What this calculator does
Growth consumes cash. More sales require more inventory, more receivables and often more equipment, and only part of that is funded by suppliers extending credit and by profits retained.
The gap widens faster than sales do. Growing from $5 million to $5.5 million needs $112,000 of external funding here; growing to $7 million needs $988,000, nearly nine times as much for four times the sales increase, because retained earnings barely move while asset requirements scale directly.
The formula
The required increase in assets is the asset-to-sales ratio times the sales increase. Spontaneous liabilities grow the same way and are subtracted, as are retained earnings on the projected sales. What remains must be financed externally.
| Term | Meaning |
|---|---|
| Spontaneous liabilities | Payables and accruals that grow automatically with sales, providing free funding. |
| Asset intensity | Assets required per dollar of sales, which sets how capital-hungry growth is. |
| AFN | The shortfall that must be met by new debt or new equity. |
The inputs explained
| Field | What to enter |
|---|---|
| Current sales ($) | Current annual sales. |
| Projected sales ($) | Projected sales for the coming period. |
| Assets that grow with sales ($) | Assets that scale with sales, meaning inventory, receivables and productive capacity. |
| Liabilities that grow with sales (payables, accruals) ($) | Liabilities that scale with sales, being payables and accruals. |
| Net profit margin (%) | Net profit margin as a percentage. |
| Dividend payout ratio (%) | The dividend payout ratio, since distributed profit cannot fund growth. |
When to use it
Planning a growth year
Knowing the funding gap in advance is the difference between arranging finance and scrambling for it.
Testing whether growth is self-funding
A negative result means retained earnings more than cover the expansion.
Assessing a dividend decision
Paying out more profit directly increases the external funding required.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How much funding does each growth rate need?
Three sales targets against the same cost structure.
| Projected sales | Additional funds needed | Increase in retained earnings |
|---|---|---|
| $5.5m | $112,000.00 | $198,000.00 |
| $6m | $404,000.00 | $216,000.00 |
| $7m | $988,000.00 | $252,000.00 |
Questions
What counts as a spontaneous liability?
Accounts payable and accruals, which rise automatically as purchasing and payroll grow. They are effectively interest-free funding that arrives with the growth itself, which is why they reduce the gap.
Can the answer be negative?
Yes, and it means growth is self-funding with cash to spare. That happens when margins are strong, the payout ratio is low, or the business is not asset-intensive.
Why do fast-growing companies run out of cash?
Precisely because of this arithmetic. Asset requirements scale with sales while retained earnings scale with profit, which is a much smaller number. Profitable companies fail this way regularly.
Does this assume no efficiency gains?
Yes. It holds the asset-to-sales ratio constant, which is conservative. A business that improves inventory turns or collects faster as it grows will need less than the model suggests.
For growth funded purely from retained profit, see the sustainable growth rate calculator. For the working capital that growth consumes, see the working capital calculator.