Factors Responsible for Industrial Sickness

This article throws light upon the top six factors responsible for industrial sickness. The factors are: 1. Balance Sheet Analysis for the Last 5 Years 2. Profit and Loss Account Analysis for the Last 5 Years 3. Fund Flow Statement Analysis for Last 5 Years 4. Ratio Analysis for the Last 5 Years 5. Cash Credit Dealings during Last 5 Years 6. Analysis of Operational Parameters for the Last 2 Years.

Industrial Sickness: Factor # 1. Balance Sheet Analysis for the Last 5 Years:

To ascertain the ups and downs in respect of:

(a) Accumulation or otherwise of Assets.

(b) Increase or decrease of Liabilities.

(c) Reduction or accumulation of Capital Reserves and Surplus.

(d) Borrowings and loan repayments, etc.

This analysis would show whether health of the unit is improving or deteriorating.

Industrial Sickness: Factor # 2. Profit and Loss Account Analysis for the Last 5 Years:

To ascertain the increase or decrease of:

(a) Turnover,

(b) Interest on loan,

(c) Capital locked up in inventory,

(d) Revenue,

(e) Cash Profit or Cash Loss,

(f) Net Profit or Net Loss,

(g) Trends of such losses, etc.

The factual study and interpretation of the figures arrived at (1) and (2) above would assist us to:

i. Conclude whether the business is improving or has generated surplus fund for declaration of dividend, etc.

ii. Find out whether the financial position is a matter of concern or otherwise so that remedial action can be taken up as soon as the symptoms of deterioration are in sight.

Industrial Sickness: Factor # 3. Fund Flow Statement Analysis for Last 5 Years:

To ascertain the danger sign of liquidity crisis warranting corrective action in relation to the following:

(a) Utilisation of fund or cash generated.

(b) Utilisation of cash profit.

(c) Incurrence and magnitude of cash loss and its financing.

(d) How are the cash losses financed? Is it by withholding the payments of creditors? Is it by decreasing the quantum of working capital?

Industrial Sickness: Factor # 4. Ratio Analysis for the Last 5 Years:

These can be of predictive value for forewarning industrial sickness.

The following ratio tests are suggested.

(a) Cash Flow/Total Debt:

(b) Total Debt/Total Assets:

A higher ratio gives an indication of increased current liabilities and decreased assets, and signifies weak corporate health.

(c) ‘Z’ Score approach (also known as ‘Multiple discriminant analysis’):

This combines five financial ratios as under:

Z = 0.717X1 + 0.842X2 + 0.033X3 + 0.042X4 + 0.995X5,

Where X1 = Working Capital/Total Assets

X1 = Retained earnings since inception/Total Assets

X3 = Earnings before tax and interest/Total Assets

X4 = Market Value of Equity/Book Value of Total Assets

X5 = Sales/Total Assets.

If Z > 2.9, the unit is healthy

= 1.2 to 2.9, the unit is in difficulties (grey area)

< 1.2, the unit is in danger zone.

Any sharp fall or decline of each of the above ratios indicates a deplorable condition and requires an immediate remedial action to arrest the situation.

Industrial Sickness: Factor # 5. Cash Credit Dealings during Last 5 Years:

To ascertain whether there is a continuous irregularity in the following financial management parameters, e.g.:

(a) Diversion of funds.

(b) Using working capital funds to meet capital expenditure.

(c) Longer period of credit allowed to customers.

(d) Blocking previous working capital in inventory consisting of slow-moving items, etc.

Industrial Sickness: Factor # 6. Analysis of Operational Parameters for the Last 2 Years:

The would include the following areas:

(a) Production and Productivity:

(i) High rate of rejection of manufactured goods due to poor supervision, poor quality of raw material, faulty machines, high turnover of skilled labour, etc.

(ii) Poor productivity, improper product mix, non-consideration of production priority in terms of higher contribution, etc.

(b) Marketing:

(i) Lack of professionalism, improper manning, etc.

(ii) Keen competition, improper market segmentation, etc.

(iii) Difficulties in selling the products due to poor demand which may be attributed to: wrong or obsolete design, poor quality, inadequate publicity, poor distribution arrangement, etc.

(iv) Dependence on few customers.

(c) Industrial Relations:

(i) Lack of incentives to motivate workers for increasing production.

(ii) Poor liaison with the workmen through recognised union.

(iii) Non-compliance with the basics of labour legislation and thereby inviting undesirable labour unrest.

(d) Cost related Factors:

(i) Inadequate control over costs and overheads.

(ii) Lack of departmental targets in both physical and financial terms.

(iii) Improper management information system and cost data in respect of produc­tion^ sales, purchases, capacity utilisation, etc..

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