Sales Increase Maggie\'s Muffins, Inc., generated $4,000,000 in sales during 201

Question

Sales Increase

Maggie's Muffins, Inc., generated $4,000,000 in sales during 2013, and its year-end total assets were $2,400,000. Also, at year-end 2013, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2014, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 4%, and its payout ratio will be 50%. How large a sales increase can the company achieve without having to raise funds externally; that is, what is its self-supporting growth rate? Do not round intermediate steps. Round your answers to the nearest whole.

Sales can increase by $

Explanation / Answer

Additional funds needed (AFN) 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. Additional funds needed (AFN) is also called external financing needed.

Additional funds needed method of financial planning assumes that the company's financial ratios do not change. In response to an increase in sales, a company must increase its assets, such as property, plant and equipment, inventories, accounts receivable, etc. Part of this increase in offset by spontaneous increase in liabilities such as accounts payable, taxes, etc., and part is offset by increase in retained earnings.

Formula and Calculation

Additional funds needed (AFN) is calculated as the excess of required increase in assets over the increase in liabilities and increase in retained earnings.

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