Short-term financial planning with uncertain receipts and disbursements

Abstract

The problem of short-term financial planning is to determine an optimal credit mix to meet the short-term cash needs and an optimal investment plan for excess cash. A number of linear optimization models have been developed to solve this problem, some of which are in practical use. The purpose of this paper is to generalize the assumptions of these models concerning the available information about future receipts and disbursements. It is presupposed that the financial officer has some idea as to the amount involved which, however, cannot be specified by a probability distribution. On the contrary, we assume that these ideas only permit qualitative probability statements such as the following: “That the difference between disbursements and receipts in a certain period lies in an interval I 1 is no less probable than that it lies in an interval I 2”. For this level of information we formulate a model for short-term financial planning, and we develop a solution procedure to determine the optimum financial alternatives. Finally, the entire procedure is demonstrated by a medium sized example.