Working Capital Management with Regression Analysis (With

Ashley Lewis | Download | HTML Embed
  • Aug 29, 2015
  • Views: 2
  • Page(s): 5
  • Size: 560.77 kB
  • Report



1 Inte rnational Journal of Engineering Technology, Manage ment and Applied Sciences August 2015, Volume 3, Issue 8, ISSN 2349-4476 Working Capital Management with Regression Analysis (With reference to Visakhapatnam Steel Plant (RINL), VSP) Dr.T.Durga Prasad Associate Professor Aditya Global Business School, Surampalem, East Godavari Dist. ABSTRACT Working capital is the life blood of the organization, without pumping of blood cant live the life, so like cant pumping of working capital cant run the organization. In traditional way ev ery organization to be calculation of working capital uses like difference between current assets and current liabilities, ratio analysis and trend analysis but these are all not accrual. So in this context, iam focus on statistical way approach. Working capital directly impact on sales performance, so now iam conduct the relationship between sales and working capital, the relation developed through uses of regression analysis. So we are used regression analysis easily forecast requirement of working capital. INTRODUCTION: Working capital refers to the funds required in the business to carry on its day to day operating activities e.g., funds required for the purchase of raw-materials / stores, payments of wages and other day to day expenses. Working capital is current assets minus current liabilities and the amount can be positive or negative. It is that part of firms capital which is required for financing short-term or current assets such as cash, marketable securities, debtors and inventories. Definition: according to shubin working capital is the amount of funds necessary to cover the cost of operating the enterprise. Objectives of the study: To be find out relation between sales and working capital To be assess annual growth rate of sales performance To be assess annual growth rate of working capital To be analyze working capital requirement in future To be study the changes in working capital position the organizat ion Methodology of the study: There are basically two sources of information which determine the methodology to be followed in the over all areas of a project work. They are primary source and secondary source. The present study is conducted basic on secondary data. Following tools are used like.. Regression analysis Trend analysis Annual growth rate calculation Advantages of regression analysis : Regression analysis which is a proven method of forecasting. Bigger the amount of data we have, better are the chances of accuracy with this method. Regression analysis tool are widely accepted Disadvantages of regression analysis: It is not simple like percentage of sales method. The understanding and calculation, both are difficult and lengthy. Separately appointed one technical person Limitations of the study: Financial analysis is based on only monetary information and non-monetary factors are ignored, 148 Dr.T.Durga Prasad

2 Inte rnational Journal of Engineering Technology, Manage ment and Applied Sciences August 2015, Volume 3, Issue 8, ISSN 2349-4476 Financial and statistical tools used in this study do have their own limitations. Sophisticated significant test could not be made to generalize the findings of the study. Review of Literature In 1999, the centre for Trade Policy Studies hosted an event, which discussed the steel crisis of 1998. At that time, the cause for steels woes was a combination of poor corporate decisions and macroeconomics. Hundreds of firms in dozens of industries experienced falling profitability, layoffs, and even bankruptcies (Ikenson, 2001). The US steel industry considered 1998 a crisis point when steel imports rose to great heights while return on sales started its downturn. Treado (2004) claimed that between 1998 a nd 2003, 29 US steel makers faced bankruptcy leading to global loss of 67 million metric tons in capacity8. However the picture changes when uncertainty (i.e. uncertain growth) is introduced (Brigham and Houston, 2000). Larger amounts of cash, securities, accounts receivables, marketable securities, inventories, and fixed assets will be needed to support increased sales Required levels will be based on expected sales levels and expected order lead times. Additional holdings may be needed to enable the firm to deal with departures from the expected values. Further, firms will also attempt to increase their accounts payable balances as a means of financing increased levels of current operating assets. Firms which are in high growth stages will face the challenge of maintaining the necessary level of operating assets to support subsequent growth, while at the same time attempting to maintain adequate performance indicators 10 . Zinters study (2002) of Minnesotas iron and steel industry from 1974 to 1990 supported similar claims made by many others that imports are significant contributor to declining employment in the manufacturing sector, however, competition from import prices was not a direct, statistically significant cause of employment decline in Minnesotas iron and steel industry. TREND ANALSIS IN SALES PERFORMANCE (Rs. In crores) YEARS SALES GROWTH ANNUAL GROWTH GROWTH TREND RATE 2000-01 164 ------- --------- 100 2001-02 161 (03) -1.83 98 2002-03 542 378 234.78 330 2003-04 1360 1196 220.66 829 2004-05 3933 3769 277.13 2398 2005-06 4216 4052 103.03 2570 2006-07 4360 4196 99.52 2658 2007-08 4488 4324 99.17 2736 *Source: Annual reports collected from Visakhapatnam steel plant. *Figures in parentheses denote the negative value. 149 Dr.T.Durga Prasad

