A Project on

STUDY OF BUDGETING IN RELIANCE INDUSTRIES LIMITED

REFINERY DIVISION, JAMNAGAR

This project is Submitted pursuing my B.com (H) 5th semester

SUBMITTED BY:Xxxx

MODY INSTITUTE OF TECHNOLOGY AND SCIENCE (MITS UNIVERSITY)

PREFACE
I have pleasure to bring out this document incorporating my views on budgeting. The project consists of comprehensive discussions on the elements of budgeting. This project report is prepared pursing my 3rd year of B.com (H) at the MODY INSTITUTE OF TECHNOLOGY AND SCIENCE. The project is a part of my academic curriculum. By this document, reader will be able to get a gist of the subject budgeting + categories of budgeting + budgetary process and so on. The information provided in this project is derived with reference from various books, internet sites & professional guidance from people related to this field. I confirm that this particular project is original to best of my knowledge.

ACKNOWLEDGEMENET
If I look and see, how I got here, what I think, and so on, I discover a debt to others. The work of some supportive people makes our lives easier every day. I believe its not only appropriate to acknowledge all of these people I know who have directly shaped my life and my work. This page is specifically printed to note my appreciation of those people who stand out most notably in my mind as contributing to the content of what you will find in this Dissertation Report. My first vote of thanks would go to Sh. J.S.P. Bansal (Sr. V.PCommercial) and Sh. K.K Vagadia (Sr. V.P-HR) who provided me an opportunity to work at Reliance Industries Limited. I really express my thanks to Sh.N.Hariharan Vice President HRD & Learning Center, for sharing his valuable time with me. I would like to thank Sh. A.S.Sundaram for giving me their valuable advices and for providing me all the facilities which were necessary for this project. I really express my deepest gratitude to the following Finance staff for their support, valuable advices and experiences they shared with me:Mr. Vinod Kr.Jain for guiding me throughout the project work, Mr.Santosh Kr.Ram and Mr. K. Sriram for their co-operation and guidance during training period. Ms. Deesha, Mr. Suresh Kumble and Mr. Bhavin Shah and all those who directly or indirectly helped me during my project work.

Table of Content
S.NO TOPIC 1 INTRODUCTION A. Company profile B. History C. Product profile 2 BUDGETING A. Budget B. Budgeting C. Calendar of Budget Preparation 3 BUDGETARY PROCESS A. Revenue Budgeting Process B. Capital Budgeting Process C. MIS Report 4 5 RECOMMODATIONS REFERENCES Page number
4 To 10
4 To 6 7 To 8 9 To 10

11 To 14
11 11 To 14 15

16 To 32
16 To 21 21 To 30 31 To 32

33

34

Chapter-1 INTRODUCTION
A. Company profile.
"Between my past, the present and the future, there is one common factor: Relationship and Trust. This is the foundation of our growth."

Shri Dhirubhai H. Ambani Founder Chairman Reliance Group December 28, 1932 - July 6, 2002

Board of Directors of Reliance Industries Limited

Shri Mukesh D. Ambani Chairman & Managing Director

Shri Nikhil R. Meswani Executive Director

Shri Hital R. Meswani Executive Director

Shri PMS Prasad Executive Director

Shri P.K.Kapil Executive Director

Shri Ramniklal H. Ambani

Shri Mansingh L. Bhakta

Shri Yogendra P. Trivedi

Dr. D. V. Kapur

Shri M. P. Modi

Prof. Ashok Misra

Prof. Dipak C Jain

Dr. Raghunath Anant Mashelkar

COMPANY SECRETARY Vinod M.Ambani SOLICITORS & ADVOCATES Kanga & Co REGISTERED OFFICE 3 Floor, Maker Chambers IV 222, Nariman Point Mumbai 400201, India
rd

