What are the key factors on which external financing depends, as indicated in the AFN equation?
To explain: Key factors on which external financing depends, as indicated in additional fund needed equation.
Additional fund needed:
Additional fund needed is also known as external financing needed. It is the state in which a company needed finance to increase its operation. Additional fund needed is a method in which companies raise the funds through external resources to increase its assets, which would increase the sales revenue of a company.
However, according to additional fund needed method, a company does not change its financial ratio. Liabilities and retained earnings spontaneously increase with the increase in sales and assets.
Key factors on which external financing depend are as follows:
Payout ratio:
Payout ratio is the fraction of dividend and net income. It is the amount of dividend that has to be paid to the shareholders out of the net income of the year.
Sales growth rate:
Sales growth rate means the growth rate in which the sales of a company grow per year.
Capital intensity ratio:
Capital intensity ratio is the ratio that helps to find the amount of capital a company needed to invest in its assets so that company has enough assets to meet its sales target. It helps to find out the amount of capital a company can invest into its assets.
Profit margin:
Profit margin is the excess of total sales revenue over the total cost. Profit margin is the difference between net sales and cost.
Days sales outstanding:
Days sales outstanding means the number of days a company needed to pay off to its suppliers.
External financing depends on payout ratio, sales growth rate, capital intensity ratio, profit margin, and days sales outstanding.
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