Week 5 External Financing Required

External Financing Required (EFR)

When the pro forma balance sheet is completed, total assets and total liabilities and equity will rarely match. The discrepancy between forecasted assets and forecasted liabilities and equity results because either too little or too much financing is projected for the amount of asset growth expected.

The discrepancy is called external financing required (EFR) when forecasted assets exceed forecasted liabilities and equity.

The discrepancy is called excess financing when forecasted liabilities and equity exceed forecasted assets.

The determination of external financing required is one of the most important reasons for producing pro forma financial statements. Armed with the knowledge of how much additional external funding is needed, financial managers can make the necessary financing arrangements in the financial markets before a crisis occurs.