AUDITORS Chaturvedi & Shah Deloittee, Haskins & Shah Rajendra & Co AUDIT COMMITEE Yogendra P. Trivedi (Chairman) Mahesh .P. Modi Dr Raghunath A Mashelkar FINANCE COMMITEE Mukesh D. Ambani (Chairman) Nikhil R. Meswani Hital R. Meswani RENUMERATION COMMITE Mansingh L. Bhakta (Chairman) Yogendra P. Trivedi Dr. Dharam Vir Kapur SHAREHOLDERs/ INVESTORs GRIEVANCE COMMITTEE Mansingh L. Bhakta (Chairman) Nikhil R. Meswani Hital R. Meswani Yogendra P. Trivedi

BANKERS ABN Amro Bank Allahabad Bank Andhra Bank Bank of America Bank of Baroda Bank of India Bank of Maharashtra Caylon Bank Canara Bank Central Bank Corporation Bank Deutsche Bank HDFC Bank Limited ICICI Bank Limited IDBI Bank Limited Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab National Bank Standard Charted Bank State Bank of Hydrabad State Bank of India State Bank of Patiala State Bank of Saurashtra Syndicate Bank UCO Bank Vijaya Bank Union Bank of India

B. History:The Reliance Group, founded by Dhirubhai H. Ambani (1932-2002), is Indias largest private sector enterprise, with businesses in the energy and materials value chain. Groups annual revenues are in excess of US$ 44 billion. The flagship company, Reliance Industries Limited, is a Fortune Global 500 company in India. Backward vertical integration has been the comerstone of the evolution and growth of Reliance. Starting with textiles in the late seventies, Reliance pursed a strategy of backward vertical integration in polyester, fibre intermediates, plastics, petrochemicals, petroleum refining and oil and gas exploration and production- to be fully integrated along the materials and energy value chain. The Groups activities span exploration and production of oil and gas, petroleum refining and marketing, petrochemicals (polyester, fibre intermediates, plastics and chemicals), textiles, retail and special economic zones. Reliance enjoys global leadership in its businesses, being the largest polyester yam and fibre producer in the world and among the top five to ten producers in the world in major petrochemical products. Reliance has now come up with the Worlds largest grass roots petroleum refinery, a petrochemical complex and an independent power plant at Jamnagar in Gujarat. The entire Jamnagar Complex is the first world- scale manufacturing complex of its kind, having a fully integrated petroleum refinery, petrochemicals complex, captive power plants, and a captive port, with related infrastructure. The Rs. 25,000 crore complex set up by the Reliance group at Jamnagar represents the single largest investment ever made by the private sector at any single location in India. RIL emerged as the only Indian company in the list of global companies that create most value for their shareholders, published

by Financial Times based on a global survey and research conducted by Price water house coopers in 2004. RIL features in the Forbes Global list of worlds 400 best big companies and in FT Global 500 list of worlds largest companies. RIL in the First Largest private sector Company from India to feature in the Fortune Global 500 list of Worlds Largest Corporations and ranks 103rd amongst the worlds Top 200 Companies in terms of profits. RIL is amongst the 30 fastest Climbers ranked by Fortune. RIL ranks amongst the worlds 25 Most Innovative Companies as per a list compiled by US financial publication- Business Week in collaboration with the Boston Consulting Group. RIL emerged as the Best Managed Company in India in a Study by Business Today and A.T. Kearney in 2003. The company emerged Indias biggest wealth creator in the private sector over 5- year period in a study by Business Today-Stern Stewart in 2004. According to a survey by Global Consultancies Firm the Nielson, RIL is on top as the Most Admired Company by stakeholders for their Corporate Social Responsibility initiative. RIL has been awarded the prestigious Annual FICCI Awards 2007-08 in the category of Excellence in Science and Technology and Technological Innovation. Reliances Jamnagar complex represents the largest industrial project ever implementation in the Indian corporate sector. The Jamnagar manufacturing complex is a fully integrated Manufacturing complex, with a petroleum refinery complex, an Aromatics/petrochemical complex, a power generation complex, a port and terminal complex, as well as access to a pipeline network. Major Group companies are Reliance Industries Limited (including main subsidiary Reliance Retail Limited) and Reliance Industrial Infrastructure Limited.

