Explain two approaches that are used to calculate External Funding Requirement (EFR) and the type of funding.

To compute EFR and the type of funding, the following approaches can be used: (1) Analytical Approach: In this approach, we begin by analyzing each item on the balance sheet in relation to changes in sales and determine their amounts while considering prescribed conditions, such as maintaining specific Debt-to-Equity or Current Ratios, among others. (2) Formula based Approach: In this approach, we first calculate the amount of EFR using the following formula: EFR = (TA / S) x ∆S – (Payable and Liabilities / S) x ∆S – mS1(1 – d) Where: ∆S = Change in Sales S1 = Revised Sales TA = Total Assets Payable and Liabilities = Payables and liabilities that change spontaneously in accordance with level of sales. m = Profit Multiplier or percentage of Net Profit after Tax d = Dividend Pay-out Ratio