). The next step is compilation of the financial budget, the information for which flows from assets/ basins/ plants at location level, gets compiled at the regional level and finally gets consolidated by the CBC. To begin with, financial data with regard to service cost comes from section heads of each service type to the Location Budget Coordinators (LBC) of services, duly approved by the Head of Services. The LBC of Services compiles the budgets prepared by each section head and allocates the service cost to the respective asset/ basin/ plant based on inputs/ allocation criteria (such as number of hours/ rig days) received from section heads of each service type. These allocations are then forwarded to the respective functional heads of assets/ basins/ plants. The functional heads of assets/ basins/ plants assess the financial budget for each activity corresponding to the physical targets. On completion of assessment, they forward the budgets to their LBCs. The respective LBCs review these budgets for consistency, accuracy and prudence and forward them to the Regional Budget Coordinator (RBC) for compilation at regional level. The RBCs compile the budgets received from assets, basins and plants and assess the accuracy and correctness of data received. The RBC may seek clarifications from the functional heads on a case to case basis. After approval of RBCs, the budgets are forwarded to CBC. The CBC reviews the financial budget during which it may seek clarifications from functional heads. On finalization of budget, CBC prepares a budget agenda and forwards it to the Project Appraisal Committee (PAC) and Executive Committee (EC) for approval. These committees review the budget and make recommendations to the BoD. The BoD after considering the recommendations approves the budget. The approved budget is then forwarded to each location for uploading to SAP. The item wise budget, duly adjusted to the overall approved budget, is loaded to SAP by each LBC. Monitoring the budgets is then the primary responsibility of the function head. The secondary responsibility of budget monitoring lies with the LBCs, RBCs and the CBC.
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Budget timelines
The preparation of budgets is completed as per the CRC structure i.e. separately for assets, basins, services, institutes, regional offices and subsequently for the company as a whole. Budget comprises of three different components:
Revised Estimates (RE) for the current year; Budget Estimates (BE) for the subsequent year; Commitment Budget Estimates (CBE) for the year following the subsequent year.
The preparation of RE, BE and CBE is in three stages and is required to be completed within the timelines given below Time schedule 15th June of each financial year Stage 2 Formulation of activity-wise indicative financial outlays corresponding to approved physical targets Examination of activity outlays by CBC, and communication of indicative financial outlays to virtual corporates Stage 3 Determination of financial outlays based on approved indicative financial outlays Presentation of draft budget proposals by CBC to the EC Determination of financial outlays based on approved indicative financial outlays Formulation of activity-wise indicative financial outlays 15th June of each financial year 30th June of each financial year 20th July of each financial year 14th August of each financial
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Stage Stage 1
Stage
Activity
Description of activity
BUDGET FORMULATION
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Budgets are prepared at the work centres where budget is utilized/ consumed rather than at work centres where payments are made, as budgets are prepared and monitored in terms of cost of activities and profitability of the virtual corporate. In case of centralized procurement cases, budget provision is kept at the consuming work centres. The consuming work centres forward indents along with the sanction orders to the central procurement agency for procurement. With the implementation of CRC structure, budget is prepared and monitored in terms of cost of activities and profitability of the virtual corporate. Unless the budget provision is kept at the consuming centres, true profitability and cost of activities for the virtual corporate does not emerge. For detailed guidelines on SAP facility to upload budget at one work centre while actual utilization/ Logistics Invoice Verification (LIV) being done at other work centres against funds of the budget holder
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To plan activity wise financial outlays accurately, consumption of stores and spares is considered rather than procurement of the same, as procurement budget is derived from planned consumption for the targeted level of activities. Accordingly, the work centres updated the details of opening stock, planned consumption and the planned closing stock (considering buffer stock, maxima-minima level, etc as per policy) in the budget software. Based on this input, the procurement budget is prepared automatically by the system using the following formula:
The consumption figures are used for determining activity wise outlays and budgeted costs. The difference between procurement and consumption is reflected as inventory variation, which is shown as working capital change. It is ensured that inventory levels are not very high. In case of contractual payments anticipated utilisation of services in the respective budget periods are updated in the consumption column. The requirement of contractual services is planned precisely after considering the realistic requirement so that it does not impact cost of the activity.