C. PRODUCT PROFILE:The Company expanded into textiles in 1975. Since its initial public offering in 1977, the Company has expanded rapidly and integrated backwards into other industry sectors, most notably the production of petrochemicals and the refining of crude oil. The Company from time to time seeks to further diversify into other industries. The Company now has operations that span from the exploration and production of oil and gas to the manufacture of petroleum products, polyester products, polyester intermediates, plastics, polymer intermediates, chemicals and synthetic textiles and fabrics. The Company's major products and brands, from oil and gas to textiles are tightly integrated and benefit from synergies across the Company. Central to the Company's operations is its vertical backward integration strategy; raw materials such as PTA, MEG, ethylene, propylene and normal paraffin that were previously imported at a higher cost and subject to import duties are now sourced from within the Company. This has had a positive effect on the Company's operating margins and interest costs and decreased the Company's exposure to the cyclicality of markets and raw material prices. The Company believes that this strategy is also important in maintaining a domestic market leadership position in its major product lines and in providing a competitive advantage. The Company's operations can be classified into four segments namely:

Petroleum Refining and Marketing business Petrochemicals business Oil and Gas Exploration & Production business Others

The Company has the largest refining capacity at any single location.

The Company is:

Largest producer of Polyester Fibre and Yarn 4th largest producer of Paraxylene (PX) 5th largest producer of Polypropylene (PP) 7th largest producer of Purified Terephthalic Acid (PTA) and Mono Ethylene Glycol (MEG)

Chapter-2 Budgeting
A) Budget is (1) the quantitative expression of a proposed plan of
action by management for a specified period and, (2) An aid to coordinating what needs to be done to implement that plan. Budget is a financial and/or quantitative statement prepared and approved prior to a defined period of time, of the policy to be pursued during that period that period of attaining a given objective. It is the process of planning all flows of financial resources into, with in and from an entity during some specified future period. -National Association Accountants (USA)

B) Budgeting is the whole process of designing, implementing and

operating BUDGET.

1) Purpose of budgeting:a) Provide a forecast of revenue and expenditure, i.e. construct a model of how our business might perform. b) Enable the actual financial operation of the business to be measured against the forecast. c) Compels strategic planning and implementation of plans. d) Provide a framework for judging performance.

2) Zero Base budgeting system:Zero base budgeting is where all the activities are re-evaluated each time a budget is formulated.

3) Categories of budgeting:BUDGETING

REVENUE BUDGETING

CAPITAL BUDGETING

Operating expenses

Capital expenses

a) Revenue budgeting:Revenue budgeting comprises of: i) Operating expenditure:A category of expenditure that a business incurs as a result of performing its normal business operations. One of the typical responsibilities that management must contend with is determining how low operating expenses can be reduced without significantly affecting the firm's ability to compete with its competitors. ii) Objectives, Principles, Policies and Directives of Revenue Budgeting( OPEX BUDGET). - To prepare Annual Operating Budget with proper justification of planned expenses & monitoring of actual expenses with respect to plan. To inform management the reasons of variance between Budget and actual expenses to take necessary steps if required.

- To make the budgetary process transparent among users & an effective tool for cost control.

