Estimate the external financing required when projected asset growth exceeds available internal funds and liabilities, based on sales forecasts.
Accounts payable, accrued expenses, etc.
Percentage of earnings retained (not paid as dividends)
Additional Funds Needed
Projected Sales
Required Assets
Retained Earnings
Where:
A/S₀ = Asset-to-sales ratio
ΔS = Change in sales
L/S₀ = Spontaneous liability-to-sales ratio
M = Profit margin
S₁ = Projected sales
RR = Retention ratio
Liabilities that increase automatically with sales (accounts payable, accrued expenses).
Percentage of net income retained in the business rather than paid as dividends.
How much assets are required to support each dollar of sales.
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