For oil and gas producers, managing money is a nail-biting experience at the best of times. In good times, capital spending soars; in bad times, operational expenses still occur.
Small and midsize producers are typically sending money out almost as fast as it comes in the door—sometimes faster. Knowing where the money is going is one thing that most accounting packages can tell you. Knowing why it was spent in the first place usually requires a bit of research. Knowing where to spend next is even more difficult.
Here are five reasons why ditching separate accounting software and production management systems in favor of a unified enterprise resource planning (ERP) system helps small and midsize producers.
When an oil and gas producer is small, the boss may allocate costs in his or her head. It’s pretty easy to divide a service invoice between a couple of wells just in one’s head. When the producer starts adding sites, the company needs a more formal way to divide the services contracts. That way, when investors are auditing each well, the operator can simply and quickly justify every penny spent.
Specialist equipment in oil production is very expensive. Companies can’t just run down to the local hardware store for necessary items. In addition, lead times for some items are quite long.
Oil producers need to justify the cost of each major asset purchase to maximize their efficiency. Knowing how well the existing equipment performed and how much it cost over time is critical to knowing the true cost of equipment.
Being able to allocate operating cost from the accounting system and relate that cost to the value of production over the item’s life expectancy is critical to maximizing return on investment for the equipment and for the company. It’s much easier to do that from one system and one database.
Different well sites have different production and operating costs. Knowing how much money will be lost from taking equipment offline is crucial. Offsetting that loss are savings from not operating—usually not a good tradeoff. The long-term costs come from the accounting system, while the production value projection comes from the production system. Both are kept together in the ERP system.
Too often, the accounting department’s first sign that an expense occurred comes when the invoice arrives at the office. Without the proper attributes in the memo line of the invoice, accounting needs to track down why the expense was incurred and against what accounts to allocate it. A single ERP system requires that work orders and other expenses be approved in the accounting system—no surprises at the end of the month or unknown invoices showing up in the mail.
Single System for Growth
Many small and midsize producers purchase production and accounting systems separately and at different times. Oil producers can only grow so much before the manual work required to make the two systems work together becomes too much. Installing a single ERP system before problems become nightmares is the best route to take for the small and midsize oil producer.
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