b) Capital budgeting:It is a process of evaluation and selecting long term investment that are consistent with the goal of shareholders wealth maximisation. Capital budgeting comprises of:i) Capital expenditure:Capex is incurred when a business spends money either to buy fixed asset or to add to the value of an existing fixed asset with a useful life that extends beyond the taxable year. Capex are used by a company to acquire or upgrade physical asset such as equipment, property, or industrial buildings. Included in capital expenditure are amounts spend on:Acquiring fixed asset. Fixed problems with an asset that existing prior to acquisition. Preparing an asset to be used in business. Legal costs of establishing or maintaining ones right of ownership in a piece of property. - Restoring property or adapting it to a new or different use. - Starting a new business. An ongoing question of the accounting of any company is whether certain expenses should be capitalized or expensed. Costs that are expensed in a particular month simply appear on the financial statement as a cost that was incurred that month. Costs that are capitalized, however, are amortized over multiple years. Capitalized expenditure show up on the balance sheet. Most ordinary business expressed is clearly either expressed or capitalized, but some expenses could be treated either way according to the preference of the company. ii) Objectives, Principles, Policies, and Directives of Capital Budgeting (CAPEX BUDGET). - To bring accountability of budget, plant wise Fund Centre mechanism is followed. To make the budgetary process transparent among users who helps in achieving cost control. -

Chapter-3 Budgetary Process

A) Revenue Budgeting, OPEX Budget,( Operating Expenses)
1) PROCESS INVOLVED:a) Consumption Budget:- This is the budget reflecting the consumption of material and services. In other words, it is the budget for the total value of the materials and services, which is expected to be consumed during the year. - Monitoring of consumption budget shall be through cost centre centre accounting in SAP through reports of Plan v/s Actual expenses.

b) Procurement Budget:Budget for material and services for which purchase requisitions will be raised is SAP. For the total expected procurement value for the year, for each FC and commitment then combination of the funds shall be provided in the system. The procurement budget for material shall be completely based on operating inventory level for the year, expected consumption during the year and the minimum stock level to be maintained at all times. For example, for Material A, expected consumption during the year is Rs.100, the operating inventory is Rs.20. The minimum inventory level to be maintained is Rs.10. The consumption budget is Rs. 100 and procurement budget shall be Rs. 90(100-20+10).

In addition, the procurement Budget for the Financial Year will be adjusted for any un-liquidated PR/PO of the earlier year based on the above principle.

It may be noted that all the inputs from the Fund Centre Owners shall be as Consumption Budget only. However, for materials the budget department will then forward he inputs to stores department for their comments on the Inventory Levels, based on which the Procurement budget shall be computed. Monitoring the Procurement Budget shall be through The Funds Management System (TRFM) in SAP.

2) MAJOR HEADS UNDER WHICH OPERATING EXPENSE OF RIL IS CLASIFIED:The six major heads under which the operating expenses of RIL are categorised as: a) Chemicals and catalysts b) Maintenance c) Operation contracts d) Salary and wages e) Insurance, and f) Overheads - Production/Sales plan are considered from the Annual Business Plan, which is issued by Head Office, Mumbai. - Operating expenses and site overhead are budgeted based on the inputs received (in the portals asking the requirement and details of the expenses being incurred) from the Cost Centre owners. - Norms i) FORMAT OF BUDGET INPUT

Sr.No
01 02 03 04 05 06 07

Name of the sheet

Norms Fixed Catalyst Overheads Stores and Spares Contracts Operation Contracts Salaries and Wages Insurance

Description
Norms for fuel, catchem (catalyst and chemicals), Power and utilities. Fixed bed catalyst and shut down chemicals. Fixed overhead expenses Stores and spares + contracts for repairs and maintenance Operation Contracts Employee Related costs Insurance

 Norms: The catalyst and chemicals consumption quantities are based on the norms given by Central Technical Service (CTS). Maintenance Contracts is based on the inputs from CMS (Central Maintenance Services). Administration overheads budget is provided mainly by Administrative Department. Professional fees for foreign consultants being expenditure on SHELL/UOP Technical Support Agreement and Studies etc. are given by concerned authority and included under Overheads. Spares, maintenance consumable, lubes, etc. are budgeted based on the inputs from Central Maintenance Group, Jamnagar (Central Technical Services- CTS). Budget for Operation Contracts is based on the inputs from the respective plant managers/ Cost Centre Owners. Salaries are considered based on inputs received from HR Department. Budget for Insurance premium is provided by Insurance Cell.

