Additional Funds Needed Calculator
What is Additional Funds Needed?
Additional Funds Needed (AFN) is a critical financial concept that allows a business to calculate the amount of money needed to support its operations or growth. In essence, AFN measures the money needed to fund new assets given an assumed increase in sales. It takes into account any increase in liabilities and any increase in retained earnings. This calculation is essential for developing a comprehensive growth strategy, as it provides an estimate of the additional financing needed to achieve the desired expansion without stressing existing financial resources.
How to use Additional Funds needed Calculator
To calculate the Additional Funds Needed you need to follow these steps:
Determine the change in assets: First, you have to calculate the change in assets for your company. This is done by subtracting the initial assets from the final assets for a given period.
Determine the change in liabilities: Next, calculate the change in the company's liabilities. The change in liabilities is calculated in the same way as the change in assets - by subtracting the initial liabilities from the final liabilities.
Determine the change in retained earnings: The change in retained earnings is given by the difference between the final and the initial retained earnings.
Calculate the Additional Funds Needed: Finally, use the following formula to calculate the Additional Funds Needed:
AFN = Change in assets - Change in liabilities - Change in retained earnings
Should the result be a positive number, it would indicate that the company needs additional funds. A negative number would suggest that the company has surplus cash.
Actual Example to Demonstrate the Calculator
Let's illustrate the usage of this calculator with a hypothetical company: Company Alpha.
The change in assets for Company Alpha is $500,000.
The change in liabilities amounts to $250,000.
The company has seen a change in retained earnings of $50,000.
Substitute Company Alpha's information into the formula:
AFN = $500,000 (Change in assets) - $250,000 (Change in liabilities) - $50,000 (Change in retained earnings)
This yields an AFN of: $200,000.
In this case, Company Alpha needs to finance an additional $200,000 to fund its growth effectively. This could be sourced from a variety of avenues including, but not limited to, borrowing, issuing new shares, or reinvesting profits.