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Additional Funds Needed (AFN) is a term used to identify funds that are needed above and beyond the amount needed to successfully manage the ongoing operation of a business. Typically, a business looking to expand its current operations, whether by establishing more locations or outlets or expanding its product line, will use this financial concept to determine how much money is needed to accomplish these tasks while maintaining the integrity of the business. main operation. Various factors can influence the amount of additional funds needed, including expanding the sales force as a means of attracting new customers and generating additional revenue that can finance various growth strategies.
There are several ways to determine the additional funds needed. Most approaches will include the use of a simple formula that sets out the projected increase in assets as a result of the expansion effort. From this amount, the anticipated increase in liabilities is deducted, along with any increase in the company’s retained earnings. Once these factors are taken into account, it is possible for the company to know if external financing is needed and, if so, how much will be needed to launch and finance the expansion effort.
Properly calculating the additional funds needed positions the company to make some sort of effort beyond the established operation without putting that operation in immediate jeopardy. By balancing the assets the company currently owns with the projected cost of expansion, it is possible to arrive at the most prudent amount of financing needed for launch. At the same time, calculating the additional resources required will also provide data that will make it easier to predict when the expansion will begin to earn its own profit and ultimately pay off the investment made in this effort. This can be especially important for obtaining external funding,
It is important to note that the factors that influence the additional funds required vary from situation to situation. For example, the company may or may not have to expand the sales force to successfully launch a new product, which can save a lot in terms of hiring new salespeople. At the same time, increasing the budget for marketing and public relations can be important to the task. Identifying the type and amount of increase in various liabilities associated with a specific expansion effort will increase the chances of avoiding incurring debt that would later cripple the business if the expansion did not proceed as planned.