Explore BrainMass
Share

Explore BrainMass

    The Additional Funds Needed equation (AFN)

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Additional External Financing

    You have been running your small business, Craft's Boat Shop, for several years now and have been very successful. You have come to the point where you expect sales to increase next year and want to be sure that you have enough assets available to support your sales. You also need to have the financing available to acquire those assets, if needed.

    Accordingly, you have gathered the following data:

    Craft's Boat Shop

    Sales Last Year
    $1,000,000

    Assets at the End of Last Year
    750,000

    Accounts Payable
    60,000

    Notes Payable
    60,000

    Accruals
    30,000

    Profit Margin on Sales
    5%

    Dividend Payout
    50%

    Note: All figures are as of the end of last year

    Required:
    •If you need $0.80 in assets for every $1.00 in sales, by how much can sales increase without obtaining additional outside financing? HINT: Use the AFN formula.

    © BrainMass Inc. brainmass.com October 10, 2019, 7:06 am ad1c9bdddf
    https://brainmass.com/business/cash-budgeting/the-additional-funds-needed-equation-afn-568265

    Solution Preview

    Hello,
    Thank you for using BM. Here is my suggested solution:
    The Additional Funds Needed (AFN) is the required additional assets - Increase in spontaneous liabilities - Increase in retained earnings.
    In our case, we need this AFN to equal zero (the question is: by how much can sales increase without obtaining additional outside financing? which means ...

    Solution Summary

    The Additional Funds Needed equation (AFN) is used to calculate sales increase without obtaining additional outside financing.

    $2.19