Working Capital Management with Regression Analysis (With reference to Visakhapatnam Steel Plant (RINL), VSP)

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1 148 Working Capital Management with Regression Analysis (With reference to Visakhapatnam Steel Plant (RINL), VSP) Associate Professor Aditya Global Business School, Surampalem, East Godavari Dist. ABSTRACT Working capital is the life blood of the organization, without pumping of blood can t live the life, so like cant pumping of working capital can t run the organization. In traditional way every 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 firm s 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 organization 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,

2 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 At that time, the cause for steel s 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 and 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. Zinter s study (2002) of Minnesota s 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 Minnesota s iron and steel industry. TREND ANALSIS IN SALES PERFORMANCE YEARS SALES GROWTH ANNUAL GROWTH RATE GROWTH TREND (03) *Figures in parentheses denote the negative value. 149

3 YEARS Working Capital statement of Visakhapatnam Steel Plant Annual growth Growth working Growth rate (%) trend capital Avg *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

4 Regression Analysis Table Working Product of Sales (x) Square of Sr. Sales Capital And Working Capital (y) Sales (x) No. Year (x) (y) x*y x Gross Total 08 Years 1, Denotation n Σx Σy Σxy Σx 2 *Figures in parentheses denote the negative value. *figures values are directly taken Formula = Σy = na + bσx Formula = Σxy = aσx + bσx 2 Will replace the formula with values we have Will replace the formula with values we have = 08a b = 19224a b Multiply by Multiply by 08 => = a b => = a Eq. (1) Eq. (2) Subtract Eq. (1) from (2), we get, = b => b = / = Now, replace b = in our old eq = 08a b We get, a = After all this exercise, we get the following equation, Working Capital (x) = 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 (in crores). (Working Capital = * 8000 = ). 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

5 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 Delhi Chandra Prasanna, Financial management: Theory and practice. Op. Cit., P.196 David 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 Belani, Harish M., Current asset evaluation A new technique, the Economic times, 4 th February, Chajravartym N.C., Projection of need of working capital, the management Accountant, vol.14, No.5, may *Annual reports collected from Visakhapatnam steel plant, Visakhapatnam *Steel information collected in Google search engine 152