6) Procurement budget
Budget is utilized in the year when material is received/ services are utilised and not at the stage of creation of PO or opening of letter of credit. Funds are assigned/ committed at the stage of issue of supply order/contract from the budget of the respective FYs in which delivery of the material/utilisation of services is due as per contract terms. Actual utilization takes place at the stage of LIV which happens at the stage of receipt of material/ utilisation of services. In the event that substantial amount of funds are provided in the RE towards items which are at conceptual stage or expenditure which is yet to be sanctioned, and such items remain unutilised at the end of the year, then not only such items have to be carried forward to the next year but also result into adverse comments from the GOI. Therefore, it is essential that while keeping budget provision, lead time in creation of PR, its release at various stages including financial concurrence and expenditure sanction,
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time taken in tendering process, issue of supply order and delivery schedule are taken into account and budget be kept in the respective budget years during which material is expected to be received/ services are to be utilised. Also, it is ensured that delivery date in the PR is kept realistic after taking into account the time involved for completing various stages of processing (specially for the PRs which are likely to mature at the fag end of the FY), so that under utilisation of budget and throw forward of open commitments is avoided. The planning of procurement process targets deliveries to take place latest by third quarter of the budget year. If the deliveries are likely to spill into the fourth quarter, then the procurement process targets deliveries in the first quarter of the next FY. Thus, the chances of under utilisation due to uncertainties of the procurement process is reduced and shortage of funds in BE period due to carry forward of immature supply orders of previous years shall be avoided. Procurement cases can be initiated against the budget provided in BE / CBE after the approval of budget by the BoD. Note: In case of import procurements, currency rates as specified in the annual budget circular issued by the CBC are considered.
BoD approved schemes; Other schemes relating to oil & gas production and processing;
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Major acquisition programmes; Major refurbishment/ up-gradation of equipments; Infocom initiatives; R&D schemes and equipments; Major buildings & civil works; and JVs To facilitate preparation of the capital budget, specific scheme codes are created in the
budget software so that the scheme details can be aggregated from the root level. Scheme code master along with section cost centre master is created centrally at the respective location by the LBC.
9) Replacement capital
Replacement capital forms part of non-plan capital and is included in the operational budget as per corporate policy. These are items in the nature of revamp of production installations/ facilities, pipeline replacement projects, etc which are chargeable to profit & loss account as per accounting policy.
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In cases where POs have been placed and material has not been received, reappropriation of budget is done in the budgetary estimates for the current year. However, reappropriation of budget is done only between plan to plan and non-plan to non-plan only. The carry forward cases are shown separately in the budget software. Cases where POs remain open till the end of the FY, and deliveries are not received; the POs get carry forwarded automatically to the next FY through a central process in the fourth week of April each year. In all such cases, the POs consume the free budget from the budget estimate of the current year. However, in some of the commitment items where sufficient free budget (unassigned budget) is not available, the available budget becomes negative and the system stops further processing of purchase orders in respect for such commitment items with negative available budget. Accordingly, all work centres review such cases and make funds available through re-appropriation of funds from other commitment items where funds are available. Cases wherever LIV has been done even though actual payment has not been made or wherever down payment against procurement cases has been created in the system, the budget is considered as utilized. In these cases, budget is not carried forward in revised estimates for the current year. Cases where LIV could not be completed in the previous FY or where down payments against specific commitment items of the purchase orders were not created are reflected in revised estimates for the current year as carry forward budget.
12) Changes in rates of custom duties, excise duties and service tax
GOI announces certain changes in customs duties/excise duties/service tax through the yearly Finance Bill. Accordingly, while determining budget requirements for procurement & services, revised rates of custom duty/excise/service tax are considered for fund requirement
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supported by an increase in physical activity for work over operations, maintenance, revamping and replacements.
