Explain Regression analysis method in estimation of working capital.

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

Solution

The solution is given below −

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

Mandalika

Updated on: 29-Sep-2020

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