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Financial Management of Sick Units Prepared by :

AFROZ MALIK Click to edit Master subtitle style (58) KHUSHNOOD FAKHI (15) PROF. PANDALIA
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The financial management of sick units is divided into six sections


Definition of sickness 2. Causes of Sickness 3. Symptoms of Sickness ClickPredictionMaster subtitle style to edit of Sickness 4. 5. Revival of Sickness 6. Turnaround Stories
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DEFINITION OF SICKNESS

RBI define as a sick unit as One which has incurred cash losses for one year and, in the judgment of the financing banks, Click to edit Master subtitle style 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 then 1:1 and debt/equity ratio is worsening.

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Term lending financial institution classify a unit as a sick after considering any of the following symptoms:
Default in meeting four consecutive half-yearly installments Click to editprincipal in respect of institutional loans. of interest or Master subtitle style Cash losses for a period of 2 years or continued erosion in the net worth, say by 50 percent. Mounting arrears on account of statutory and other liabilities fro a period of 1 to 2 years.

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Causes of Sickness
Unfavorable external environment oManagerial deficiencies qProduction qMarketing qFinance Click to edit Master subtitle style qPersonnel
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Unfavorable External Environment


Shortage of key inputs Changes in government policies Click to edit Master subtitle style Development of new technologies Sudden decline in order of from major customer Natural calamities

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Managerial deficiencies
Production
Improper location Click to edit Master subtitle style
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Wrong technology oUneconomic plant size oPoor maintenance

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Marketing
Inaccurate demand projection oImproper product mix Click to edit Master subtitle style oHigh distribution cost oPoor customer service
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Finance
Wrong capital structure o Bad edit Master subtitle style Click to investment decision o Weak budgetary control o Improper tax planning
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Personnel

Click to edit Master subtitle style oIneffective leadership

Bad labour relation oOver staffing oWeak employee commitment


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Symptoms of Sickness
Delay or default in payment to supplier Irregularity in bank account Low turnover of assets Click to edit Master subtitle style Accumulation of inventories Poor maintenance of plant and machinery Decline in the price of equity shares and debenture

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Prediction of Sickness
Univarate analysis qMultivariate analysis
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Univariate Analysis
In univariate analysis, an attempt is made to predict sickness on the basis of single Click to editratio subtitle style financial Master The three type of analysis conducted to determine the predictive power of financial ratio.

A comparison of mean value A dichotomous classification analysis, and An 4/28/12 analysis for likelihood ratio

Multivariate Analysis
Multivariate technique, commonly used in predicting business failure or sickness, is the Click to editof multiple of discriminant analysis. technique Master subtitle style This is a statically technique which help in classifying an observation. It essentially involves estimating a function which discriminates best between the groups. The discriminating function is usually a linear one.

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A Critique of bankruptcy Prediction Model


Through the various bankruptcy prediction model appear posses some predictive value, it is very difficult to generalize about corporate for the following reason. Click We edit Master well defined theory of corporate failure to do not have a subtitle style 1. to guide empirical work. In the absence of such theory, empirical research involves a great deal of experimentation with different variable. 2. Empirical studies are statically flawed because they are retrospective in nature

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Revival of Sick Unit


When an industrial unit is defined as sick, a viability study should be conducted to access whether the unit can be revived/rehabilitated within a reasonable Click to edit Master subtitle style 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 is better dead than alive, step must be taken to liquidate it expeditiously.

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Viability Study

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A reasonable comprehensiv e assessment


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Market Analysis
Market share behavior over the past few years. oGrowth rate of the total market. oEmergence of competition. oComparative price and cost analysis. Click to edit Master subtitle style oOrder book position. oUnique selling proposition, if any, employed by the firm. oConsumer attitudes, preference, and needs. oDistribution channels used by the firm. oDistribution cost analysis.
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Production/Technical Analysis
Technological capability of the firm . oPlant condition. oDegree of balance in the capacities at different stages of manufacturing. Click to edit process. oManufacturing Master subtitle style oPlant Maintenance system. oAvability of power, water, fuel, and other utilities. oSupply of raw material.
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Finance
Liquidity position. oLeverage analysis. oTurnover of assets. oProfitability. Click to edit Master subtitle style oEstimate of working capital needs. oBalance sheet and income statement projection. oBudgetary control and responsibility accounting. o Cost reduction and reduction.
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Personnel Organization
Click to edit Master subtitle style Human resources
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Employee motivation, morale and commitment oLeadership oManpower in relation needs


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Environment
Supply of raw material. oAvability of power, fuel, and water. oGovernmental policies with respect of excise duties, Click to edit Master subtitle style custom duties, export duties, reservations, etc. oIndustrial licensing policy. oLending policies of financial institution and commercial banks. oGeneral industrial relation situation. oCompetitive developments.
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Result of viability study


The viability study may suggest on the following: The unit can be revived by adopting one or more of the Click to edit Master subtitle style following measures: Debt restructuring, infusion of funds, correction of functional deficiencies, granting of special reliefs and concession by the government , replacement of existing management because of its incompetence and/or dishonesty. 2. The unit of potentially viable-this essentially implies that the benefits expected from remedial measures are less than 4/28/12 cost of such remedial measures. the
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Revival programme
Settlement with creditors oProvision of additional capital o Reformulation of product- market strategy oModernizations of plant and machinery Click to edit Master subtitle style oReduction in manpower oStrict control over cost oImprovement in managerial system oChange of management oDebt reconstructing
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