16) Inventory
Inventory management is essential to optimise level of inventory holding and carrying cost. While preparing/ approving item-wise budgets for stores and spares, the available items in stock is considered To meet this objective, the budget software provides additional fields for updating planned consumption of stores and spares items. Opening and closing inventory as per buffer stock requirements/ corporation policy is to be updated in respective fields and the system automatically determines the procurement budget for each line item. Budget head-wise summary report variation projected in the budget. The guiding
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principle is to optimise the investment in inventory and also attempts should be made to reduce the level of non-moving/ slow moving inventory. All work centres ensure that there is no addition to slow moving/ non moving inventory.
17) Profitability
While framing the budget estimates it is considered that not only the physical targets set in the MoU are to be achieved but the financial parameters of gross margin, net profit / capital employed and net profit/ net worth indicated therein are also to be achieved. Profitability of the asset/basin assumes greater importance, rather than the cash outflow. The assets/basins are therefore expected to prepare Budgeted Profit Margin and Contribution and emphasise achievement of overall efficiency/productivity and cost effectiveness in all its operations.
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The physical targets are framed by the assets and basins in consultation with the respective heads of Services in line with the overall corporate objective, MoU targets and five year plan projections. The physical targets form the basis for budget, annual plan and are submitted to the Planning Commission.
Process flowchart
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Process flowchart
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Interest bearing personnel advances refers to advances given by the company to eligible employees to facilitate them to incur personal expenditure. These can be given for purposes such as house building, purchase of four-wheelers or two-wheelers. However, advances given for purchase of desktop computers and laptops is non-interest bearing.
The RBC is responsible for assessing requirement for such advances on a quarterly basis for the respective region, on the basis of information obtained from PCS and HR section. This requirement is intimated to the CBC, which reviews the requirement and approves/ allocates funds to each region.
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Process flowchart
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Procedure for creating new fund centre and new commitment item:
For creating a new fund centre and new commitment item, a request is forwarded to the CBC with relevant justification by the user/ LBC. On review and approval by the CBC, the request is forwarded to the designated officer in ICE team for creating the fund centre/ commitment item in SAP. Once created, the same is intimated to the user/ LBC and the CBC. Once the approved overall budget is obtained from CBC, the LBC of each location is responsible for uploading the commitment item-wise budget within the overall approved limit in SAP. Loading of approved budget is done to facilitate year-wise capturing of committed POs.
to three years or more. LSTK projects need not necessarily be large projects monetarily but may be of high strategic importance. Approval of these projects is either obtained from the respective asset head or the BoD and subsequently from the GOI, depending on the nature and value of the project. The IM module facilitates review of associated actual costs vis--vis budgeted costs at WBS level, status and progress of the projects. Fund centres are created according to the existing CRC structure (use T -code IM23 for obtaining the structure/ IM hierarchy from SAP). For instance, there are separate fund centres for surface teams at Assets that are involved in activities such as enhancement of facilities, constructions etc and separate fund centres for sub-surface teams that are involved in well services, reservoir activities etc. The budget for all projects/ schemes is rolled up at the IM Position ID level i.e. at respective work centre/ asset level. The assets give details of cost calculations of the related activities pertaining to the respective projects/ schemes, after which approvals are obtained from competent authority. The approved plan is then converted to budget at various IM position ID level. Further, the budget is distributed to various projects within an IM position ID level after which the budgets are available for utilisation. Budgets in IM get utilised when a service entry sheet (SES) is made in SAP. For detailed process on creation of service entry
the indenter arranges for the budget before PO release. (For detailed process of reappropriation, refer Para 2.2.4.10 mentioned below). Non-availability of budget in the system can not be a constraint for creating PR in the system. Out of the various critical elements in a PR, there are four elements which impact fund management and therefore require close scrutiny by the LBC at the PR release stage. These are detailed below:
a)
Plant: Plants pertaining to the respective business area are allowed. Multiple line items
can be indicated for fund utilization from fund centers of different business area / company code.
b)
Fund centre: Relevant fund centre is indicated. Multiple line items can be indicated for
different fund centre within the same business area.
c)
Account assignment category: With regard to account assignment category the following is ensured:
Field should be blank for procurement of material / capital items except for purchase of medicine / stationary.
