SICKNESS IN SMALL ENTERPRISES

Concept
Signals

and symptoms Magnitude of sickness Causes and consequences Corrective measures

According to the Reserve Bank of India, 1. a sick unit is one which incurs cash losses for 1 year, and in the judgement of bank, it is likely to continue to incur cash losses for the current year as well as the following year. 2. the unit has an imbalance in it financial structure 3. when cumulative losses exceed capital and reserve

Emphasis is on profitability, liquidity, and solvency

The sickness industries companies act, 1985, defines sick industry as, an industrial company which has at the end of any financial year accumulated losses equal to or exceeding its entire networth and has also suffered from cash losses in such financial year immediately preceding such financial year.

SIGNALS AND SYMPTOMS OF SICKNESS

A GRADUAL PROCESS (the process is as follows:- ) Normal units Functional areas,viz., production, marketing, finance, and personnel are efficient. Current ration is more than 1.

Tending towards sickness Initial aberration in some of the above functional areas Incipient sickness Deterioration in the above func. Areas continue. Sickness Units func. Area have become inefficient. Cash losses-last year, expected in current and next year. Current ratio<1

SIGNALS
THE WARNING SIGNS IN SEVERAL FUNC. AREAS is CALLED AS SIGNALS Important ones are: Decline in capacity utilization Shortage of liquid funds Inventory in excessive quantity Non-submission of data to banks Frequent breakdowns in plants Decline in quality of product/service rendered Delay or default in payment of statutory dues Decline in technical deficiency Frequent turnover of personnel

SYMPTOMS
IT IS THE PERSISTENCE OF VARIOUS SIGNALS OVER A LONG PERIOD OF TIME Important ones are: Persisting shortage of cash Widespread use of creative accounting Continuous tumple in prices of shares Freq. requests to banks for loans Delay in payment of statutory dues Delay in audit of annual accounts Morale degradation of employees among top and middle management level

However, financial rations are not the real reasons all the time. Reasons: sickness prone units do a lot of window dressing; financial data available after a gap of one year.

MAGNITUDE OF INDUSTRIAL SICKNESS

In case of a global experience, certain level of industrial sickness is inevitable During 1977-91, growth of sick small units exceed the growth of small scale units Cause: inter alia due to liberalisation policy by govt. on India during 6th and 7th five year plan Numerous small scale enter for competition and today, we find 1 sick small unit in every 10 sick small units

CAUSES ON INDUSTRIAL SICKNESS

ORIGIN OF THE CAUSES INCLUDES TWO CATEGORIES OF CLASSIFICATION: 1. External or exogenous causes ( beyond the control of industry; usually affect the industry group as a whole; the small scale units) 2. Internal or endogenous causes (within control of unit; usually affect large sick units)

EXTERNAL CAUSES
Imp. External factors: Changes in industrial policies of the govt. Inadequate and untimely availability of necessary inputs( raw materials, power, transport..) Lack and shrinkage of demand for product Recessionary trends hovering in economy Freq. industrial strikes and labor unrest Shortage of financial resources esp. Working Capital Natural calamities like flood, etc. Therefore, it is broadly classified as: 1. Govt. policy 2. Environment 3. Natural calamities

INTERNAL CAUSES
INTERNAL DEFICIENCIES OCCUR N VARIOUS FUNC. AREAS LIKE: finance, prodn, mktg, personnel Planning and construction stage: unit is in an uneconomic location; adopted inefficient method of prodn; producing obsolete product

2nd stage: mistakes in recruitment and training; underestimates of various inputs : power, fund, etc.

3rd stage: change in the demand for product; new and advanced method of prodn.; emergence of new competitors Acc. To Economic survey, 1992-93, 90% of sick units fall in small scale sectors

CONSEQUENCES
Main evil effects: Locking up economic financial resources Wastages of scarce capital assets Loss of production Increase in unemployment

CONSEQUENCES (CONTD.)
1. Huge financial losses to the banks: Locking up of substantial funds in sick units affects the future lending capacity Recovery takes a long time 2. Loss to employment opportunities: Most danger socioeconomic problem Estimate shows about 6% of total employment in industrial sectors

3. Emergence of industrial unrest: Trade unions oppose Threatens peace and tranquility of industrial environment.

CORRECTIVE MEASURES
4. Adverse effect of prospective investors & entrepreneurs: Share price goes down stock market affected Industrial climate becomes non-conducive affects prospective entrepreneurs 5. Wastages of scarce resources: The resources are already scarce in an under-developed economy. wastage of these resources is a loss. 6. Loss of revenue to the Govt: Raising substantial revenue from large number industrial units is greatly reduced.

CORRECTIVE MEASURES (CONTD.)

oDetection of sickness at the incipient stage and not in the delayed stage - responsible for high proportion of non-viable units; appropriate measjures are to be taken oSick units need to be closed or liquidated and only few are picked up for revival; therefore, merger for a large no. of sick units is a welcome proposition oInspite of failure in unit-management, financial institutions, labour view, all diverse viewpoints could be integrated, interests could be converged, unit can be salvaged. oOpen a separate division in BIFR(Board of Industrial and Financial Reconstruction) to deal with this sickness

CORRECTIVE MEASURES (CONTD.) oRehabilitation packages are provided already for financial measures like: rescheduling of debts, enhancement of Working Capital limit, etc. Other problems excluded like managerial efficiency, marketability of products, availability of power and raw material need to be attended too. oRehabilitation programme needs to be implemented really fast so that revival of the nsick unit does not become a distant goal. oGovt. of India and Reserve Bank of India requested to direct banks to give infn. on sick units to agencies like BIFR (Board of Industrial and Financial Reconstruction) oNECESSARY KNOWLEDGE IS TO BE IMPARTED TO ENTREPRENEURS IN VARIOUS FUNC. AREAS TO PREVENT SICKNESS OF THE UNITS.