3 Inte rnational Journal of Engineering Technology, Manage ment and Applied Sciences August 2015, Volume 3, Issue 8, ISSN 2349-4476 Working Capital statement of Visakhapatnam Steel Plant (Rs. In crores) Annual growth Growth working rate (%) trend YEARS Growth capital 2000-01 445.22 -------- ------- 100 2001-02 539.97 94.75 21.28 121 2002-03 691.53 151.56 28.06 155 2003-04 1571.32 879.79 127.22 352 2004-05 1712.53 141.21 8.98 384 2005-06 1789.24 76.71 4.48 401 2006-07 1823.51 34.27 1.91 409 2007-08 1896.59 73.08 4.00 425 Avg. 24.49 293 *Source: Annual reports collected from Visakhapatnam steel plant. *Figures in parentheses denote the negative value. Regression analysis: The Regression analysis, a statistical tool, is used to estimate the working capital and its components. It establishes an equation relationship between revenue and working capital. It can also be called trend analysis because the relation is carved out based on past trend. Without going into technical details, this method says Working Capital = Intercept + Slope * Revenue. The standard equation is stated as below: y = a + bx In our case, y represents the working capital because that is to be forecasted. x represents sales as it is the base for finding out the working capital. a & b are intercept and slope. Slope is the rate of change of working capital with one unit change in revenue. Intercept is the point where regression line and working capital axis meets. At the end of the statistical exercise with past revenue and working capital data, we will get an equation as explained above with real values of a and b. Then we will be able to find out y (working capital) for a given x (forecasted sales) 150 Dr.T.Durga Prasad

4 Inte rnational Journal of Engineering Technology, Manage ment and Applied Sciences August 2015, Volume 3, Issue 8, ISSN 2349-4476 Regression Analysis Table (Rs. In crores) Working Product of Sales (x) Square of Sr. Sales Capital And Working Capital (y) Sales (x) No. Year (x) (y) x*y x2 1 2000-01 164 445 72980 26896 2 2001-02 161 540 86940 25921 3 2002-03 542 692 375064 293764 4 2003-04 1360 1571 2136560 1849600 5 2004-05 3933 1713 6737229 15468489 6 2005-06 4216 1789 7542424 17774656 7 2006-07 4360 1824 7952640 19009600 8 2007-08 4488 1897 8513736 20142144 Gross 08 Total Years 1,9224 10471 33417573 74591070 Denotation n x y xy x 2 *Source: Annual reports collected from Visakhapatnam steel plant. *Figures in parentheses denote the negative value. *figures values are directly taken Formula = y = na + bx Formula = xy = ax + bx 2 Will replace the formula with values we have Will replace the formula with values we have 10471 = 08a + 19224b 33417573 = 19224a + 74591070b Multiply by 19224 Multiply by 08 => 267340584 = 153792a + 596728560b => 201294504= 153792a + 369562176 Eq. (1) Eq. (2) Subtract Eq. (1) from (2), we get, 66046080 = 0 + 227166384 b => b = 66046080/227166384 = 0.2907 Now, replace b = 0.2907 in our old eq. 10471 = 08a + 19224b We get, a = -610.32 After all this exercise, we get the following equation, Working Capital (x) = -610.32 + 0.2907 Sales (b) Now, if the forecasted sales will be next year is Rs.8000 (in crores), the working capital as per this method would be Rs.1715.28 (in crores). (Working Capital = -610.32 + 0.2907 * 8000 = 1715.28). In the similar fashion, all the components can be calculated. Findings of the study: If observation of sales performance is good but an annual growth rate is declining. Working capital annual growth rate is declining Sales performance was maintained by stable manner. Investing of working capital are also maintain by stable manner Loans and advances, sundry debtors / creditors, stock with contractors / others are subject to reconciliation/ confirmation. Suggestions of the study: Minimizing of investing in working capital it will be effect on profit performance. Volume of Sales was gradually decreased, so improve sales performance. The firm must balance the trade-off between the security of a stringent credit and the potential loss of volume of credit sales. 151 Dr.T.Durga Prasad

5 Inte rnational Journal of Engineering Technology, Manage ment and Applied Sciences August 2015, Volume 3, Issue 8, ISSN 2349-4476 Selective use of credit policy variables, like cash discount for prompt payments better collection efforts early payments can lead to reduction in the collection period. The liquidity position of the plant is not satisfactory. It suggested that the industry should try to manage its quick assets and current liabilities more efficiently. Conclusion: In overall observation of the study regression analysis tool is one of the most important key for estimation of future requirement of working capital. Regression analysis is Not only large scale industries in small scale industries are more helpful, and advisable. It will be reduce the investment requirement, cost controlling and more reliable also. Reference: Agrawal, N.K., management of working capital, sterling publication private Limited, New Delh i 1983. Chandra Prasanna, Financial management: Theory and practice. Op. Cit., P.196 Davi d B.Zenoff and Jack Zwick, international financial management (Englewood cliffs, N.J. : Prentice Hall Inc 1969) p.228. Guthman, Analysis of financial management op. cit., P.185. I.M.Pandey, Financial management: Finance and accounting area (Ahmedabad: Indian institute f management, 1975) p.325. ARTICLES AGARWAL, H.L., Working capital policy developing and analytical model, the Management accountant, vol.19, No.2, February 1984. Belani, Harish M., Current asset evaluation A new technique, the Economic t imes, 4th February, 1985. Chajravartym N.C., Project ion of need of working capital, the management Accountant, vol.14, No.5, may 1979. *Annual reports collected from Visakhapatnam steel plant, Visakhapatnam *Steel informat ion collected in Google search engine 152 Dr.T.Durga Prasad

Load More