Assign K for contractual payment and procurement of medicine and stationery with relevant GL / commitment items.
Assign A and ensure the asset number for installation and commissioning of assets is indicated (accounted as contractual payments).
Assign P for projects and ensure WBS elements for the contractual payments only if the item of contractual payment is in nature of Capital Work In Progress (CWIP).
Based on material code, capital census code relevant commitment items / GL is derived. Procurement budget control for all stores / spares / capital items is at the inventory level only. Material consumption accounts do not have any budgetary control. Only for contractual services procurement budget control exists at consumption accounts. CI: CIs not relevant for budgeting, like MCON_STORE, MCON_SPARE,
OUTSIDE_FM etc. are being allowed. Fund centre together with GL account determines the commitment item from which budget is consumed.
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Budget supplement
Budget supplements are used to add funding to existing budgets. This can be done only once during the year align the previously budgeted amount (BE) with the RE. The supplement is for the additive amount only, when posted, the cumulative fund totals (original budget plus supplements) are reflected in the system. The LBC can add supplement to the respective fund centre and commitment item by executing the Tcode FR21. Supplement can also be done via batch mode using the Tcode ZFISR. Before executing these T-codes the LBC ensures that the following information is available: Fund; FC; Commitment item; and Budget supplement amount.
Budget transfer
Budget transfer can take place when funds are transferred from one asset/ basin/ service to another asset/ basin/ service. The LBC of the transferor asset/ basin/ service executes the Tcode FR 50 for transferring funds only after obtaining the authorized document for transfer of funds. On executing the T-code the fund totals in the transferor asset/ basin/ service get reduced and are then reflected in the fund totals of the transferee asset/ basin/ service. Before executing the T-code the LBC ensures the availability of the following information:
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Budget subtype; Fiscal year; Fund centre; Commitment item; and Amount for each item.
Budget return
Budget return procedure is used to return or reduce a previously budgeted amount. This can be done only once during the year align the previously budgeted amount (BE) with the RE. The LBC executes Tcode FR29 for return of funds. Before executing the T-code the LBC ensures the availability of the following information: Budget subtype; Fiscal year; Fund centre; Commitment item; and
Re-appropriation of funds
Re-appropriation of funds can take place at the time of PR release stage the concurring officer approves the PR subject to availability of funds. At that stage, it is the indenters responsibility to make funds available before the PO release for which a requisition is made to the LBC. The requisition duly authorised by the Head of the indenting section clearly specifies the following:
Amount of fund requirement; Commitment item against which funds are required; and Commitment items (giving three to four options) from which funds can be reappropriated. Based on the above information the LBC re-appropriates funds, considering that re-
appropriation can take place within commitment items under plan budget and within
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commitment items under non-plan budget. However, re-appropriation of funds from one commitment item in plan budget to another commitment item in non-plan budget and vice versa is not allowed.
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Follow up with Pre-Audit section /MM section to ensure that LIVs are processed LBCs follow up with Pre-Audit/ MM section to ensure that LIV is done to the maximum extent possible against all down payments made against respective POs before end of current fiscal year Deletion of all parked FI documents consuming budget Carry forward of commitments on account of all open Pos Reconstruction of distributed and assigned values The T codes FM9P and FMBV are executed for both the current fiscal year as well as the subsequent fiscal year. This exercise is done centrally immediately after the carry-forward exercise is completed.
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Removal of budget deficits from the system The report S_ALR_87012621 is generated to view the budget deficits. LBCs remove budget deficits from fund centres by making the required budget transfer postings using the T code FR14. This exercise is done by the respective LBCs immediately after FY close.
