How do I Calculate AFN?

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Close-up of pen sitting on top of calculator
Close-up of pen sitting on top of calculator (Image: Nonwarit/iStock/Getty Images)

After the 2007 economic downturn, help for businesses to get back on their feet has been enthusiastically welcomed. One useful tool to businesses in need is the forecasting model provided by the Additional Funds Needed (AFN) formula. The AFN formula projects additional funds required next year for a business to remain viable. This can help businesses to set goals with respect to their assets, liabilities, sales and retained earnings to remain economically stable and move toward a more financially positive future.

Express assets that must increase if sales are to increase as a percentage of sales.

Multiply this percentage of sales by the projected or desired change in sales from the current year to next year. This represents the projected increase required in sales.

Express liabilities that increase spontaneously with sales as a percentage of sales.

Multiply this percentage of sales by the projected or desired change in sales from the current year to the next year. This represents the projected spontaneous increase in liabilities.

Subtract the percentage of earnings paid out in dividends from 1. This represents the percentage of earnings retained.

Multiply the profit margin per $1 of sales, expressed as a percentage, by the total projected or desired sales for next year and by the percentage of earnings retained. This represents the projected increase in retained earnings.

Subtract the projected spontaneous increase in liabilities and the projected increase in retained earnings from the projected increase required in sales. This is represents the AFN.

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