Financial Management of

Sick units
 Definition of sickness
• RBI
cash losses
current ratio is less then 1:1

• Company act, 2002

Accumulated losses
Failed to repay its debts
 Causes of sickness
A firm remains healthy if it
• Operates in reasonably favorable
environment
• Has a fairly efficient management.

The sickness may be caused by

• Unfavorable external environment
• Managerial deficiencies
 Unfavorable External
Environment
• Shortage of key input like power and basic raw
materials.
• Changes in government policies
• Development of new technology.
• Sudden decline in the order from government.
• Shift in the customer preference.
• Natural calamities.
• Reduced lending by financial institution.
 Managerial Deficiencies
Production
• Improper location
• Wrong technology
• Uneconomic plant size
• Inadequate emphasis on research and
development
• Weak production and quality control
• Poor maintenance
 Managerial Deficiencies
Marketing
• Inaccurate demand projection
• Improper product mix
• Wrong product positioning
• Inadequate sales promotion
• High distribution cost
• Poor customer service
 Managerial Deficiencies
Finance
• Wrong capital structure
• Bad investment decisions
• Week budgetary control
• Poor management of receivables
• Bad cash planning and control
• Improper tax planning
 Managerial Deficiencies
Personal
• Ineffective leadership
• Bad leader relations
• Inadequate human resources
• Over staffing
 RBI Study of Cause of Sickness
Cause Number Percentage
Mismanagement & 197 52
Managerial
deficiencies
Faulty initial planning 52 14
and other technical
drawbacks
Labour trouble 9 2
Market recession 86 23
Other (infrastructure 34 9
factor, raw material
shortage etc.)
100 100
 Symptoms of Sickness
• Delay or default in payment to suppliers.
• Delay or default I payment to bank and financial
institutes.
• Frequent request to bank and financial institutes
for additional credit.
• Poor maintenance of plant and machinery.
• Accumulation of inventories.
• Decline in the price of equity shares and
debentures.