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BUDGET MONITORING
Utilization of the budget as per plan is monitored by the BoD and the GOI on a periodic basis through submission of the quarterly reports, namely, statement of actual expenditure against central plan outlay and statement of plan expenditure, on a monthly basis. Monitoring of the budget is done with the aim of having 100% planned budget utilization. Variations between both physical and financial parameters in the budget and actual utilization are reviewed and required corrective actions are taken after obtaining required clarifications from the virtual corporate. Virtual corporate review variations between budgeted targets and actual utilization, and progress of ongoing projects on a quarterly basis on budget utilization is prepared on a quarterly basis recommending corrective actions to be taken and detailing the reasons for variations as per format specified by the CBC. A monthly expenditure report, monthly sales expenditure report and monthly sales receipts report is prepared by each LBC and forwarded to the RBC for consolidation at regional level.
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RESEARCH METHODOLOGY
Following in order to complete project report on budget on O.N.G.C. Ltd., methodology has been adopted. The very first step I have taken is that I have collected all the accounts which are required for analysis after that I have extracted the things out of accounts, which are needed for Budget analysis. (e.g. Current assets etc.) There are two main types of data collection i.e. Primary data Secondary data
PRIMARY DATA It means collection of information for the first time. In order to collect such type of information questioner, ie.e. to be constructed and information is collected from the respondent. In my project report budget analysis in ONGC Ltd., the primary data collection is not used since it is based on secondary date already available.
SECONDARY DATA Secondary data are information, which has already been collected by others. In order to carry out my project successful I have relied on the secondary data already available. Source of secondary data Annual report of ONGC Ltd. Monthly publication of ONGC i.e. corporation finance. ONGC Ltd website : www.ongcindia.com Library of ONGC at KDMIPE
1. Research Design
: Exploratory Research
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3. Operational Area of Study : Frontier Basin, ONGC 4. Data Processing Method : By calculating the utilization ratios of capital and revenue (actual target)*100%
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Oil & Natural Gas Corporation Ltd is a Government of India undertaking as previously stated and hence the preparation of budget is synchronized with the 5 year plans prepared by the government and further budget targets decided with the approval from the ministry of Petroleum and Gas. Presently the annual budgets are prepared in accordance with the 11th five year plan from 2007-2012. ONGC has set 3% higher budget in this plan than the previous one.
The budget is prepared as explained in the process for planned or capital expenditure (Capex) and non-planned or operating expenditure (Opex) at every level. The Capex and Opex budget outlays for past few years are tabled on next page
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Description
Actual 07-08
SURVEY EXPL. DRILLING DEV. DRILLING R&D CAPITAL JVS PLAN-ONGC INTEGRATION PROJECTS TOTAL
1498 2390
11421
13305
17887
18346
19338
17887
07-08 in comparison to 07-08 & 08-09. This goes on to show a consistent increase in the activity. However if we look at the actual utilization of 07-08 then its lesser than RE.It
Ac tu al
It can be seen from the graph that there is a jump In the actual utilization of budget in
Ac tu al (0 607 ) BE (0 708 )
RE (0 708 ) BE (0 809 )
(0 506 )
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produces a case in point of lock up of funds due to certain expected expenditures. There is a cushion of Rs 695 crores, but looking at the size of the company, a headroom of this extent is unavoidable.
Description
Actual 07-08
OPEX JVs OPEX STAT. LEVIES INTEREST PYT. CORPORATE TAX DIVIDEND LOAN REPAYMENT
WORKING CAPITAL 481 CHANGES ADV. SUBSIDIARIES TOTAL NON PLAN 37945 TO 4259
-2418
4004
4000
4000
41185
39510
38163
42080
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per the requirement of the corresponding planned outlays. Therefore we can draw a conclusion that the plan budget and the non planned budget need to be made in proper harmony with each other and there needs to be a better coordination between the two.
