The financial management of sick unit is divided into six sections Definition of sickness Causes of sickness Stages of industrial

trial sickness Symptoms of sickness Revival of a sick unit

Definition of sickness
According to RBI, a sick unit is that which has incurred a cash loss for one year and is likely to continue incurring losses for the current year as well as in the following year and the unit has an imbalance in its financial structure that is, current ratio is less than 1:1 and debt/equity ratio is worsening.

Weak Units:
The companies (secondary amendment) Act, 2002 defines a sick company as one Which has accumulated losses in any financial year equal to 50% or more of its average net worth during 4 years immediately preceding the financial year in question , or Which has failed to repay its debts within any 3 consecutive quarters on demand for repayment by its creditors. A current debt equity ratio of less than 1:1

Causes of sickness
Unfavourable external environment Managerial deficiencies o Production o Marketing o Finance o personnel

Unfavourable external environment

Shortage of key inputs like power & basic raw material. Changes in government policies. Development of new technology. Shifts in consumer preferences. Natural calamities. Adverse international developments.

Managerial deficiencies
Production Improper location Wrong technology Uneconomic plant size Unsuitable plant & machinery Weak production & quality control Poor maintenance Marketing Inaccurate demand projection Improper product mix Wrong product positioning High distribution costs Poor customer service

Finance

Wrong capital structure Bad investment decision Weak budgetary decisions Improper tax planning

Personnel Ineffective leadership Bad labour relation over staffing Weak employee commitment

STAGES OF INDUSTRIAL SICKNESS

Healthy stage Moving towards sickness Incipient sickness

Sickness

SYMPTOMS OF INDUSTRIAL SICKNESS

Shortage of liquid funds
Delay or default in payment to banks and financial institutions Non submission of information to banks and financial institutions Underutilization of capacity Poor maintenance of plant and machinery Increase in stock of inventory Excessive turnover of personnel Resort to creative accounting which seeks to present a better financial picture than what it really is Decline in the price of equity shares and debentures Unfavorable current ratio

REVIVAL OF A SICK UNIT

Viability study to assess whether the unit can be revived or not within a reasonable period.

Viability Study
Market Analysis Production/Technical Analysis Finance Personnel Organisation Environment

Market Analysis a) b) c) d) e) f) g) h) i) j) Market share behaviour over the past few years Growth rate of the total market Emergence of competition Comparative price and cost analysis Order book position USP,if any, employed by the firm Consumer attitudes,prefernces,and needs Promotional strategies of the firm and its consumers Distribution channel used by the firm Distributor cost analysis

Production/Technical Analysis
a) b) c) d) e) f) g) Technological capability of the firm Plant condition Degree of balance in capacities at different stages of manufacturing Manufacturing process Plant maintenance system Availability of power,water,fuel and other utilities Supply of raw materials

Finance
a) b) c) d) e) f) g) h) Liquidity position Leverage Analysis Turnover of assets Profitability Estimate of working capital needs Balance sheet and income statement projection Budgetary control and responsibility accounting Cost control and reduction

Personnel Organisation a) b) c) d) Human Resources Employee motivation, morale and commitment Leadership Manpower in relation to needs

Environment

a) Supply of raw materials b) Availability of power, fuel and water c) Governmental policies with respect to excise duties, customs duties export duties,reservations,etc d) Lending policies of financial institutions and commercial bank e) General industrial relations situation f) Competitive developments

REVIVAL PROGRAMME
Settlement with creditors Provision of additional capital Divestment and Disposal Reformulation of product-market strategy Modernisation of plant and machinery Reduction in manpower Strict control over costs Streamlining of operations

 Improvement in managerial systems a) b) c) d) e) Environmental monitoring Organizational structure Responsibility accounting Management information system Budgetary control

Workers participation Change of management

 Debt

Restructuring

a) b) c) d) e)

Interest rate relief Deferment of past interest dues Waiver of penalties Reschedulement of loan repayment Reduction in loan amount