Working Capital Analysis

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Data source Different reports, being generated by the respective departments was used for collection of data, like monthly debtors report, daily cash flow report, annual audited accounts of the company, inventory stock report. The accounts of the company for the last 6 months, i.e. from Jan’17 to Jun’17 were referred to for the purpose of analysis. It was collected from online sources like company website, MIS reports, internal available company accounts and other websites. Working capital is very essential for success of a business and, therefore, needs efficient management and control. Each of the components of the working capital needs proper management to optimize profit. Hence the management of working capital involves managing …show more content…

If it is constantly coming near say 30%, i.e. working capital level is 30% of sales, the next year estimation is done based on this estimate. If the expected sales are 5 crores, 1.5 crores would be required as working capital. The advantage of this method is that it is very simple to understand and calculate also. Disadvantage includes its assumption which is difficult to be true for many organizations. Year Sales (in ‘0000) Working Capital (in ‘0000) Relationship between sales and revenue (%) Jan-17 425.31 106.73 0.25 Feb-17 528.77 139.01 0.26 Mar-17 480.26 167.61 0.35 Apr-17 622.71 214.29 0.34 May-17 511.45 192.38 0.38 Jun-17 550.11 247.09 0.45 Table 1: Percentage of Sales method calculation The relationship between Net sales and Working capital level for six months works out to be different values and since obtaining a linear relationship between both was not possible. Even the average doesn’t hold good for the above case. So the next method called regression analysis method was used where the relation between two variables was established which increases the accuracy of the estimate. 2. Regression Analysis Method This statistical estimation tool tries to establish trend relationship between revenue and working capital. It can also be called a trend analysis because the relation is carved out based on past trends. Without going into technical details, this method says ‘Working Capital = Intercept + Slope * Revenue’ The