Additional funds needed (AFN) is a

financial Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...

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 In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...

that will be needed to increase sales.

Calculation

AFN is a way of calculating how much new

funding Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...

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 the AFN (Additional Funds Needed) value comes out to be negative, this is actually a positive situation for the company! A negative AFN means that the company will not need external financing to support its growth. It indicates that the company has enough internal funds to support its projected sales growth. The AFN equation is as follows: AFN = (A0/S0)ΔS-(L0/S0)ΔS-MS₁(1-Payout) Where: A₀ (Current Assets): Represents the company's current assets, including cash, inventory, and equipment. S₀ (Current Sales): The company's current sales or revenue figures, showing the base sales level. ΔS (Change in Sales): The projected increase in sales, forecasting future growth. L₀ (Spontaneous Liabilities): Liabilities that increase automatically with sales growth, like accounts payable and accrued wages. M (Profit Margin): The company's net income divided by sales, showing profitability. S₁ (New Level of Sales): The projected sales level after the expected growth. Payout Ratio: The percentage of earnings distributed as dividends, with the rest reinvested in the company.{{cite web , last1=Biswas Hridoy , first1=Hrittik , title=How to Calculate Additional Funds Needed , url=https://finalitics.net/how-to-calculate-additional-funds-needed-afn/ , website=finalitics , publisher=Hrittik Biswas Hridoy In Finance knowing calculation is not enough it's great if yo
understand the whole AFN equation with a business case scenario
The relevant ratios within the formula are: (A*/S₀): Called the capital intensity ratio (L*/S₀): Called the spontaneous liabilities ratio

References

Business terms Financial capital