Additional Funds Needed (AFN) Calculator
Calculate the Additional Funds Needed (AFN) for a company to support projected sales growth using the percent-of-sales forecasting method.
How to use this tool
- Enter spontaneous assets (a*), current sales (sโ), projected sales (sโ), spontaneous liabilities (l*), net profit margin (m) and dividend payout ratio (d) in the fields above.
- Results update instantly as you type โ or click Calculate.
- Read your additional funds needed (afn) and the full breakdown beneath it.
Formula
AFN = (A*/Sโ)รฮS โ (L*/Sโ)รฮS โ MรSโร(1โd)
Where: A* = spontaneous assets, Sโ = current sales, ฮS = projected increase in sales, L* = spontaneous liabilities, M = net profit margin, Sโ = projected sales, d = dividend payout ratio.
How it works
The AFN (Additional Funds Needed) formula, also called External Financing Needed (EFN), uses the percent-of-sales method to estimate how much external capital a firm must raise to support a projected increase in sales. It assumes that spontaneous assets (e.g., receivables, inventory) and spontaneous liabilities (e.g., accounts payable, accruals) scale proportionally with sales. Internally generated retained earnings reduce the external funding requirement.
Worked example
Company Projecting 20% Sales Growth
- Change in sales: ฮS = $1,200,000 โ $1,000,000 = $200,000
- Required asset increase: ($500,000 / $1,000,000) ร $200,000 = $100,000
- Spontaneous financing increase: ($200,000 / $1,000,000) ร $200,000 = $40,000
- Addition to retained earnings: 5% ร $1,200,000 ร (1 โ 40%) = $36,000
- AFN = $100,000 โ $40,000 โ $36,000 = $24,000
AFN = $24,000 in external financing required
Key terms
- Spontaneous Assets
- Assets that rise automatically with sales, such as accounts receivable and inventory, without requiring a discrete financing decision.
- Spontaneous Liabilities
- Liabilities that increase automatically with sales, such as accounts payable and accrued wages, providing automatic financing.
- Percent-of-Sales Method
- A financial forecasting technique that assumes key balance sheet items remain a constant percentage of sales as the firm grows.
- Dividend Payout Ratio
- The proportion of net income paid out as dividends; the remainder (retention ratio = 1 โ d) is added to retained earnings.
- External Financing Needed (EFN)
- Another name for AFN; the amount of funds that must be raised from external sources (debt or equity) to fund projected growth.