Best Practice in Revenue Management

10/30/2018
Best Practice in Revenue Management

Do you want to increase your accounting department’s efficiency, reduce administrative expenses and increase cash flow? Read on to learn of a revenue management best practice that can do just that.

If you’re part of an upstream oil and gas accounting department that records revenue transactions from cash receipts, the adoption of marketing contract-based procedure that calculates revenue transactions from production volumes and contract terms can help your organization gain the following efficiencies:

  • Savings of 25-75% of time spent entering data into your accounting system
  • Saving up to 25% of time spent creating prior period adjustments
  • Savings of 15-25% of time spent reporting on production and severance taxes
  • Improve cash flow by knowing your purchasers are paying on time and in accordance with their product sales contract
  • Improve cash flow by knowing division orders are processed timely and suspended revenue is received, not held by the purchaser

Below we’ll discuss the challenges oil and gas accounting departments face, best practices to avoid these challenges, and how to implement these best practices.

The Challenges

Operators often record revenue transaction from cash receipts (Check Stub Data Entry). Here are a few reasons why:

  • A check stub is the easiest available source of the information
  • The operator is only willing to pay other interest owners the amount they receive from the purchaser
  • They cannot get the production information from the production operations team in a timely manner
  • They don’t trust the information they receive from production operations
  • They don’t understand the marketing terms and pricing arrangements
  • They don’t have the ability to calculate all the components (taxes, marketing, transportation, etc.)
  • The adage “this is the only way we have ever done it”
  • The system only allows entry from check stubs

The challenges created by this method are:

  • The operator is fully dependent on receipt of payment from the purchaser to record revenue
  • The values calculated by the purchaser are recorded, whether correct or not, and the process does not validate the accuracy of the purchaser payment
  • There is no audit of the purchaser calculated values, therefore purchaser errors go undetected
  • Data is entered for documents other than the actual source documents
  • Revenue suspended by the purchaser goes undetected
  • Timing for lease distribution, reporting of production, and severance taxes cannot be met and is dependent on purchaser receipts
  • Receivables are not recorded, delaying the collection of outstanding revenue”
  • Calculation errors are recorded whether correct or not, and are only corrected once the purchaser makes the correction
  • When time constraints require recording revenue, and/or calculating and reporting taxes from data other than purchaser receipts, the work must be done in spreadsheets

Out with The Old

From the challenges outlined above, you can see that recording information solely from a check stub entry is not an effective process. It makes it difficult for the revenue accountant to comply with both lease and marketing contracts. In addition, government royalty and tax reporting requirements effectively render the process as obsolete. Auditors have established that oil and gas operators must prove the accuracy of the recorded data and validate that their business process accurately records and validates transactions through the audit. Manual check stub data entry no longer meets the mark. The inability to systematically calculate and record revenue transactions based on the source data and to provide auditable assurance of the accuracy of the data is essential. It’s also difficult to properly distribute and value revenue for different purposes for several reasons:

  • Individuals have special ownership-level pricing
  • Disproportionate sharing of different revenue related costs
  • Tax-exempt interest
  • Tracking multiple tax classifications
  • Payment of owner based on multiple dispositions (Lease Use, Fuel, Flare, Shrinkage, etc.)

In with The New

By systematically recording revenue transactions starting with production dispositions from production data revenue, accountants quickly see the benefits:

  • Calculating the values based on the marketing contract
  • Calculating production and severance taxes
  • Calculating special owner pricing
  • Calculating special component sharing
  • Allocating to owners
  • Distribution to owners
  • Variance and exception analysis
  • General ledger account reconciliation
  • Processing prior period adjustments

The revenue accountant can quickly evaluate the information and focus on accuracy, variances, exceptions, and reconciling the difference versus calculating revenue values and data entry as is prevalent in many revenue accounting departments. With proper systems in place focus should be on:

  • Monitoring volume difference between the dispositions reported by the field and amounts received from the purchaser(s)
  • Monitoring compliance with lease and marketing contracts
  • Ensuring proper distribution is made to the different owners – special owner pricing, special volume disposition requirements (payment in lease use, flare, fuel, etc.), special component sharing, and NPI (Net Profit Interest) calculation
  • Receivable account reconciliation; monitoring purchaser compliance with marketing agreement versus accepting payments at face value
  • Focus on improved processing to reduce prior period adjustments, do it right the first time – save your organization from redoing and reprocessing information through business process improvements

How to Save Time & Money

Errors are costly and avoidable, especially when using spreadsheets. Below are some points to better manage and gain full advantage of your accounting system:

  • Look for a system that is integrated with production operations so that there is a single system of record for production data
  • Establish strict review and approval standards for data entered into the system
  • Eliminate manual keying of data, when possible
  • Depend on system calculations, not spreadsheet calculations where a single error can impact many calculations and multiple transactions
  • Get your data into the system; having your data housed in multiple spreadsheets and point solutions limits your ability to analyze performance, report results, and gain efficiencies
  • Understand and use the software as designed. Some estimate that user only exercise 20% of the overall functionality of commercial software. Ask your provider how to best use the software so that you are getting the maximum value.

Operators can reduce 25-50% of their prior period adjustments by focusing on and controlling the accuracy and timing when data is received. By focusing on a single point of data entry and establishing business processes to ensure the accuracy and timeliness of the data, an operator can realize many benefits:

  • Less time spent calculating revenue transactions in spreadsheets and entering data into your accounting system
  • Having a process that has an automated system for reprocessing can minimize time spent making adjustments to prior periods, which can be a huge savings
  • No more reporting on production and severance taxes
  • Improve cash flow by knowing your purchasers are paying on time and in accordance with their product sales contract
  • Improve cash flow by knowing division orders are processed timely and suspended revenues are received and not held by the purchaser

 

 

About The Author
Steve Tanabe, a Director of Product Management at P2, is our resident BOLO aficionado. Steve has 30-plus years of upstream oil and gas experience and more than 10 years of BOLO experience. A member of AAFP (Accounting and Finance Professionals), Steve studied Accounting at Metropolitan State University of Denver. If you’ve ever talked to Steve, you know he’s passionate about golf and classic cars but he’s equally as passionate about the BOLO solution … and that’s saying something.

Related Articles


The Benefit of Replacing Manual Processes with Workflow Automation

11/29/2018
Is your back office tied up in tasks that take away from their core responsibilities? Are they spending hours sifting...

Unlock the Value of Accounting Data with Oil & Gas Business Intelligence

11/13/2018
Are you working in an upstream oil and gas accounting department that relies heavily on spreadsheets for your reporting needs?...

How Manual Processes & Workarounds Are Costing You Money

11/06/2018
We all know the saying, time is money. What manual processes and workarounds are you currently using at your upstream...