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. A 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).

How to Calculate Working Capital using Regression Analysis with Formula and Example

Let us try to understand what we have to do for getting our estimates rather than understanding too much technical statistics. See the following table. The first column is a year, a second is sales and third is working capital. As we required the past data for future forecasting, here we have our past data. The fourth column is the product of sales and working capital and a fifth is the square of sales.







Product of

Sales (x)



Capital (y)


Square of

Sales (x)




           100               55                5,500              10,000



           110               64                7,040              12,100



           121               80                9,680              14,641



           130               70                9,100              16,900



           150               90              13,500              22,500



           180             120              21,600              32,400



           181             100              18,100              32,761



           190             140              26,600              36,100



           230             150              34,500              52,900



           250             160              40,000              62,500















Once this table is ready with n, Σx, Σy, Σxy and Σx2. We will solve the following equations.

Formula = Σy = na + bΣx Formula = Σxy = aΣx + bΣx2
Will replace the formula with values we have Will replace the formula with values we have
1029 = 10a + 1642b 185620 = 1642a + 292802b

Multiply by 1642

Multiply by 10

=>  1689618 = 16420a + 2696164 ———– Eq. (1) =>  1856200 = 16420a + 2928020b ———– Eq. (2)
Subtract Eq. (1) from (2), we get,
166582 = 0 + 231856 b
=>  b = 166582/231856 = 0.7185
Now, replace b = 0.7185 in our old eq. 1029 = 10a + 1642b
We get, a = -15. 078

After all this exercise, we get the following equation,

Working Capital (x) = -15.078 + 0.7185 Sales (b)

Now, if the forecasted sales for the year 2015 are 300, the working capital as per this method would be 200.472. (Working Capital = -15.078 + 0.7185 * 300 = 200.472). In the similar fashion, all the components can be calculated.

Advantages and Disadvantages

The advantage of this method is that it is based on the 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. Its drawback is that it is not simple like percentage of sales method. The understanding and calculation, both are difficult and lengthy. 

Other Methods for Estimating the Working Capital Requirements

Percentage of Sales Method

Operating Cycle Method

Last updated on : January 12th, 2018
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About The Author

Sanjay Bulaki Borad
Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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