Financial planning using goal programming

Abstract

Financial planners within industrial organizations are often given the impossible task of formulating a multi-year financial plan which is severely over-constrained. As the planner attempts to meet one objective another variable (or ratio of variables) becomes unacceptable and he is faced with the familiar ‘balloon squeezing’ effect. The problem is one of multiple conflicting objectives (goals) hence lends itself very well to a goal programming method of solution. This approach provides a powerful ‘what-if’ device for the financial planner and allows him to arrive at a satisfactory solution by examining the various trade-offs among the conflicting goals. To be an effective and usable tool, the individual goals are not assigned a priority coefficient as is typical of most goal programming applications. Rather, the planner can reflect his priorities in the manner in which he performs the subsequent what-if analyses. Also, a more flexible penalty function is introduced allowing the planner to assign a more realistic set of penalities which vary in severity over a specified range. Methods of implementing this concept are discussed which overcome the problems created by the immense storage requirements and the necessity of assigning the various penalties.