MULTIFACTOR FINANCIAL-PLANNING - AN OUTLINE AND ILLUSTRATION

This paper deals with the support of strategically oriented financial planning processes in business firms. In handling a financial planning problem, the decision maker has to deal with a number of complications. In this paper special attention is paid to the risk with regard to the outcomes of the financial plan and the existence of multiple, conflicting goals. Various participants in the firm make their demands on financial policy. As these demands may well be conflicting, the planner is faced with a multi-objective decision problem. In financial literature, risk is usually modelled as the variance of cash flows or in terms of their covariance with the return on the financial market portfolio. Risk is then usually incorporated in the net present value of the cash flows by using a risk adjusted discount rate. The existence of multiple goals is usually abstracted from, or is considered to be included in the net present value. The only goal the financial planner needs to be concerned about is the maximization of the firms market value. In this paper, an interactive approach to financial planning is presented. In this approach, risk is modelled by means of so-called multi-factor risk models. Multiple goals are explicitly accounted for in our model through the use of an interactive goal programming method. The use of the interactive approach will be numerically demonstrated by means of an exemplary planning problem. In this problem, a selection is to be made from a set of capital investment projects while taking account of the financing consequences over time.