CALCULATION OF WORKING CAPITAL BY REGRESSION

ANALYSIS

V.RAMANAH,BC0160031

WORKING CAPITAL
Working capital, also known as net working capital (NWC), is the difference
between a company’s current assets, such as cash, accounts receivable (customers’ unpaid
bills) and inventories of raw materials and finished goods, and its current liabilities, such as
accounts payable. Working capital is a measure of a company's liquidity, operational
efficiency and its short-term financial health. If a company has substantial working capital,
then it should have the potential to invest and grow. If a company's current assets do not
exceed its current liabilities, then it may have trouble growing or paying back creditors, or
even go bankrupt.

FORMULA FOR WORKING CAPITAL

To calculate the working capital, compare a company's current assets to its current
liabilities. Current assets listed on a company's balance sheet include cash, accounts
receivable, inventory and other assets that are expected to be liquidated or turned into cash in
less than one year. Current liabilities include accounts payable, wages, taxes payable, and the
current portion of long-term debt. Current assets are available within 12 months. Current
liabilities are due within 12 months. Working capital that is in line with or higher than the
industry average for a company of comparable size is generally considered acceptable. Low
working capital may indicate a risk of distress or default.

CHANGES IN WORKING CAPITAL AFFECT A COMPANY'S CASH FLOW

Most major new projects, such as an expansion in production or into new markets,
require an investment in working capital. That reduces cash flow. But cash will also fall if
money is collected too slowly, or if sales volumes are decreasing – which will lead to a fall in
accounts receivable. Companies that are using working capital inefficiently can boost cash
flow by squeezing suppliers and customers.

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

The value of ‘a’ and ‘b’ are obtained by the solution of simultaneous linear equations given
below:
∑y = na + b∑

∑xy = a∑x + b∑x2

ABOUT THE COMPANY:

Wipro Limited (NYSE: WIT, BSE: 507685, NSE: Wipro) is a leading global information
technology, consulting and business process services company. We harness the power of
cognitive computing, hyper-automation, robotics, cloud, analytics and emerging technologies
to help our clients adapt to the digital world and make them successful. A company
recognized globally for its comprehensive portfolio of services, strong commitment to
sustainability and good corporate citizenship, we have over 160,000 dedicated employees
serving clients across six continents. Together, we discover ideas and connect the dots to
build a better and a bold new future.

Wipro Limited is a market leading Information Technology, consulting and business process
services company. Wipro utilizes the power of analytics, robotics, cloud and other emerging
technologies to help clients spread across six different continents to adapt to the current
digital trend and help them thrive to success. Wipro has over 1,60,000 dedicated employees
serving together and building a bold and new future. The amount of revenue generated by
Wipro in the financial year 2017 is 848 crores USD.

Wipro Limited, also known as Western India Products Limited is an Indian information
technology company established by Mohamed Hashem Premji as 'Western India Vegetable
Products Limited' in 1945 which was later abbreviated to Wipro. It was previously set up as
a refined edible oil manufacturer in Amalner, Maharashtra. After Mohamed Premji's death in
1966  his son Azim Premji took in charge of the company at a young age of 21. The year
1980 marked the arrival of Wipro in the Information Technology domain.   

WIPRO'S VISION

To earn our clients' trust  and maximize the value of their business by providing solutions that
integrate deep industry insights, leading technologies and best in class delivery process.

HEADQUARTERS OF THE COMPANY

Bangalore, Karnataka, India

OBJECTIVES OF THE STUDY

 To study regression analysis as a statistical tool and its application in the estimating
working capital
 To estimate the working capital of wipro for the year 2014 using historical data
available between 2005 and 2014.

RESEARCH METHODOLOGY

The research shall be doctrinal, descriptive and analytical. In the analytical part the statistical
tool ‘regression analysis’ shall be applied to historical data from primary sources.

SOURCES

Primary Source: Annual Reports of Wipro

The relationship between sales and working capital is given by the equation:
Y = a + bx

Where,

x = Sales (independent variable)

y = Working capital level (dependent variable)

a = Intercept of the least square line with vertical axis

b = Slope of the line

Linear regression model is used to judge the relationship of two variables. By using the mode
we can estimate level of working capital needed for given amount of sales. The data relating
to level of working capital and its corresponding sales during past 5 – 6 years is used in
establishment of trend relationship.

The value of ‘a’ and ‘b’ are obtained by the solution of simultaneous linear equations given
below:
∑y = na + b∑

∑xy = a∑x + b∑x2

Working Capital = Current Assets – Current Liabilities

CALCULATION OF WORKING CAPITAL:

2014

Working Capital = 17,688.6

2013

Working Capital = 12,260.2

2012

Working Capital =13,717.6

2011

Working Capital = 11,387.6

2010

Working Capital = 4,133.8

2009

Working Capital = 1,180.9

2008
Working Capital = 7,264.1

2007

Working Capital = 2527.7

2006

Working Capital = 1,205.26

2005

Working Capital = 849.77

Working Capital
Year (In Rs. Cr.) x Xy x2
Y
2005 849.77 0 0 0
2006 1205.26 1 1205.26 1
2007 2527.7 2 5055.4 4
2008 7264.1 3 21792.3 9
2009 1180.9 4 4723.6 16
2010 4133.8 5 20669 25
2011 11387.6 6 68325.6 36
2012 13717.6 7 96023.2 49
2013 12260.2 8 98081.6 64
2014 17,688.6 9 159197.4 81

N = 10 ∑y = 72215.53 ∑x = 45 ∑xy = 475073.36 ∑x2 = 285

We know that –

∑ y = Na + b ∑ x

∑ xy = a ∑ x + b ∑ x2

72215.53 = 10a+45b -------------------------------1

 475073.36 = 45a+285b-----------------------------2

Solving equation 1&2

We get a = 965.909273 ,b = 1819.436061

The general form of linear equation of regression y= a + bx---------------------3

Substituting the value of a & b in equation 3

Here, y = Required Working Capital; x = the value of x in 2014

y = 965.909273+1819.436061x

y = 965.909273+1819.436061(9)

 y = 16374.924549

From the above we get to know that for the year 2014, the working capital requirement is
estimated to be Rs. 16374.924549 crores

If we trace the trend of the Working Capital, the capital for the following years would
increase by Rs. 1819.436061 crores