3) DEFINITION:a) Fund Centre: Each plant or function is being allotted FC

(Fund centre) to have an ownership of that Plant/ Function.

b) Commitment: In relation to monitoring of budget in SAP,

commitment includes value of pending PR/PO/WO plus value of Invoice Posting.

4) THE PROCESS FLOW:Annual Budget input collected from Fund Centre owners Review of inputs and clarifications Compilation of Input and Annual Plan Preparation of Budget along with Analysis of variance and present to site management for review Sent to Top Management for Approval Uploading Approval Budget in SAP Monitoring of Budget Supplement of Funds/Transfer of Funds Monitoring of consumption Budget

a) Preparation of annual Opex Budget:Firstly the Annual Budget Input is being collected from FC (Fund Centre) owners as per the Formats and procedures circulated in advance for the budget year. Review of input received from FC owners and compilation of Budget after obtaining clarifications, if required. The budget based on the inputs received from Fund Centre is compiled and Annual Plan is then is released by EPS, Mumbai. Preparation of Budget along with Analysis of variance between budget v/s actual and presenting the same to site management for review. After review the Opex Budget is sent to the Top Management for approval.

b) Uploading of approval budget in SAP:Approval budget is uploaded commitment item wise in FC and released in staggered way in SAP system- TRFM Module. After release, budget is available for use by FC owners.

c) Monitoring of Budget:In TRFM Module, each FC is put in error mode i.e. system checks online budget availability when ever user makes any commitment. If budget is available, system processes the commitment, otherwise it stops the user to get additional budget sanctions. Each FC owner can view the status of budget availability in SAP system.

d) Supplement of Funds/Transfer of funds:Where budget exhausts and user requires fund, user has to get approvals from the appropriate authority to either get additional budget or to get the fund transferred from within same FC or from within same FC or from different FC.

e) Monitoring of consumption Budget:Through the MIS reports the consumption budget is monitored.

5) SCOPE:In this process only the revenue items are being covered.

6) BUDGET COMIPLATION:The budget will be completed based on the inputs received from FC owners and Central Agencies pertaining to the Planned/ Estimated expenses to be incurred by them during the year. Planning estimation of the expenses (other than fixed expenses) shall be based on the past experiences and the level of operation to be maintained during the year. The actual of the current year and that of the previous year are only indicative figure for comparison purpose. If in case, proposal budget is not less than the actual/ projected expenditure of financial year, then the same needs justification. Management expectation is of an overall reduction in the operating cost. Circulation of actual expenditure to all the fund centre owners for their info and exception reports highlighting where actual expenses have excluded the plan for past year.

B) Capital Budgeting (Capex Budget):1) DEFINITION:a) Fund Centre: Each plant or function is being allotted
fund centre to have an ownership of that plant/ function. Budget is monitored fund centre wise in SAP TRFM Module.

b) Field/ Plant Change Order (FCO/PCO): Any change

or modification carried out at site to enhance capacity/ productivity/ efficiency/reliability of Plant or reduce costs/ increase revenue.

c) Capex Asset Proposal: A proposal used to acquire a

ready-to- use asset like IT/Admin Asset.

d) Commitment: For the monitoring of funds, commitment

means unliquidated value of PR and PO and Invoice booking.

2) PROCESS FLOW:Preparation of annual Capex Budget Uploading and releasing of approved budget in SAP Monitoring of Budget Supplement of funds/transfer of funds Monitoring the status of Capex FCOs-MIS Financial validation of FCOs for closure Year end procedures in SAP

a) Preparation of annual Capex Budget:For the compilation of Capex budget of the site through budget portal in the web page, the target date for the proposal entry, approval entry, approval by HOD/Sector Chief which is predefined in the portal is intimated in advance to all the users along with other necessary instructions. Compilation of the proposals into complex wise based on the inputs entered in the budget portal and review of the same. Preparation of capex budget along with justification and budget v/s actual commitment of the last year are presented to site President for review.

