Industrial Sickness

Contents

• Why is it relevant in this context?

• What is industrial sickness?

• Causes of sickness

• Symptoms of sickness

• Remedies for sickness

Why is it Relevant?

• Most of the entrepreneurs are first generation entrepreneurs

• They lack prior experience, expertise & resources

• Sick industries result in losses for lenders, suppliers, employees, exchequer

What is Industrial Sickness?

• Two possible ways of understanding sickness

1. Based on net worth

2. Based on operating cash flows

• Different definitions provided: Companies (Second Amendment) Act, 2002; SICA, 1985; RBI

• All definitions based on financial indicators

What is Industrial Sickness?...

• General understanding of sickness:

1. Firm faces financial embarrassment

2. Viability is threatened by adverse factors

Causes of Sickness

1. Factors in external environment – external causes

2. Quality of management – internal causes

• External causes – non-controllable

• Internal causes – controllable

External Causes – Unfavourable External Environment

• Shortage of key inputs

• Change in govt. policies – excise, customs, reservation, licensing etc.

• Creation of overcapacity

• Technological obsolescence

• Changes in consumer preferences

• Natural calamities

• Adverse international developments

• Reduced lending by financial institutions

Internal Causes – Managerial Deficiencies

Function-wise classification:

• Production

• Marketing

• Finance

• Human Resources

Deficiencies: Production

• Improper location

• Wrong technology

• Uneconomic plant size

• Unsuitable plant & machinery

• Inadequate focus on R&D

• Poor quality control

• Poor maintenance

Deficiencies: Marketing

• Inaccurate demand projection

• Improper product mix

• Wrong product positioning

• Irrational price structure

• Inadequate sales promotion

• High distribution costs

• Poor customer service

Deficiencies: Finance

• Wrong capital structure

• Bad investment decisions

• Weak budgetary control

• Absence of responsibility accounting

• Inadequate MIS

• Poor management of receivables

• Bad cash planning & control

• Strained relationship with lenders & shareholders

• Improper tax planning

Deficiencies: HR

• Ineffective leadership

• Bad labour relations

• Inadequate human resources

• Overstaffing

• Poor commitment of employees

• Irrational compensation structure

Other Deficiencies

Deficiencies in the project formulation & implementation phase:

• Ill-conceived projects

• Shortage of capital from promoters

• Delay in loan disbursements

• Underestimation of project costs

• Major changes in implementation stage

• Overspending on unproductive expenses

Symptoms of Sickness

• Delay/Default in supplier payments

• Delay/Default in debt service payments

• Lack of transparency to banks etc.

• Frequent requests for additional credit to banks

• Decline in capacity utilisation

• Poor maintenance of plant & machinery

• Low turnover of assets

Symptoms of Sickness

• Accumulation of inventories

• Inability to avail quantity/trade/cash discounts

• Excessive turnover of personnel

• Extension of accounting period

• Window dressing / Creative accounting

• Decline in the market value of equity shares