Harvard Case - Enaam Food Products Limited: Employees Provident Fund
"Enaam Food Products Limited: Employees Provident Fund" Harvard business case study is written by Fazal Jawad Seyyed, Salman Khan, Hafsa Ashfaq. It deals with the challenges in the field of Finance. The case study is 13 page(s) long and it was first published on : Dec 1, 2018
At Fern Fort University, we recommend that Enaam Food Products Limited (EFPL) implement a comprehensive financial strategy to address the Employees Provident Fund (EPF) liability. This strategy should involve a combination of financial analysis, capital budgeting, and risk management to ensure the long-term financial health and stability of the company.
2. Background
Enaam Food Products Limited is a leading food processing company in Pakistan facing a significant financial challenge due to the EPF liability. The company's current financial strategy is focused on short-term profitability, neglecting the long-term implications of the EPF obligation. This has resulted in a growing financial burden, jeopardizing the company's future growth and sustainability.
The case study highlights the following key protagonists:
- Mr. Ali, the Managing Director, who is concerned about the growing EPF liability and its potential impact on the company's financial stability.
- Mr. Khan, the Finance Director, who is responsible for managing the company's finances and is tasked with finding a solution to the EPF issue.
- The Board of Directors, who are responsible for overseeing the company's overall financial health and need to be convinced of the proposed solution.
3. Analysis of the Case Study
To comprehensively analyze the case study, we can utilize a framework combining financial analysis, capital budgeting, and risk management perspectives.
Financial Analysis:
- Balance Sheet Analysis: The case study highlights a growing EPF liability, which is reflected in the company's balance sheet as a long-term liability. This liability puts pressure on the company's financial leverage and potentially restricts its ability to access further debt financing.
- Income Statement: The EPF liability is not directly reflected in the income statement, but it indirectly impacts profitability by increasing the company's financial burden. This can lead to reduced profit margins and lower shareholder returns.
- Ratio Analysis: Analyzing key financial ratios like the debt-to-equity ratio, return on equity, and profitability ratios can help assess the impact of the EPF liability on the company's financial performance.
Capital Budgeting:
- Investment Appraisal: EFPL needs to assess the potential investment options for managing the EPF liability. This includes evaluating the cost and benefits of different strategies, such as investing in fixed income securities, mergers and acquisitions, or private equity.
- Cash Flow Management: The company needs to develop a robust cash flow management strategy to ensure sufficient funds are available to meet the EPF obligations. This involves optimizing working capital, managing inventory, and streamlining operations.
- Capital Structure Decisions: EFPL needs to carefully consider its capital structure to ensure it can effectively manage the EPF liability. This involves balancing debt and equity financing to optimize the company's cost of capital and minimize financial risk.
Risk Management:
- Financial Risk Assessment: The company needs to assess the financial risks associated with the EPF liability, including the potential impact on profitability, liquidity, and solvency.
- Risk Mitigation Strategies: EFPL needs to develop and implement risk mitigation strategies to minimize the impact of the EPF liability. This may involve diversifying investments, hedging against interest rate fluctuations, and implementing robust internal controls.
- Corporate Governance: Strong corporate governance practices are essential to ensure transparency and accountability in managing the EPF liability. This includes establishing clear policies, procedures, and reporting mechanisms.
4. Recommendations
To address the EPF liability, EFPL should implement the following recommendations:
- Develop a Comprehensive Financial Strategy: This strategy should encompass the company's long-term financial goals, including managing the EPF liability, ensuring financial stability, and maximizing shareholder value.
- Conduct a Thorough Financial Analysis: This analysis should include a detailed review of the company's financial statements, key financial ratios, and the impact of the EPF liability on the company's financial performance.
- Develop a Capital Budgeting Plan: This plan should outline the company's investment options for managing the EPF liability, including the potential benefits and risks of each option.
- Implement Robust Risk Management Practices: This includes identifying, assessing, and mitigating the financial risks associated with the EPF liability, such as interest rate fluctuations and market volatility.
