Explain Regression analysis method in estimation of working capital.

Banking & FinanceFinanceFinance Management

In regression analysis method, statistical tool is used to calculate working capital.

Calculations

  • Working capital = Int + m*R

            Int = intercept, m = slope, R = Revenue

  • Σy = na + bΣx
  • Σxy = aΣx + bΣ2

            Where x = sales, y = working capital, n = years

Advantages of this method include −

  • Accurate method for bigger volume of data.
  • It is a proven method.

Disadvantages of this method include −

  • Not east to understand.
  • Calculations are complicated as compared to percentage sales method.

Example

  • By using following table, calculate the data using regression analysis method, forecasted sales = 500

YearSales (X)Working capital (Y)
20XX8060
20XX9565
20XX11075
20XX12580
20XX14090
20XX150100

Solution

The solution is given below −

Year (n)Sales (X)Working capital (Y)X*YX2
20XX806048006400
20XX956561759025
20XX11075825012100
20XX125801000015625
20XX140901260019600
20XX1501001500022500
Σn = 6Σx = 700ΣY = 470ΣX*Y = 56825ΣX2= 85250

Now calculate

  • Σy = na + bΣx => 470= 6a+700b
  • Σxy = aΣx + bΣ𝑥2=> 56825 = 700a + 85250b=> (by dividing with 25) => 2273 = 28a + 3410b
  • By multiplying Σy with 28 and Σxy with 6, we get,
  • 13160 = 168a+19600b
  • 13638 = 168a +20460b

By solving the above two equations, we get => b = 0.56 and a = 13

  • Working capital = Int + m*R => 13+0.56(500) => 293
raja
Published on 29-Sep-2020 17:29:10
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