Trend in Planned and Non Planned Budget Utilisation Trend PLAN EXPENDITURE
Figure in crore
AC TU A
The graph clearly depicts that the non plan activity is not consistent and is varying as
RE (0 708 ) BE (0 809 )
2007-08
2008-09
2009-10
2010-11
2011-12
OVER85%
64%
98%
90%
81%
96%
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PLAN BE 20000 15000 10000 5000 0 2002-03 2006-07 2003-4 2007-08 2004-05 2005-06 2008-09 2009-10 2006-07 2010-11 2007-08 2011-12 7408 10308 10000 10487 14354 PLAN BE
17887
PLAN ACTUAL 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0
2008-09 2004-05
109% 93%
98%
The graphs above show that the plan BE and plan actual have been rising with more or less a consistent rate signifying a growth in the activities of the company.However it being a plan expenditure, it could have been more precise.
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18346 RE
PLAN ACTUAL 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0
PLAN ACTUAL OVER RE (%) 120% 100% 80% 60% 40% 20% 0%
200 200 201 200 200 20022003-4 200420052006- 201 200767018903 05 06 07 08 1107 1208 09 10
90%
If we compare the percentage utilisation of BE and RE, then the actual utilisation seem consistent in both the cases except that in the year 2004-05.Thus here the vision of the budget makers can be deemed fine and in consonance with the overall objectives of the firm.This so ,because the utilisation ratios in most of the cases are quite high i.e more than
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90%, signifying proper allocation and near to optimum utilization of funds.Thus it can be said that the budget makers and controlers have been successful in striking a proper balance between an efficient control mechanism and smooth functioning.
NON-PLAN EXPENDITURE
Figure in Crore
Particulars
2006-07
2007-08
2008-09
2009-10
201011
BE RE ACTUAL
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NON PLAN BE 10000 8000 6000 4000 2000 0 200 200 200 200 200 200 2-03 3-4 4-05 5-06 6-07 7-08
200 200 200 200 200 200 200 200 201 201 201 201 6- 67- 78- 89- 9- 0- 0- 1- 107 07 08 08 09 09 10 10 11 11 12 12
8984
NON PLAN BE
NON PLAN RE 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0
8619
9256
NON PLAN RE
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NON PLAN ACTUAL OVER BE (%) 114% 112% 110% 108% 106% 104% 102% 100% 98% 96%
200 200 200 200 201 678- 2005-92002200320042006- 0200707 08 11 09 10 03 4 05 06 07 08 201 112
112%
111%
110%
108%
107%
102%
NON PLAN ACTUAL OVER RE (%) 140% 120% 100% 80% 60% 40% 20% 0%
200 200 2002- 200 2003- 20046803 74 05 07 08 09 201 2007201 200 2006200501906 07 08 11 12 10
122% 93%
111%
100%
The corroboration of the aforesaid points regarding the under sanctioning of opex outlays can be seen here.It can be suggested that it would be more appropriate if a portion of the planned expenditure is diverted towards the non planned expenditure to maintain a optimum balance of liquidity in both the areas.
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07 BUDGETED ESTIMATE (BE) (Rs) REVISED ESTIMATE (RE) (Rs) 24.88 7.5
08 13.27 5.07
09 17.22 9.32
10 37.2 3.56
11 12.94 22.68
12 12.12 31.1
the budget is revised.This could have been because of major shift in plans in the region or due to underachievement in the previous year or optimism in the coming year. REVENUE EXPENDITURE (TARGET) YEAR 2006-07 2007-08 200809 BE (Rs) RE (Rs) 90.63 85.6 91.77 68.9 62.76 61.67 200910 44.58 71.78 201011 81.9 86.16 116.44 78.2 2011-12
2 0 0 2 -0 3 2 0 0 3 -0 4 2 0 0 4 -0 5 2 0 0 5 -0 6 2 0 0 6 -0 7 2 0 0 7 -0 8
37.2 40 31.1 35 30 24.88 22.68 25 13.27 17.22 20 12.94 12.12 15 9.32 10 7.5 5.07 3.56 5 0
200607 200708 200809 200910 201011 201112
It can be learned from the graph above that there is quite a large shift in outlays when
116.44 90.63 85.6 91.77 68.9 62.76 71.78 81.9 86.16 78.2 BE (Rs) RE (Rs)
2010-11 2011-12
61.67 44.58
2002-03
2007-08
2003-04
2008-09
2004-05 2005-06
2009-10
2006-07
2007-08
The revenue targets are not subjected to much changes negatively except that in the year 2007-08.
