Sickness in Small Scale Industries
BY-
Contents
Meaning of Industrial Sickness
Process of industrial sickness
Signals and symptoms of Industrial Sickness
Causes
Consequences
Preventive measures measures
Different roles
Case studies
Industrial Sickness
Accumulated losses equal to or exceeding 50% of its net worth in the immediately preceding five accounting years.
A current debt equity ratio of less than 1:1.
Suffers a cash loss in the immediately preceding accounting year.
Process of Industrial Sickness
Process of Industrial Sickness
Normal Units Functional areas, viz., production, marketing, finance and personnel are normal and efficient. Generating profits, current ratio also is more than one.
Tending toward sickness Net worth is positive, debt equity ratio is satisfactory, initial aberration in some of the functional areas mentioned above. Decline in profit during last year and losses anticipated in current year.
Incipient sickness Deterioration in the above functional areas continues, cash losses incurred in last year are expected in current year also. Deterioration anticipated in current year. Although current ratio is more than one during last year.
Sickness Deterioration anticipated in debt- equity ratio during current year. Unit’s functional areas have become inefficient, cash losses incurred in last year.
Signals of Industrial Sickness
Decline in capacity utilization
Shortages of liquid funds to meet short-term financial obligation
Inventories to excessive quantities
Non submission of data to banks and financial institutions
Irregularity in maintaining bank accounts
Frequent breakdowns in plants and equipments
Decline in quantity of product manufactured or service rendered
Delay or default in the payment of statutory dues such as provident fund, sales tax, excise duty, employees, etc.
Decline in technical deficiency
Frequent turnover of personnel in the industry
Symptoms of industrial sickness
Persisting shortage of cash
Deteriorating financial ratios
Widespread use of creative accounting
Continuous tumble in the prices of the shares
Frequent request to banks and financial institutions for loans
Delay and default in the payment of statutory dues
Delay in audit of annual accounts
Morale degradation of employees and desperation among the top and middle management level
Causes of Industrial Sickness
External Causes
Internal Causes
Analysis: Year-wise SSI-sick units in Orissa
Year upto No. of SSI Units Set-up
No. of SSI-sick Units
Percentage to the total
1995-96 49,586 1,458 2.94
1996-97 52,687 1,464 2.77
1997-98 55,873 1,489 2.66
1998-99 59,057 1,493 2.52
1999-2000 62,530 1,508 2.41
2000-01 66,206 1,519 2.29
2001-02 70,125 1,524 2.17
2002-03 74,133 1,527 2.05
2003-04 78,564 1,535 1.95
Analysis: SSI-Sick Units in South Orissa of 2003-04
Sl. District No. of SSI units set up
No. of Sick Units
No. of Closed Units
No. of revived units
1 Ganjam 7511 2088 112 21
2 Gajapati 355 71 18 03
3 Koraput 4025 934 41 10
4 Malkangiri 126 22 04 -
5 Nowaranpur 302 51 - -
6 Rayagada 1297 231 10 02
7 Bondh 166 12 16 04
8 Kandhamal 1850 317 12 02
Total 15632 3726 243 42
Consequences of industrial sickness
Huge financial losses to the banks and the financial institutions
Loss to employment opportunities
Emergence of industrial unrest
Adverse effect on prospective investors and entrepreneurs
Wastage of scarce resources
Loss of revenue to the Government
Preventive measures
In preventing the sickness, therefore, the role of the following agencies has been identified with respective distinction
Term Lending Institutions
Commercial Banks
Entrepreneur
Government
These agencies can effectively stem the sickness if they make use of signals and symptoms that are generated by the industrial unit in its working and by using information and reporting system of important key parameters of the industrial enterprise.
Role of Term Lending Institutions
Appraisal of Management
Proper evaluation of the management of the project.
Banning Industries Not Having Scope
Timely help by identifying those industries or industrial products, where sickness seems to be emerging
Machinery & Equipment
Ensure that the second-hand equipment would have a reasonable long life after reconditioning.
Satisfactory Implementation
Ensure that all avoidable delays at the appraisal stage and during the disbursement of the sanctioned assistance are eschewed scrupulously
Role of Commercial Banks Careful Proper Appraisal
Ensures not only its success but the banker's interest is also safeguarded.
Timely disbursement
To ensure that working capital finance should be available in time to avoid overruns in project cost.
Warning Signals
A good look at the ledger account of a customer (bank's) by an experienced banker
Market Intelligence
An innocuous visit to the unit by the banker might help in crystallizing the picture further.
The Role of the Entrepreneur
Management Board
The industry should have a board with competent persons from all disciplines needed to run the unit successfully, appoint a dynamic chief executive to implement the policies formulated by the board and ensure a proper second line of defense by appointing professional go-getters.
Partners in Enterprise
The Role of the Government
Sudden changes in industrial policy
May discourage new investment but also upsets further plans causing sickness in the established units.
Resistance to change
Without a change in management, the unit would soon become chronically sick.
Power to change
Term lenders may be authorized to appoint in units suffering from incipient sickness whole time financial, technical and marketing directors.
Sick Industrial Company Act
Timely detection of sick and potentially sick companies
Speedy determination by a body of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies.
The expeditious enforcement of the measures so determined and for all matters connected therewith or incidental thereto.
Mitsubishi Chemicals Corporation
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