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Goal Programming for Capital Management

The document presents a goal programming model for working capital management that considers the twin goals of liquidity and profitability. It assigns different priority coefficients to goals like maintaining target current and quick ratios to ensure liquidity and profitability defined as earnings before tax over net worth. The model minimizes the deviations from these goals subject to constraints regarding current assets, liabilities and profit targets.

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BharatKathuria
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412 views4 pages

Goal Programming for Capital Management

The document presents a goal programming model for working capital management that considers the twin goals of liquidity and profitability. It assigns different priority coefficients to goals like maintaining target current and quick ratios to ensure liquidity and profitability defined as earnings before tax over net worth. The model minimizes the deviations from these goals subject to constraints regarding current assets, liabilities and profit targets.

Uploaded by

BharatKathuria
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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A Goal Programming Model for working Capital Management

A same priority goal programming model may be expressed as follows:

( )
m
Minimize z = ∑ d i + d i
+ −

i =1

Subject to

( )=b
n

∑a j =1
ij
−
xi + d i − d i
+
i for all i

− +
xi , d i , d i ≥ 0 for all i, j

where

+
d i = Deviational variable reflecting over achievement of specified goals
−
d i = Deviational variable reflecting under achievement of specified goals
m = number of goals
n = number of decision variables, not including deviation variables

here all goals have same priorities

.
Prioritized goal programming model may be expressed as follows:

( )
m
Minimize z = ∑ pi d i + pi d i
+ −

i =1

Subject to

( )=b
n

∑a
j =1
ij
−
xi + d i − d i
+
i for all i

− +
xi , d i , d i ≥ 0 for all i, j
where

pi = prority coefficient assigned to goal i


pi > pi+1

− +
only one of d i , d i can be non zero

− +
di × di = 0
Goal Programming Model for working Capital Management

o The twin goals of liquidity and profitability have been considered


o Liquidity assuming primary importance
o Profitability is defined as:
EBT
Net Worth
o Current ratio (measure of short term solvency) has been assigned the topmost
priority
CA
CR = = 2 : 1 (industry norm)
CL

o This is followed by quick ratio (acid test ratio)

CA - Inventorie s
QR = = 1:1
CL

The different priority coefficients assigned to different goals are as follows:

Goal Priority coefficient

Target value for current assets P1


Target value for quick assets P2
Target value for current liabilities P3
Profitability (maintaining CR) P4
Profitability (maintaining QR) P5
Target value for cash P6
Target value for marketable securities P6
Amount of Inventory P7
Value of Account receivables P8
Amount of Short term borrowings P9
The other notations are:

CL Current liabilities
Pt Profit target (x5)
Ct Target value of cash (x1)
Ms value of M-S (x2)
I amount of inventory (x4)
R value of account receivables (x3)
Sl amount of short term loans (x7)
Cc cost of capital
CR current ratio
QR quick ratio
X6 trade credit and accrued expenses
The goal programming model is:

2p 1 d 1− + p1 d 1+ + 2p 2 d 2− + p 2 d 2+ + p 3 ( d 3− + d 3+ ) + p 4 d 4− + p 5 d 5−
Min z =
+ 2p 6 (d 6− + d 6+ ) + p 6 d 7− + p 7 d 8+ + p 9 d 10+

Subject to :

(a) Liquidity Goals

x1 + x 2 + x3 + x 4 + d1− − d1+ = 2CL 1


− +
x1 + x 2 + x3 + d − d = CL
2 2 2
− +
x6 + x7 + d − d = CL
3 3 3

(b) Profitability Goals

x + C (2( x + x ) − CR( x + x + x + x )) + d = P
5 c 6 7 1 2 3 4
−
4 t
4
−
x5 + C c (( x6 + x7 ) − QR ( x1 + x 2 + x3 )) + d = Pt 5 5

(c) Current assets subgoal

Cash x1 + d 6− − d 6+ = Ct 6
M-S x 2 + d 7− = M s 7
Inventory x 4 − d 8+ = I 8
AR x3 − d 9+ = Ra 9

(d) Current liabilities

x 7 − d10+ = S l 10

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