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EXPENDITURE (ACTUAL) YEAR 2006-07 2007-08 2008-09 200910 CAPITAL (Rs) REVENUE (Rs)
70 60 50 40 30 20 41.71 37.24 35.9
2010-11
2011-12
4.66 41.71
4.16 37.24
4.96 35.9
66.27
3.18 46
8.22 41.13
28.57 66.27
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8.22 4.96 4.16 3.18 10 4.66 0 2006-07 2007-08 2010-11 2011-12 2008-09 2009-10 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
The actual utilization data gives correct view of the scenario and helps in plugging lacunas and making the budgeting system more effective.If we study the above graphs and tables then it becomes clearly evident that in both the cases,whether its capital expenditure or revenue expenditure,there have been major deviations in actual figures even over the revised estimates.
FINDINGS
It is observed that the budget utilization is good only for some few cases: Capital utilisation for BE & RE for the year 2009-10 Revenue realised for BE for the year 2008-09
During my course of training in the Company, the Revised Estimate of 2009-10 and Budget Estimate of 2009-10 was under preparation and approval.
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The total financial outlay of RE (2009-10) is Rs 269.54 crore and that of BE (200809) is Rs 283.96 crore. But the RE for 2008-09 was Rs.109.3 crore. Since the subsequent year budget is high it requires close controlling and monitoring to achieve 90% of its estimation.
RECOMMENDATIONS
1) Proper review of monthly and quarterly budgets -It has been witnessed that the
actual targets achieved year on year basis ,vary widely from the budgeted estimates and revised estimates. In lieu of this anomaly ,it can be said that the month and quarter wise physical targets breakups and corresponding budget allocations need to be fixed with a clear vision and proper planning.
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2) Use of SAP-Budget is meant more for controlling than for meeting financial needs as
and when they arise. Therefore proper control mechanism needs to be installed which can minimize deviations in practicality. The budget software presently being used at ONGC just fixes the initial outlays and targets. These targets are then fed into the SAP software in order to monitor the achieved progress. This creates duplicity in the budget preparation. Hence a better option would be to channelize the whole process of budget preparation and operation through SAP only as this software provides lesser room for deviations and hence better monitoring.
7)Focus on OPEX expenditures Mostly the long term budgeting plans get executed
without much delays or hassles as range of time of their execution is suitable to minor
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adjustments if and when required. However variances in OPEX budget actually creates problems. Thus in order to minimize the overall variation ,OPEX should be scrutinized ,so that annual targets are achieved.
8) Better response towards market volatility -The recent spate of fluctuating crude
oil prices indicate that expecting a hundred percent accuracy in line with the estimates is harsh on the company. However if predetermined response system is in place then market volatility wont remain a deterrent and the company would be better prepared to achieve its projected aggressive guidance.
CONCLUSIONS
It can be concluded that the utilisation is poor with respect to BE and RE. It should be more than 90% in case of realistic budget. And it was realisable only for few cases.
The subsequent year budget being more optimistic, it requires a close controlling and monitoring to achieve 90% of the target.
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Hence, more focus is required for controlling of budget for maximum utilisation of plan budget in terms of financial as well as physical budgets.
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RESEARCH METHODOLOGY
C. R. KOTHARI
FINANCIAL MANAGEMENT
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