FINANCIAL MANAGEMENT IN SICK UNITS

Prepared By: Gishan Khan Pankti Sampat Neelu Yadav Keval Raymangya Dharmendra Shah

1344 1364 1380 1361 1368

THE FINANCIAL MANAGEMENT OF SICK UNIT IS DEVIDED IN TO SIX SECTIONS

DEFINITION OF SICKNESS CAUSES OF SICKNESS SYMPTOMS OF SICKNESS PREDICTION OF SICKNESS

1 2

3 4

5 6

REVIVAL OF A SICK UNIT TURN AROUND STORIES

DEFINATION OF SICKNESS
RBI define a sick unit as one which has incurred cash losses for one year and, in the judgment of the financing bank, is likely to incur cash losses for the current as well as following year and/or there is an imbalance in the units financial structure, that is, current ratio is less than 1:1 and debt/equity ratio is worsening.

CAUSES OF SICKNESS
Unfavorable external environment

Managerial deficiencies
Production Marketing

Finance
personnel

UNFAVORABLE EXTERNAL ENVIRONMENT

Shortage of key inputs

Changes in government policies

Development of new technologies Sudden decline in orders from major customers

Shifts in customers preferences

Natural calamities

MANAGERIAL DEFICIENCIES

PRODUCTION Improper location Wrong technology Uneconomic plant size Poor maintenance

MANAGERIAL DEFICIENCIES
MARKETING Inaccurate demand projection Improper product mix High distribution cost Poor customers service

MANAGERIAL DEFICIENCIES

FINANCE Wrong capital structure Bad investment decisions Weak budgetary control Improper tax planning

MANAGERIAL DEFICIENCIES

PERSONNEL Ineffective leadership Bad labor relations Over staffing Weak employee commitment

SYMPTOMS OF SICKNESS
Delay or default in payment to suppliers. Irregularity in the bank account. Decline in capacity utilizations.

Low turn over of assets.

Accumulations of inventories. Poor maintenance of plant and machinery. Excessive turnover of personnel.

PREDICTION OF SICKNESS
Univariate Analysis

Multivariate Analysis

UNIVARIATE ANALYSIS
In univariate analysis, an attempt is made to predict

sickness on the basis of single financial ratio. Beaver conducted three types of analysis to determine the predict power of financial ratios: A comparison of mean values A dichotomous classification analysis and An analysis for likelihood ratios.

MULTIVARIATE ANALYSIS
Multivariate technique commonly used in predicting

business failure or sickness, is the technique of multiple discriminant analysis. It essentially involves estimating a function which discriminates best between the groups. The discriminates function is usually a linear one.

REVIVAL OF SICKUNITS
When an industrial unit is identified as sick, viability

study should be conductive to assess whether the unit can be revived/rehabilitated within a responsible period. If viability study suggest that the unit can be rehabilitated, a suitable plan for rehabilitation must be formulated. If the viability study indicates that the unit is better dead than alive steps must be taken to liquidate it.

VIABILITY STUDY
A reasonably comprehensive assessment of the various aspects of the working of a unit, a viability study generally covers the followings: Market Analysis Production and technical analysis Finance

Personnel organizations

MARKET ANALYSIS
Market share behavior over the past few years

Growth rate of the total market

Emergence of competitions Comparative price and cost analysis Order book positions Unique selling propositions, if any, employed by the

firm. Consumer attitudes, preference and needs. Promotional strategies of the firm and its consumers Distribution channels used by the firm

PRODUCTION/TECHNICAL ANALYSIS
Technological capability of the firm

Plant conditions
Degree of balance in the capacities at different stages

of manufacturing. Manufacturing process Plant maintenance system Availability of power,water,fuel and other utilities. Supply of raw materials

FINANCE
Liquidity position.

Leverage analysis.
Turnover of assets. Profitability.

Estimate of working capital needs.

PERSONNEL ORGANIZATION
Human Resources.

Employee Motivation , Morale and commitment.

Leadership. Manpower in Relation to needs.

RESULTS OF VIABILITY STUDY

The Viability Study may suggest the following : The unit can be revived by adopting one or more of the following measures : 1. Debt restructuring , infusion of funds , correlation of functional deficiencies , granting of special reliefs and concessions by the govt. , replacement of existing management because of its incompetency and / or dishonesty. 2. The unit is not potentially viable this essentially implies that the benefits expected from remedial measures are less than the cost of such remedial measures.

REVIVAL PROGRAMME
Settlement of creditors. Provision of additional capital. Divestment and Disposal. Reformulation of product market strategy. Modernization of plant and machinery. Reduction in Manpower. Strict control over cost. Streamlining of operations.

Improvement in managerial system.

Workers participation. Change of management.

Depth Restructuring.

THANK YOU