What is Additional Funds Needed?

Malcolm Tatum

Additional funds needed (AFN) is a term used to identify financing that is needed above and beyond the amount necessary to successfully manage the ongoing operation of a business. Typically, a business that is looking to expand its current operations, either by the establishment of more locations or outlets or the expansion of its product line, will use this financial concept to determine how much money is needed to achieve these tasks while still maintaining the integrity of the core operation. A number of factors can go into determining the amount of additional funds needed, including the expansion of the sales force as a means of bringing in new customers to generate the extra income that can fund various growth strategies.

Man climbing a rope
Man climbing a rope

There are several different ways to go about determining additional funds needed. Most approaches will include the use of a simple formula that establishes 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 retained earnings of the business. Once these factors are accounted for, it is possible for the business to know if outside financing is necessary and, if so, how much will be required to launch and fund the expansion effort.

Properly calculating additional funds needed positions the business to engage in some sort of effort above and beyond the established operation without placing that operation into any immediate distress. By balancing the assets currently held by the business along with the projected cost of the expansion, it is possible to arrive at the most prudent amount of financing necessary for the launch. At the same time, calculating the additional funds needed will also provide data that makes it easier to anticipate when the expansion will begin to generate profits of its own and eventually offset the investment made in that effort. This can be especially important in arranging outside financing, since it aids in developing a time line that effectively identifies when the project can reasonably be expected to become self-sustaining and generate enough return to pay off that financing.

It is important to note that the factors influencing the additional funds needed will vary from one situation to another. For example, the company may or may not have to expand the sales force in order to successfully launch a new product, which can save a great deal in terms of hiring new salespeople. At the same time, increasing the budget for marketing and public relations may be important to the task. Identifying the type and the amount of increase in various liabilities associated with a specific expansion effort will increase the chances of avoiding the assumption of debt that would later cripple the company if the expansion did not perform as well as anticipated.

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