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Additional Funds Needed (AFN) is a financial 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 that will be needed to increase sales. AFN is a way of calculating how much new funding 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
If a negative value is found for AFN, that means that the action would generate extra income that could be invested elsewhere. 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.
