To calculate the Additional Funds Needed (AFN), we first need to determine the increase in assets required to support the sales growth, then subtract the expected increase in spontaneous liabilities and retained earnings: Step 1: Calculate Increase in Assets: Sales increase = $1 million (from $5 million to $6 million) Asset growth rate = Sales growth rate = 20% Increase in assets = $3 million (prior year assets) x 20% = $600,000 Step 2: Calculate Increase in Spontaneous Liabilities: Relevant spontaneous liabilities = Accounts payable Accrued liabilities = $250,000 $250,000 = $500,000 Increase in spontaneous liabilities = $500,000 x 20% = $100,000 Step 3: Calculate Increase in Retained Earnings: Forecasted profit = $6 million (sales) x 3% (profit margin) = $180,000 Retained earnings increase = $180,000 x 30% (retention ratio) = $54,000 Step 4: Calculate AFN: AFN = Increase in assets - Increase in spontaneous liabilities - Increase in retained earnings AFN = $600,000 - $100,000 - $54,000 = $446,000 Strategies to Reduce AFN: Increase Profit Margin: Improve operational efficiency to increase profit margin, generating more internal funds for growth. Reduce Dividend Payout Ratio: Lower the dividend payout ratio to retain more earnings for reinvestment. Negotiate Payment Terms: Extend payment