b) Uploading and releasing of approved budget in SAP:In case FCOs funds are uploaded commitment item wise in allotted Fund Centre in TRFM module or against the WBS element in PS module and released immediately. For assets funds would be uploaded in commitment itemcapital WIP in respective Revenue Fund Centres in TRFM Module and released immediately.

c) Monitoring of Budget:Each Fund Centre in TRFM and PS Module are put in error mode i.e. system checks online budget availability when ever user makes any commitment. If budget is available system processes the commitment otherwise it stops. When it stops, the user has to get additional budget approval. User can view the status of budget availability in SAP system.

d) Supplement of funds/ transfer of funds:Where budget exhausts and user requires fund, user has to get approval from the appropriate to get either gets additional budget or to get the funds transferred from within same fund centre or from different fund centre.

e) Monitoring the status of Capex FCOs-MIS f) Financial validation of FCOs for closure:Whenever the project is completed in all respect a close out report is being issued for financial validation after the same is technically validated by CTS in consultation with the Plants.

g) Year end procedure in SAP:Carry forward of unliquidated PR/PO and the closing available Balance and supplement.

3) GUIDELINES:a) Compilation of Annual Capex Budget, based on proposals entered in Capex Budget Portal and duly approved by the appropriate authority as per guidelines available in the Capex Budget Portal.

b) The approved procedure to be followed for creation of a WBS (in case of PS module) or Fund Centre/Internal Order (in case of Funds Management) for monitoring Capex budget in SAP. c) Periodical review of authorization of fund centres to respective users. In case the employees get transferred to another department or leaves the organization, the FC owners should intimate budget section to remove the authorization of their fund centre to avoid any un-authorized use of their funds.

4) EXCEPTIONS: Budget availability check is only at PR/PO stage but allows FI posting even in case of negative balance, however further commitment through PR/PO will not be possible in the same Fund Centre.

5) IT ENABLEMENT:a) SAP: entire budget is monitored through SAP either in PS

Module or Funds Management System.

b) Manufacturing Capex Portal: All FCOs are initiated,

approval and closed using this capex portal.

c) Budget Portal: Compilation of Capex Budget for the year is

started by making proposal entries for FCOs/ Asset in budget Portal, which is subsequently approved by respective HODs And Sector Chiefs but before final approval from Site President.

6) APPROVAL AND REVIEW:a) Once the capex is submitted for review, the user cannot edit the Capex then. b) Capex would then follow the workflow that is been defined for

The site, sector and plant. c) When the capex is saved a CAPEX proposal number is generated, this is as per the format. d) The approval and review would take place only LEVEL AFTER LEVEL. When the Capex is approved and reviewed by by the level 1 and based on his action it will either move to the next level or go back to the owner. e) Any action taken when the capex is in on approval and implementation and completion stage, mail messages are generated and sent to the concerned users. f) An approval code is generated only when the capex is APPROVED BY THE SITE COMMERCIAL CHIEF.

Chapter-4 Recommendation
For selecting a capital expenditure (capex), the company considers NPV (Net Present Value) and IRR (Internal Rate of Return) as the best tool. On the basis of these tools the company judges the worthiness of investment projects. Along with these, the company can implement EVA (ECONOMIC VALUE ADDED) method, because.. It is a performance measure that ties directly theoretically as well as empirically, to shareholders wealth creation. It converts accounting information into economic reality that is readily grasped by non financial managers, it is a simple yet effective way of teaching business literacy to everyone. It serves as a guide to every decision from strategic planning to capital budgeting to acquisition to operating decisions. As the basis for incentive compensation, it truly aligns the interest of managers with that of shareholders and make managers think and act l like owners. It is an effective tool for investor communication. It serves as an anchor for an internal system of corporate governance that motivates everyone to work co-operatively and enthusiastically to achieve the best attainable performance.

References
Websites: www. Ril.com www. Google.com www. Wikipedia.com Magazines: Business world RIL Annual Report Company Periodicals Reference Books: Financial Management
- By khan and Jain.

Financial Management
- By I M Pandye.