When sales grow, a company usually needs more inventory, receivables and equipment. Part of that is funded automatically by suppliers (accounts payable) and accrued expenses, and part by retained profit. Whatever is left must come from new debt or equity.
How to use the Additional Funds Needed
- Current sales
- Projected sales
- Assets tied to sales
- Spontaneous liabilities (payables, accruals)
- Net profit margin
- Dividend payout ratio
Results update as you type, and every field accepts the units shown in its menu.
How it works
Enter last year’s sales, next year’s sales, the assets and spontaneous liabilities that grow with sales, the profit margin and the payout ratio.
Tips
- Use figures for the same period (a month, a quarter or a year) for every input so ratios compare like with like.
- Track the metric over time – the trend usually tells you more than a single value.
- Compare your result with industry benchmarks, which vary a lot between sectors.
- Treat the result as a starting point for a decision, then check the assumptions behind each input.
Common mistakes to avoid
- Mixing monthly and yearly numbers in the same calculation.
- Using revenue where the formula needs profit (or the other way round).
- Forgetting hidden costs such as taxes, fees, overheads or your own time.
Inputs explained
| Field | What to enter |
|---|---|
| Current sales | Amount in your currency |
| Projected sales | Amount in your currency |
| Assets tied to sales | Amount in your currency |
| Spontaneous liabilities (payables, accruals) | Amount in your currency |
| Net profit margin | In % |
| Dividend payout ratio | In % |
What each result means
- Required increase in assets = [Assets tied to sales]÷[Current sales]×([Projected sales] – [Current sales])
- Spontaneous increase in liabilities = [Spontaneous liabilities (payables, accruals)]÷[Current sales]×([Projected sales] – [Current sales])
- Increase in retained earnings = [Net profit margin]÷100×[Projected sales]×(1 – [Dividend payout ratio]÷100)
- Additional funds needed = [Required increase in assets] – [Spontaneous increase in liabilities] – [Increase in retained earnings]
- Sales growth = ([Projected sales]÷[Current sales] – 1)×100
Example values
How the main result changes when Current sales changes and everything else stays at the example values above:
| Current sales | Additional funds needed |
|---|---|
| 1,000,000 | 1,275,000 |
| 1,500,000 | 525,000 |
| 2,000,000 | 150,000 |
| 2,500,000 | -75,000 |
| 3,000,000 | -225,000 |
| 4,000,000 | -412,500 |
Formula
AFN = (A ÷ S₀) × ΔS − (L ÷ S₀) × ΔS − PM × S₁ × bΔS = S₁ − S₀; b = retention ratio = 1 − payout ratioWorked example
Inputs — Current sales: $2,000,000; Projected sales: $2,500,000; Assets tied to sales: $1,200,000; Spontaneous liabilities (payables, accruals): $300,000; Net profit margin: 5 %; Dividend payout ratio: 40 %.
Results — Required increase in assets = $300,000.00; Spontaneous increase in liabilities = $75,000.00; Increase in retained earnings = $75,000.00; Additional funds needed = $150,000.00; Sales growth = 25 %.
Frequently asked questions
What does a negative AFN mean?
The company generates more funds than its growth needs – it has surplus financing.
How can a company reduce AFN?
Raise the profit margin, cut the payout ratio, or use assets more efficiently.
What are spontaneous liabilities?
Liabilities that grow automatically with sales, such as accounts payable and accrued wages.
What formula does the Additional Funds Needed use?
AFN = (A ÷ S₀) × ΔS − (L ÷ S₀) × ΔS − PM × S₁ × b.