Short-term financing
Corporations routinely face the problem of financing short-term cash commitments.
Linear programming can help in figuring out an optimal combination of financial
instruments to meet these commitments. To illustrate this, consider the following
problem. For simplicity of exposition, we keep the example very small.
A company has the following short-term financing problem:
Month Jan Feb Mar Apr May Jun
Net cash flow −150 −100 200 −200 50 300
Net cash flow requirements are given in thousands of dollars. The company has the
following sources of funds:
a line of credit of up to $100k at an interest rate of 1% per month;
in any one of the first three months, it can issue 90-day commercial paper bearing a total
interest of 2% for the three-month period;
excess funds can be invested at an interest rate of 0.3% per month.
There are many questions that the company might want to answer.
What interest payments will the company need to make between January and June? Is it economical to use the line of credit in some of the months? If so, when? How much?
Linear programming gives us a mechanism for answering these questions quickly
and easily. It also allows to answer some “what if” questions about changes in the
data without having to resolve the problem. What if the net cash flow in January
was −$200k (instead of −$150k)?
What if the limit on the credit line was increased from $100k to $200k? What if the negative net cash flow in January was due to the purchase of a machine worth $150k and the vendor allowed part or all of the payment on this machine to be made in June at an interest rate of 3% for the five-month period?
The answers to these questions are readily available when this problem is formulated and solved as a linear program
