{"id":39002,"date":"2025-06-26T17:00:02","date_gmt":"2025-06-26T17:00:02","guid":{"rendered":"https:\/\/gaviki.com\/blog\/?p=39002"},"modified":"2025-06-26T17:00:04","modified_gmt":"2025-06-26T17:00:04","slug":"how-do-i-find-external-financing-need-efn-using-this-equation-with-the-pro-forma-statements-provided","status":"publish","type":"post","link":"https:\/\/gaviki.com\/blog\/how-do-i-find-external-financing-need-efn-using-this-equation-with-the-pro-forma-statements-provided\/","title":{"rendered":"How do I find external financing need (EFN) using this equation with the pro forma statements provided"},"content":{"rendered":"\n<p>How do I find external financing need (EFN) using this equation with the pro forma statements provided: EFN = (asset\/sales * change in sales &#8211; spontaneous liabilities\/sales * change in sales &#8211; PM * projected sales * (1-d) 2019 Income Statement 2020 Pro Forma Income Statement Sales:<br>790.9 Dividends: -498.6 Addition to retained earnings:<br>174.9 Accounts receivable: 741.8 Inventory: 1,366.4 Other current assets: 174.1 Total current assets: 2,457.2 Net plant and equipment: 1,266.4 Other long-term assets: 76.3 Total assets:<br>192.8 Accrued expenses: 348.9 Short-term debt: 3.0 Total current liabilities: 544.7 Long-term debt: 342.0 Other long-term liabilities: 209.2 Total liabilities: 1,095.9 Common stock and paid-in surplus: 70.1 Retained earnings: 2,633.9 Total equity: 2,704.0 Total liabilities and owners&#8217; equity: $3,799.9 External financing needs (EFN): 121.21<\/p>\n\n\n\n<p><strong><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">The Correct Answer and Explanation is:<\/mark><\/strong><\/p>\n\n\n\n<p>To find the <strong>External Financing Needed (EFN)<\/strong>, we use the following formula:EFN=(AssetsSales\u00d7\u0394Sales)\u2212(Spontaneous&nbsp;LiabilitiesSales\u00d7\u0394Sales)\u2212(PM\u00d7Projected&nbsp;Sales\u00d7(1\u2212d))\\text{EFN} = \\left(\\frac{\\text{Assets}}{\\text{Sales}} \\times \\Delta \\text{Sales}\\right) &#8211; \\left(\\frac{\\text{Spontaneous Liabilities}}{\\text{Sales}} \\times \\Delta \\text{Sales}\\right) &#8211; \\left(\\text{PM} \\times \\text{Projected Sales} \\times (1 &#8211; d)\\right)EFN=(SalesAssets\u200b\u00d7\u0394Sales)\u2212(SalesSpontaneous&nbsp;Liabilities\u200b\u00d7\u0394Sales)\u2212(PM\u00d7Projected&nbsp;Sales\u00d7(1\u2212d))<\/p>\n\n\n\n<p>Where:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Assets\/Sales<\/strong> is the ratio of total assets to sales (reflects how much asset investment is needed per dollar of sales),<\/li>\n\n\n\n<li><strong>Spontaneous liabilities\/Sales<\/strong> is the ratio of liabilities that vary with sales (like accounts payable and accrued expenses) to sales,<\/li>\n\n\n\n<li><strong>\u0394 Sales<\/strong> is the change in sales from 2019 to 2020,<\/li>\n\n\n\n<li><strong>PM<\/strong> is the profit margin (Net income \/ Sales),<\/li>\n\n\n\n<li><strong>d<\/strong> is the dividend payout ratio.<\/li>\n<\/ul>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">Step-by-step Calculation:<\/h3>\n\n\n\n<p><strong>1. Gather values:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>2019 Sales = $790.9<\/li>\n\n\n\n<li>2020 Projected Sales = Let&#8217;s assume they increased by 15%. So, \u0394Sales=790.9\u00d70.15=118.635\\Delta \\text{Sales} = 790.9 \\times 0.15 = 118.635\u0394Sales=790.9\u00d70.15=118.635 Projected\u00a0Sales=790.9+118.635=909.535\\text{Projected Sales} = 790.9 + 118.635 = 909.535Projected\u00a0Sales=790.9+118.635=909.535<\/li>\n<\/ul>\n\n\n\n<p><strong>2. Asset\/Sales Ratio:<\/strong>Total&nbsp;AssetsSales=3,799.9790.9\u22484.803\\frac{\\text{Total Assets}}{\\text{Sales}} = \\frac{3,799.9}{790.9} \\approx 4.803SalesTotal&nbsp;Assets\u200b=790.93,799.9\u200b\u22484.803<\/p>\n\n\n\n<p><strong>3. Spontaneous Liabilities\/Sales Ratio:<\/strong><\/p>\n\n\n\n<p>Spontaneous liabilities usually include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Accrued expenses = 192.8<\/li>\n\n\n\n<li>Accounts payable (missing here but likely in total current liabilities)<\/li>\n\n\n\n<li>Let\u2019s assume spontaneous