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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.
Production • Improper location • Wrong technology • Uneconomic plant size • Inadequate emphasis on research and development • Weak production and quality control • Poor maintenance
Marketing • Inaccurate demand projection • Improper product mix • Wrong product positioning • Inadequate sales promotion • High distribution cost • Poor customer service
Finance • Wrong capital structure • Bad investment decisions • Week budgetary control • Poor management of receivables • Bad cash planning and control • Improper tax planning
Personal • Ineffective leadership • Bad leader relations • Inadequate human resources • Over staffing
RBI Study of Cause of Sickness
Cause Mismanagement & Managerial deficiencies Faulty initial planning and other technical drawbacks Labour trouble Market recession Other (infrastructure factor, raw material shortage etc.) Number 197 Percentage 52
9 86 34
2 23 9
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.