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Research (PIMSR),
New Panvel
MMS Semester - 3
Subject : Advanced Financial Management
(AFM)
by
Prof. K.G.S. MANI
Lecture date :
Lesson : Financial Management of Sick Units
(1) Definition and Meaning of Sick Unit :
(a) According to Sick Industrial Companies Act (SICA)
1985, an industrial company is defined as sick when (i)
it was in existence for not less than 7 years, (ii) its net
worth was eroded by losses, and (iii) incurred cash
losses for the current year and the preceding year
(previous year) (to explain : what is cash loss)
(b) Accordingly to Companies Act 2013, a sick industrial
company means an industry company which has (i)
accumulated losses in any financial year which are
equal to 50% or more of its average net worth during 4
years immediately preceding such financial year, or(ii)
company which
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=
=
=
=
=
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C0 to C4 re co-efficient
R1 = Profit before tax / Current liabilities
R2 = Current Assets / Total liabilities
R3 = Current liabilities / Total Assets
R4 = (Immediate Assets Current liabilities / Operating
costs
excluding
depreciation
The four ratios combine various aspects of profitability
and solvency to produce a zero score. When they turn to
the unquoted manufacturing firms, the formula
comprises five ratios. Taffler and Tisshaw claimed good
result for their formula but because of their proprietary
interest, they were not willing to publish the co-efficients
of their equations. Therefore, it is not possible for others
to test and comment on the particular models.
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(14)
Working
Capital
Management
of
sick
companies :
Industrial sickness is caused due to various factors.
These factors may be internal or external. However, the
sickness maybe attributed to the poor working capital
management. There are two concepts of working capital
namely gross working capital and net working capital. In
case adequate working capital is not available for this
period, the firm will not be in a position to sustain the
sales since it may not be in a position to purchase rawmaterials, pay wages and meet other expenses required
for manufacturing the products and to carry on with the
levels of sales to earn profits. The industrial sickness
caused may be attributed to the poor working capital
management. The following are some of the important
attributes :
(i) Poor financial planning
(ii) Poor resources management
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(iii) Inadequate working capital
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THANK YOU
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