liabilities = 192.8 + 348.9 = 541.7<\/li>\n<\/ul>\n\n\n\n<p>Spontaneous&nbsp;LiabilitiesSales=541.7790.9\u22480.685\\frac{\\text{Spontaneous Liabilities}}{\\text{Sales}} = \\frac{541.7}{790.9} \\approx 0.685SalesSpontaneous&nbsp;Liabilities\u200b=790.9541.7\u200b\u22480.685<\/p>\n\n\n\n<p><strong>4. Profit Margin (PM):<\/strong>Addition&nbsp;to&nbsp;Retained&nbsp;Earnings=174.9Dividends=498.6Net&nbsp;Income=174.9+498.6=673.5\\text{Addition to Retained Earnings} = 174.9 \\text{Dividends} = 498.6 \\text{Net Income} = 174.9 + 498.6 = 673.5Addition&nbsp;to&nbsp;Retained&nbsp;Earnings=174.9Dividends=498.6Net&nbsp;Income=174.9+498.6=673.5PM=673.5790.9\u22480.8517d=498.6673.5\u22480.74\\text{PM} = \\frac{673.5}{790.9} \\approx 0.8517 \\quad d = \\frac{498.6}{673.5} \\approx 0.74PM=790.9673.5\u200b\u22480.8517d=673.5498.6\u200b\u22480.74<\/p>\n\n\n\n<p><strong>5. Apply EFN formula:<\/strong>EFN=(4.803\u00d7118.635)\u2212(0.685\u00d7118.635)\u2212(0.8517\u00d7909.535\u00d7(1\u22120.74))\\text{EFN} = \\left(4.803 \\times 118.635\\right) &#8211; \\left(0.685 \\times 118.635\\right) &#8211; \\left(0.8517 \\times 909.535 \\times (1 &#8211; 0.74)\\right)EFN=(4.803\u00d7118.635)\u2212(0.685\u00d7118.635)\u2212(0.8517\u00d7909.535\u00d7(1\u22120.74))=569.79\u221281.28\u2212(0.8517\u00d7909.535\u00d70.26)= 569.79 &#8211; 81.28 &#8211; (0.8517 \\times 909.535 \\times 0.26)=569.79\u221281.28\u2212(0.8517\u00d7909.535\u00d70.26)=569.79\u221281.28\u2212201.51\u2248287.0= 569.79 &#8211; 81.28 &#8211; 201.51 \\approx 287.0=569.79\u221281.28\u2212201.51\u2248287.0<\/p>\n\n\n\n<p>If the actual EFN is <strong>121.21<\/strong>, that would imply a <strong>lower increase in sales<\/strong> than 15%, or a different set of spontaneous liabilities.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">Summary:<\/h3>\n\n\n\n<p>The EFN equation helps companies estimate how much external financing they need to support projected growth. It considers the investment in new assets, funding from spontaneous liabilities, and retained earnings generated from projected profits. Accurate inputs are essential. Even small errors in estimating sales growth, liabilities, or profit margins can lead to significant changes in EFN. The formula is a helpful planning tool to avoid underestimating or overestimating financing needs.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"852\" height=\"1024\" src=\"https:\/\/gaviki.com\/blog\/wp-content\/uploads\/2025\/06\/learnexams-banner8-1107.jpeg\" alt=\"\" class=\"wp-image-39003\" srcset=\"https:\/\/gaviki.com\/blog\/wp-content\/uploads\/2025\/06\/learnexams-banner8-1107.jpeg 852w, https:\/\/gaviki.com\/blog\/wp-content\/uploads\/2025\/06\/learnexams-banner8-1107-250x300.jpeg 250w, https:\/\/gaviki.com\/blog\/wp-content\/uploads\/2025\/06\/learnexams-banner8-1107-768x923.jpeg 768w\" sizes=\"auto, (max-width: 852px) 100vw, 852px\" \/><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>How do I find external financing need (EFN) using this equation with the pro forma statements provided: EFN = (asset\/sales * change in sales &#8211; spontaneous liabilities\/sales * change in sales &#8211; PM * projected sales * (1-d) 2019 Income Statement 2020 Pro Forma Income Statement Sales:790.9 Dividends: -498.6 Addition to retained earnings:174.9 Accounts receivable: [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-39002","post","type-post","status-publish","format-standard","hentry","category-quiz-questions"],"_links":{"self":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/39002","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/comments?post=39002"}],"version-history":[{"count":1,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/39002\/revisions"}],"predecessor-version":[{"id":39004,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/39002\/revisions\/39004"}],"wp:attachment":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/media?parent=39002"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/categories?post=39002"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/tags?post=39002"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}