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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
| Year | Sales (X) | Working capital (Y) |
|---|---|---|
| 20XX | 80 | 60 |
| 20XX | 95 | 65 |
| 20XX | 110 | 75 |
| 20XX | 125 | 80 |
| 20XX | 140 | 90 |
| 20XX | 150 | 100 |
Solution
The solution is given below −
| Year (n) | Sales (X) | Working capital (Y) | X*Y | X2 |
|---|---|---|---|---|
| 20XX | 80 | 60 | 4800 | 6400 |
| 20XX | 95 | 65 | 6175 | 9025 |
| 20XX | 110 | 75 | 8250 | 12100 |
| 20XX | 125 | 80 | 10000 | 15625 |
| 20XX | 140 | 90 | 12600 | 19600 |
| 20XX | 150 | 100 | 15000 | 22500 |
| Σn = 6 | Σx = 700 | ΣY = 470 | ΣX*Y = 56825 | ΣX2= 85250 |
Now calculate
- Σy = na + bΣx => 470= 6a+700b
- Σxy = aΣx + bΣ?2=> 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
Updated on: 2020-09-29T13:59:10+05:30
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