IntroductionAdditional Funds NeededAFN stands for “Additional Funds Needed” which is the amount of money a company must raise from external sources to finance the increase in assets required to support increased level of sales. Also “Additional Funds Needed” is called external financing needed. This method of financial planning assumes that the company’s financial ratios do not change.
AFN is a concept used most commonly in business looking to expand operations and influence. Furthermore, this determines the extra assets and financing that will be needed for a firm to undertake a new project or expand its operations and sale. The AFN formula (A*/S0)?S – (L*/S0)?S – M(S1)(1-POR). This simplified formula (AFN) is a way of calculating how much new funding will be required, so that the firm can realistically look at whether they will be able to generate the additional funding and therefore be able to achieve the higher sales level. Determining the amount of external funding needed is a key part of this formula. Days Payable RatioThe days payable outstanding ratio evaluates how long it takes a company to pay its bills to its creditors, suppliers and vendors by relating the accounts payable to the number of days bills remain unpaid and the cost of goods sold (COGS). This ratio depicts how well a company is managing its cash flows given the number of days during an accounting period that it pays off its account payables. An increase in accounts payable is a source of cash as the company takes longer to pay its vendors and suppliers.
A decrease in accounts payable signifies a use of cash as whenever a company settles its bills it constitutes a cash outflow which reduces working capital.The longer they take to pay their creditors, the more money the company has on hand, which is good for free cash flow and working capital. A high days payable ratio is considered advantageous, but it comes with some disadvantages. When a firm takes too long to pay its creditors, the creditors will be unhappy, and may refuse to extend credit in the future, or they may offer less favorable terms. If a firm days payable outstanding is lower than the industry benchmark, then the company is not using its cash as long as its competitors in the industry.