Page 217 - DMGT405_FINANCIAL%20MANAGEMENT

Unit 10: Working Capital Management

techniques like linear regression. A formula is developed for the straight line that best fits Notes
the data and this formula can be used to express the relationship between two variables –
say prior month’s sales and working capital. The most widely used regression technique
employs the method of least squares. Let us take the following figures extracted from the
books:

Table 10.2: Ratio of Sales
2
Month Prior Months Sales Working Capital X XY
X (000) Level Y (000) (000,000) (000,000)
January 450 300 202500 135000
February 400 300 160000 120000
March 350 250 122500 87500
April 300 220 90000 66000
May 250 200 62500 50000
June 500 400 250000 200000
July 700 500 490000 350000
August 600 450 360000 270000
September 300 300 90000 90000
October 250 250 62500 62500
November 650 500 422500 325000
December 550 400 302500 220000
5300 4070 2615000 1976000
x = 5300(000) y= 4070(000) x = 2615000 xy = 1976000
2
(000,000)

Y = a + bx
y = Na + bx - 1

xy = ax + bx 2

From (1) - 4070 600 = 12 a + 5300,000 b
From (2) = 1976000 (000,000) = 53,00,000

To get the line of best for Y = a + bx, we can use the following formula
y = Na + bx

xy = ax + bx 2
Solving the above two equations, we get,

a = 35638 and b = 0.687

Hence, the line of best fit Y = 35638 + 0.687
Suppose in October, the firm had sales of 1.25,000, the estimated working capital will be
35638 + 0.687 × 425000 = 327613
3. Ratio of fixed investment: To estimate working capital requirements as a percentage of
fixed investment.

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