Additional Funds Needed (AFN) Calculator: External Financing for Sales Growth
Work out the external financing a company needs to grow sales with the percent-of-sales AFN equation. Includes the self-supporting growth rate, an excess-capacity option and an AFN-by-growth table.
How it works
AFN = (A*/S₀) × ΔS − (L*/S₀) × ΔS − M × S₁ × (1 − payout ratio) · ΔS = S₁ − S₀ · self-supporting growth g* = M × RR × S₀ ÷ (A* − L* − M × RR × S₀) · with excess capacity: full-capacity sales = S₀ ÷ capacity %, new fixed assets = max(0, FA ÷ full-capacity sales × S₁ − FA)
When sales grow, a company needs more receivables, inventory and often more plant and equipment. Part of that is funded automatically: payables and accruals grow with sales, and the firm keeps part of its profit as retained earnings. Additional funds needed (AFN) is the gap left over, which must be raised from banks, bonds or new shares. This is the percent-of-sales (AFN equation) method taught in corporate finance courses. Enter current sales, growth or projected sales, and the assets and spontaneous liabilities that move with sales. Then add the net profit margin and payout ratio. The calculator shows each piece of the equation. It also finds the self-supporting growth rate, the fastest growth possible with no outside money, and tabulates AFN for growth from 0% to 50%. If the plant is not running at full capacity, open More options. Sales can then grow to current sales ÷ capacity utilization before new fixed assets are needed, which lowers AFN. The equation assumes fixed asset and liability ratios and a constant margin and payout. Real forecasts use a full pro forma balance sheet and also account for lumpy assets and financing feedback, so treat the result as a first estimate. No other calculator on the site does this. The Sustainable Growth Rate calculator answers a related question: how fast a firm can grow at a constant debt-to-equity ratio.
Worked example
A firm had sales of $2,000 million and expects 25% growth to $2,500 million, so ΔS = $500 million. Assets tied to sales are $1,000 million (A*/S₀ = 0.5) and spontaneous liabilities $100 million (0.05). The net margin is 2.7% and the payout ratio 40%, so the retention ratio is 0.60. Assets must rise by 0.5 × 500 = $250 million. Liabilities add 0.05 × 500 = $25 million, and retained earnings add 2.7% × $2,500 × 0.60 = $40.50 million. AFN = 250 − 25 − 40.50 = $184.50 million. The self-supporting growth rate is 32.4 ÷ (1,000 − 100 − 32.4) = 3.73%.
Sources: University of Nebraska–Lincoln, Ch. 12 Financial planning and forecasting (AFN equation, $184.5 million example, excess capacity) · eFinanceManagement: Additional funds needed (Company X worked example) · Wikipedia: Additional funds needed
Frequently asked questions
What is the AFN formula?
AFN = (A*/S₀)ΔS − (L*/S₀)ΔS − M × S₁ × RR. A* is assets that grow with sales, L* is spontaneous liabilities, S₀ and S₁ are this year’s and next year’s sales, ΔS is the change, M is the profit margin and RR is the retention ratio (1 − payout ratio).
What are spontaneous liabilities?
Liabilities that rise on their own as sales grow, mainly accounts payable and accrued wages and taxes. Notes payable, long-term debt and equity are not spontaneous because the company has to arrange them, so they are left out of L*.
What does a negative AFN mean?
Retained earnings and spontaneous liabilities more than cover the new assets, so the firm has surplus funds. It can repay debt, raise dividends or buy back shares instead of raising money.
What is the self-supporting growth rate?
The highest sales growth a company can reach with AFN equal to zero, funded only by retained earnings and spontaneous liabilities. It equals M × RR × S₀ ÷ (A* − L* − M × RR × S₀).
How does excess capacity change AFN?
If fixed assets run below full capacity, sales can rise to S₀ ÷ utilization before new plant is needed. For example, at 75% utilization $2,000 of sales could grow to $2,667 with no new fixed assets, so only current assets have to grow.
Which factors increase AFN?
Faster sales growth, a higher capital intensity ratio (A*/S₀), a higher dividend payout and a lower profit margin all increase AFN. More spontaneous liabilities and spare capacity reduce it.
Related calculators
For education and rough planning only. Real financing decisions need a full forecast and professional advice.