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Additional Funds Needed

Additional Funds Needed (AFN) is a financial concept used to calculate how much new funding a business will require to achieve a higher sales level by increasing its assets. The AFN equation determines the projected increase in assets needed minus any spontaneous increase in liabilities or retained earnings. When calculating AFN, the company's existing capacity utilization must be considered, as expansion may be possible without new equipment if not at full capacity. A negative AFN value means the action would generate excess income that could be reinvested.

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641 views2 pages

Additional Funds Needed

Additional Funds Needed (AFN) is a financial concept used to calculate how much new funding a business will require to achieve a higher sales level by increasing its assets. The AFN equation determines the projected increase in assets needed minus any spontaneous increase in liabilities or retained earnings. When calculating AFN, the company's existing capacity utilization must be considered, as expansion may be possible without new equipment if not at full capacity. A negative AFN value means the action would generate excess income that could be reinvested.

Uploaded by

Prashant Dugar
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Additional Funds Needed (AFN) is a financial concept used when a business looks to expand its

operations. Since a business that seeks to increase its sales level will require more assets to meet that
goal, some provision must be made to accommodate the change in assets. To phrase it another way, the
business must have some plan to actually finance the new assets that will be needed to increase sales.

[edit]Calculation
AFN is a way of calculating how much new funding will be required, so that the firm can realistically look
at whether or not they will be able to generate the additional funding and therefore be able to achieve the
higher sales level. Determining the amount of external funding needed is a key part of calculating AFN.

A simplified version of the AFN equation is as follows:

AFN = Projected increase in Assets - Spontaneous increase in liabilities -


Any Increase in Retained Earnings

When calculating AFN, consideration must be given to whether the company is already operating at full-
capacity; if not, they can expand sales some without having to invest in new equipment.

If a negative value is found for AFN, that means that the action would generate extra income that could be
invested elsewhere.

The AFN equation is as follows:

AFN = (A*/S0)ΔS - (L*/S0)ΔS - MS1(RR)

Where:

A* = Assets tied directly to sales and will increase

L* = Spontaneous liabilities that will be affected by sales. (NOTE: Not all liabilities will be affected by sales
such as long-term debt)

S0 = Sales during the last year

S1 = Total sales projected for next year (the new level of sales).

ΔS = The increase in sales between S0 and S1

M = Profit margin, or the profit per unit of sales

MS1 = Projected Net Income

RR = The retention ratio from Net Income and is also calculated as (1 - payout ratio)

The relevant ratios within the formula were created by John and Tissue, with the guidance of Jessica.:

(A*/S0): Called the capital intensity ratio


(L*/S0): Called the spontaneous liabilities ratio

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