Definition: Industrial Sickness, as the name suggests is the state of industrial weakness or illness, i.e. the company fails to earn a reasonable profit. It is the continuous disproportion in the debt-equity ratio and falsification of the financial status of the industrial unit.
Industrial Sickness represents a stage wherein the firm is not in a position to generate a surplus on a regular basis and requires external credit, to survive in the market. When a unit is sick, it is not able to finance itself by way of regular operations.
Basically, industrial sickness is a hurdle in the process of industrial growth and development. When a unit is sick it shows signs of financial distress in the form of short term liquidity issues, revenue and operating losses, overuse of external funds until it gets to a position where the company is overburdened with indebtedness and is not able to make enough money to discharge obligations.
Symptoms of Industrial Sickness
Some of the common symptoms of industrial sickness are listed hereunder:
- Little to no movement of inventory
- Decrease in the company’s sales
- Decline in capacity utilization
- Shortage of cash to meet the day to day obligations
- Frequent proposals to extend the credit limit
- Deteriorating financial ratio
- Continuous fall in the prices of shares
- Non-payment or delay in the payment of dues like taxes, interest, dividends, salaries, etc.
- Delay in the audit of accounts.
- Disparities among various levels of management.
- Decline in technological innovations
- Irregularity in the maintenance of books of accounts.
- Overdependence on external funds
- Continuous losses
Causes of Industrial Sickness
When we talk about industrial sickness, it is not caused by a single factor, rather the collective impact of multiple factors results in industrial sickness. The factors causing industrial sickness are classified into two groups – Internal Causes and External Causes, which are discussed below:
The causes which are under the control of the enterprise, are regarded as internal causes. It may be a result of some internal insufficiency or shortcoming, in different areas of business. Some of these causes are listed below:
- Technical feasibility
- Inadequate Technical Knowhow
- Inappropriate choice of technology
- Obsolete production process
- Poor information system
- Wrong or defective idea of industry
- Economic Viability
- High cost of inputs
- High break-even point
- Excessive investment in fixed assets
- Non-flexibility of fixed assets
- Underestimation of financial requirements.
- Production Management
- Underutilization of production capacity
- Huge wastage of raw materials and supplies
- Poor maintenance and replacement of plant and machinery
- Wrong location or layout
- Poor quality maintenance
- Labour Management
- Poor performance and productivity of labour
- Huge workforce, than required.
- Lack of skilled labour
- Unreasonably high wage structure.
- Poor handling of labour
- Inadequate training
- Marketing Management
- Lack of market research and feedback
- Unsound pricing policy
- Inappropriate product mix
- Improper demand forecast
- Small customer base
- Poor marketing strategies
- Absence of horizontal and vertical integration
- Financial Management
- Shortage of working capital
- Lack of funds
- Defective Capital structure
- Administrative Management
- Huge expenditure on Research and Development
- Incompetent Management
- Lack of timely diversification.
The causes which are beyond the control of the enterprise comes under external causes, which affects the industry as a whole.
- General Issues
- Improper supply or non-availability of important raw material, or availability at higher prices
- Improper supply of critical inputs like power, water and transportation
- Chronic Power storage
- High production cost
- Ignorance of potential market
- Government controls and policies
- Sudden unfavourable change in the policies of the government
- Taxes and duties
- Price control
- Market Constraints
- Innovative technological changes, due to which products turn out as obsolete.
- Recessionary trend in the entire economy, affecting the performance of the firms
- Extraneous factors
- Natural Calamities, like an earthquake, floods, etc
- Political Situation
- Industrial Strikes
- War between countries
What are Sick Companies?
Sick companies can be understood as the industrial units which suffered cash losses in the past, i.e. for two financial years in a row, and is expected to suffer losses in future also. Further, the accumulated losses of the firm tallies or surpasses its net worth, by the end of the second year, provided that the company is registered for 5 years or more.
Also, the company defaults in repayment of debt within any three straight quarters, on-demand made in written form by a creditor for its repayment.
Types of Sick Companies
- Born Sick: Industrial Sickness is not necessarily an after-birth characteristic. This means that some industrial projects are sick right from their inception on account of poorly-conceived projects, the wrong idea of industry, wrong choice of location, inexperienced promoters, long gestation period, unproductive capital assets, inadequate market surveys, wrong selection of product, etc.
- Become Sick: There are some projects which are not sick by birth, rather they turn out to be sick, in their later stages, due to internal causes like poor management or mismanagement, faulty management policies, deliberate diversion of funds, etc.
- Made Sick: Some industrial projects are neither sick by birth nor they turn out as sick, rather sickness is thrust upon them due to various external causes which are not in the control of the company’s management. This may include abrupt changes in the policies of the government, change in trend or technology, etc.
The Bottom Line
Industrial Sickness is a state in which the firm performs badly, incurs continuous losses for many years, raises money for its survival from outside sources, and also unable to make repayment of the debt obligation.