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

a
j =1

ij

xi + d i d i
+

)=b

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

a
j =1

ij

xi + d i d i
+

)=b

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 di di = 0
+

can be non zero

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
CR = CA = 2 : 1 (industry norm) CL

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

QR = CA - Inventorie s = 1:1 CL

The different priority coefficients assigned to different goals are as follows: Goal Target value for current assets Target value for quick assets Target value for current liabilities Profitability (maintaining CR) Profitability (maintaining QR) Target value for cash Target value for marketable securities Amount of Inventory Value of Account receivables Amount of Short term borrowings The other notations are: CL Pt Ct Ms I R Sl Cc CR QR X6 Priority coefficient P1 P2 P3 P4 P5 P6 P6 P7 P8 P9

Current liabilities Profit target (x5) Target value of cash (x1) value of M-S (x2) amount of inventory (x4) value of account receivables (x3) amount of short term loans (x7) cost of capital current ratio quick ratio trade credit and accrued expenses

The goal programming model is: Min z =

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

1 2 3

(b) Profitability Goals

x5 + C c ( 2( x6 + x7 ) CR ( x1 + x1 + x3 )) + d 4 = Pt

x5 + C c (( x 6 + x 7 ) QR ( x1 + x1 + x3 )) + d = Pt

4 5

(c) Current assets subgoal Cash x1 + d 6 d 6+ = Ct M-S x 2 + d 7 = M s Inventory x 4 d 8+ = I AR x3 d 9+ = Ra (d) Current liabilities
+ x 7 d10 = S l

6 7 8 9

10