Enter the assets-to-sales ratio (A*/S0), spontaneous liabilities-to-sales ratio (L*/S0), current sales (S0), and either sales growth or projected sales (S1), along with net profit margin and the retention ratio (or payout ratio), to determine the External Funding Needed (EFN).

EFN Calculator
Sales input
Growth %
Projected Sales
Earnings input
Retention %
Payout %

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Efn (External Funding Needed) Formula

The following formula is used to calculate the External Funding Needed (EFN). 

EFN = (A^*/S_0)\Delta S - (L^*/S_0)\Delta S - M \cdot S_1 \cdot RR

Variables:

  • EFN is the External Funding Needed ($)
  • A*/S0 is the spontaneous assets-to-sales ratio (assets that vary with sales, divided by current sales)
  • ΔS is the change in sales (S1 − S0)
  • L*/S0 is the spontaneous liabilities-to-sales ratio (liabilities that vary with sales, divided by current sales)
  • M is the net profit margin (after tax)
  • RR is the retention ratio (the fraction of net income retained, sometimes written as b)
  • S1 is the projected sales
  • S0 is the current sales

To calculate the External Funding Needed, multiply the spontaneous assets-to-sales ratio (A*/S0) by the change in sales (ΔS). Subtract the increase in spontaneous liabilities, which is the spontaneous liabilities-to-sales ratio (L*/S0) times ΔS (because spontaneous liabilities provide financing). Then subtract retained earnings, which is net profit margin (M) times projected sales (S1) times the retention ratio (RR).

What is a Efn (External Funding Needed)?

External Funding Needed (EFN) is a financial concept that estimates the amount of additional financing a company needs to support a projected increase in sales, given its operating relationships (spontaneous assets and liabilities) and its internally generated funds (retained earnings). If the EFN is positive, it indicates that the company needs to secure additional financing, either through debt, equity, or a combination of both. If the EFN is negative, it means the company has excess funds that can be used for investment or to pay off existing debt.

How to Calculate Efn (External Funding Needed)?

The following steps outline how to calculate the External Funding Needed (EFN) using the given formula:

  1. First, determine the spontaneous Assets to Sales ratio (A*/S0).
  2. Next, determine the change in sales (ΔS = S1 − S0).
  3. Next, determine the spontaneous Liabilities to Sales ratio (L*/S0).
  4. Next, determine the net Profit Margin (M).
  5. Next, determine the Retention Ratio (RR).
  6. Next, determine the Projected Sales (S1).
  7. Next, determine the Current Sales (S0).
  8. Finally, calculate the External Funding Needed (EFN) using the formula EFN = (A*/S0)ΔS − (L*/S0)ΔS − M·S1·RR.
  9. After inserting the variables and calculating the result, check your answer with the calculator above.

Example Problem : 

Use the following variables as an example problem to test your knowledge:

Assets to Sales ratio (A/S) = 0.8

Change in sales (ΔS) = 100

Spontaneous Liabilities to Sales ratio (L/S) = 0.5

Profit Margin (M) = 0.2

Retention Ratio (RR) = 0.3

Projected Sales (S1) = 500

Current Sales (S) = 400

EFN = (0.8)(100) − (0.5)(100) − (0.2)(500)(0.3) = 0