Differentiate between Regression Analysis Method and Percent of Sales Method for estimating Working Capital needs.

Regression analysis method The regression analysis method is very useful statistical technique of forecasting working capital requirements. It helps in making projections after establishing the average relationship in the past years between sales and the working capital and its various components. The analysis can be carried out through the graphic portrayals (scatter diagram) or through mathematical formulae. The relationship between sales and working capital may be simple and direct indicating complete linearity between the two or may be complex in differing degrees involving simple linear regression and multiple regression situations. This method is suitable for simple as well as complex situations. Percent of sales method It is a traditional and simple method of determining the level of working capital and its components. In this method, working capital is determined on the basis of past experience. If over the years, the relationship between sales and working capital is found to be stable, then this relationship may be taken as base for determining the working capital for future. This method is simple, easy to understand and useful in forecasting of working capital. However, this method is criticised for the assumption of linear relationship, between sales and working capital. Therefore, this method may not be universally applicable.