The impact of new, unsettled economic factors is challenging even the most sophisticated corporate planning group.

As the corporate year is coming to a rapid close, planning for 2009 represents a triple problem of:

• Projections of general operating budgets for the overall costs of corporate operations,
• The specialized estimation for costs of raw materials on a varying basis to produce product, and
• The infrequent budgeting for the costs of energy to be used in producing and transporting output.

These factors affect even the smallest enterprise as well as publicly traded corporations as variations in the three planning functions can be compounding, conflicting or offsetting.

One economist, Dr. Kenneth E. Lehrer said at a recent briefing to his corporate clients, “past use of budgeting tools and techniques were based, for the most part, on relatively smooth and mostly predictable curves in terms of operational costs, raw materials and energy consumption.  Today we are faced with an unprecedented change that is affecting all of these calculations.”

Lehrer, like other economists expects the costs of raw materials/energy and transportation (including shipping expenses) to not only continue their general upward trends, but to exhibit significant variability on a quarter to quarter basis during all of 2009 and 2010.  T

hese varying and potentially conflicting trends tend to decrease the reliability of both corporate budgets and corporate earning projections. 

Lehrer outlined the example of a manufacturer who utilizes a significant quantity of plastics in their output and sought to project overall operational overhead, raw materials we well as transportation of their completed products.

“Manufacturers can no longer easily or routinely project future costs of a very volatile matrix by utilizing the CPI or other indexes that have, in previous periods easily agglomerated a multitude of the factors of production," said Lehrer.

“In an economic environment that can, at best, be labeled a mini-recession, significant projections for  - operational overhead, raw materials and transportation / energy must not only be segregated to be accurately projected, they must be segregated along lines that independently reflect best estimates.  They should include volatile costs and their respective resulting outputs, namely their impact on corporate  earnings,” he added. 

Simply stated, when an organization, especially a publicly traded company is calculating and then pronouncing future corporate earnings under SEC guidelines, the raw material and energy components cannot simply follow prior corporate projections or the CPI. 

Rather, individual components need to be segregated and projected via their own recent and varying database histories, a much more complex and time consuming task than incorporating the broad brush CPI or other generally accepted indexes. 

Stability in these financial numbers will only be reached if either the volatility of these various items decrease or enough historical data on each item is collected that allow for reliable projections to once again be collected.

For client corporations to develop new sets of reliable data that can be utilized and referenced in the budgetary process, Lehrer’s team is relying upon a variable approach to finalize the yearly corporate budgetary process, as raw materials / energy and transportations costs are not projected to follow their prior paths,

“My staff and I are advising corporate treasurers and analysts to create their own sets of databases that more appropriately reflect direct usage of individual items as opposed to acquiring general industry ratios when preparing yearly budgets in times of significant economic uncertainty, in addition to analyzing projected projects,” said the Senior Managing Director of Lehrer Financial and Economic Advisory Services (Houston, Texas).

“Fundamental corporate budgeting requires creation and implementation of new databases, as information that includes data older than five (5) years does not adequately reflect the changing fundamentals of costs of conducting business in a world economy whose volatility now includes increasing growth of raw materials from third World Nations, China and energy requirements that often conflict with governmental policies to limit global warming and pollution,” Lehrer said. 

However, as those responsible for collecting, utilizing and projecting corporate finances realize the “:good ole days” of easy economics utilizing broad based indexes along with CPI and or other broad brush concepts are slowly coming to an end, additional energy will be consumed when corporate treasurers and their staffs consume energy by “burning the midnight oil” as they ponder the future of their organizations, even if only for a year at a time.

For more detailed information, please visit the organizations website –  www.lehecoserv.com.