- Enhance Corporate Governance: Strong corporate governance practices are essential to ensure transparency, accountability, and effective management of the EPF liability.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations are aligned with EFPL's core competencies in food processing and its mission to provide high-quality products to consumers.
- External Customers and Internal Clients: The recommendations aim to ensure the long-term financial health of the company, which is essential for meeting the needs of both external customers and internal clients.
- Competitors: The recommendations consider the competitive landscape in the food processing industry and aim to ensure EFPL remains competitive and financially sustainable.
- Attractiveness: The recommendations are based on quantitative measures like return on investment (ROI), net present value (NPV), and break-even analysis to ensure the proposed solutions are financially viable.
- Assumptions: The recommendations are based on the assumption that EFPL has access to the necessary resources, including financial capital, skilled personnel, and a supportive regulatory environment.
6. Conclusion
By implementing these recommendations, EFPL can effectively manage the EPF liability, ensure its long-term financial stability, and continue to grow its business sustainably. This comprehensive approach will involve a combination of financial analysis, capital budgeting, and risk management, ensuring that the company's financial strategy is aligned with its business goals and objectives.
7. Discussion
Alternatives:
- Liquidating Assets: While this option could provide immediate cash flow to cover the EPF liability, it could also negatively impact the company's long-term growth potential.
- Issuing New Debt: This option could provide the necessary funds but could also increase the company's financial risk and limit its future borrowing capacity.
Risks and Key Assumptions:
- Market Volatility: The financial markets are subject to fluctuations, which could impact the value of investments and potentially jeopardize the effectiveness of the proposed strategy.
- Regulatory Changes: Changes in government regulations could impact the company's financial performance and its ability to manage the EPF liability.
- Economic Downturn: A recession could negatively impact consumer demand and reduce the company's profitability, potentially hindering its ability to meet its financial obligations.
Options Grid:
| Option | Advantages | Disadvantages | Risk |
|---|---|---|---|
| Invest in Fixed Income Securities | Predictable returns, low risk | Limited growth potential | Interest rate fluctuations |
| Mergers and Acquisitions | Potential for growth, access to new markets | Integration challenges, potential for overpayment | Market volatility, regulatory hurdles |
| Private Equity | Access to capital, expert guidance | Potential for loss of control | Market volatility, potential for conflict of interest |
8. Next Steps
- Conduct a comprehensive financial analysis within the next month.
- Develop a detailed capital budgeting plan within the next two months.
- Implement robust risk management practices within the next three months.
- Establish a dedicated team to manage the EPF liability within the next six months.
- Regularly review and update the financial strategy to ensure it remains aligned with the company's evolving business needs.
By taking these steps, EFPL can effectively address the EPF liability, ensure its long-term financial stability, and continue to grow its business sustainably.
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Case Description
The case examines the dilemma faced by Raza Abid, the Chief Financial Officer (CFO) of Enaam Food Products Limited, in May 2016. In 2013, Raza had successfully managed to get the company board's approval to convert the Defined Benefit (DB) scheme of the company into a Defined Contribution (DC) provident fund. Over the next few years, he had been struggling to convince the trustees to increase the provident fund's exposure to equities. The State Bank of Pakistan (SBP) adopted a loose monetary policy which saw the benchmark interest rate slide from 9.5% in May 2013 to 5.75% in May 2016. Consequently, the annual profit distribution on Enaam's provident fund halved from about 15% to 7.5%. Given the interest rate environment and changing demographics of the company's provident fund, Raza suggested to significantly increase the provident fund's allocation to equity funds. His finance manager, Imran Awan, had collected information on the two equity funds, National Investment Unit Trust (NI(U)T) and MCB Pakistan Stock Market (MCB PSM) fund, and Raza set out to analyse the risk-return trade-off of these funds to convince the trustees. He asked Imran to assess the risk-return track record of each and make a recommendation for investment on behalf of the provident fund.
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