Generating cash for growth
A MFI Furniture Group case study

Page 1: Introduction

Successful organisations are able to compete in tough environments. To do this, they need: capable managers who are willing to face facts and make hard decisionsexcellent resources, including flexible and enterprising employeesfinancial resources to support initiatives for change, growth and improvement.This case study examines how in 1999 MFI, the leading furniture retailer in the UK...
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Page 2: Turning round the business

In 1999 MFI had completed the refurbishment of most of its stores into the Homeworks format. The purpose behind this investment was to generate high levels of sales growth. However, the refurbished stores were not delivering the increased sales growth that was expected. As a result, in the period prior to 1999 MFI experienced a considerable net outflow of cash, and this had to be financed by...
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Page 3: Pilot test and invest

Successful companies seek to grow the business for shareholders, as well as to delight customers. Growing the business involves generating profits through the turnover (value of sales) being substantially greater than the cost of sales (costs that go into achieving business turnover). Provided that products are sensibly priced, the profit margin a business achieves will be high when customers...
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Page 4: The way forward

Based on the dynamic success of the UK business in recent times, the company is seeking to become truly international through piloting, testing and then investing overseas as well as forming partnerships with leading overseas companies to sell their products in the UK. For example, in August 2001, MFI created a joint venture to open several MFI stores in Taiwan with a local company. In October...
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Page 5: Building the cash base

Any business that wants to grow must secure the necessary funding. There are several sources of cash funding for a public limited company (plc). It can:sell further shares to existing shareholders at an attractive, discounted priceraise funds from loans (where the borrower pays interest and eventually the principal) or from short-term borrowing in the form of a bank overdraft. This results in a...
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Page 6: Making your assets work for you

In 2001 MFI's profit and loss account showed the following details:This profit has come from assets valued at £375.5m. This represents a return on capital employed of 16.48 For this line of business, this outcome is a good result. In addition, MFI was able to benefit from receiving net interest of£3.2m on positive cash balances in contrast with the late 1990s when it was paying out huge sums...
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Page 7: Conclusion

The story of how MFI now manages its finances helps it grow. The best way of growing a business is through profits generated through successful trading. Delighting customers provides high levels of turnover. At the same time, generating finance internally removes the cost of borrowing money - interest payments. Other forms of financial efficiency e.g. making your fixed assets work harder, reducing...
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