Working Capital Management in Sick Industries | Financial Management

The planning and control of working capital in sick industries need special attention.

A thorough analysis of causes for sickness is required for working capital management in sick industry.

The Finance manager require to take steps to restructure the working capital requirements and the banks may be approached for need based finance instead of operating on the basis of predetermined credit limits given by the bank.

The efforts to be made for improvement of current ratio and quick ratio, by reducing the levels of investment in stocks and receivable.

The financial restructuring to be made to improve the leverage ratios.

The industrial sickness is caused due to numerous internal and external factors.

But the sickness caused may also be attributed to the poor working capital management like:

(i) Poor financial planning,

(ii) Poor resources management,

(iii) Faulty costing,

(iv) Use of working capital funds for purpose of capital expenditure,

(v) Overtrading, over capitalization or under capitalization,

(vi) Inadequate working capital,

(vii) Prolonged operating cycle,

(viii) Inefficiency in collection of receivables,

(ix) Lack of effective collection machinery,

(x) Excessive holding of stocks,

(xi) Stoppage of production due to stock-outs,

(xii) Excessive reliance on trade credit, and

(xiii) Bank finance not available in-time.

Causes of Industrial Sickness:

Factually, no single factor is responsible for this growing malady of industrial sickness.

The following causes will generally lead to industrial sickness:

A. Internal Causes:

The following internal causes may lead to sickness of an industrial unit:

1. Planning and Implementation Stage:

a. Technical Feasibility:

(i) Inadequate technical know-how.

(ii) Locational disadvantage.

(iii) Outdated production process.

b. Economic Viability:

(i) High cost of inputs.

(ii) Break-even point too high.

(iii) Uneconomic size of project.

(iv) Underestimation of financial requirements.

(v) Unduly large investment in fixed assets.

(vi) Overestimation of demand.

(vii) Cost over runs resulting from delays in getting licenses/sanctions etc.

(viii) Inadequate mobilization of finance.

2. Commercial Production Stage:

a. Production Management:

(i) Inappropriate product-mix.

(ii) Poor quality control.

(iii) Poor capacity utilization.

(iv) High cost of production.

(v) Poor inventory management.

(vi) Inadequate maintenance and replacement.

(vii) Lack of timely and adequate modernization.

(viii) High wastage.

b. Financial Management:

(i) Poor resources management and financial planning.

(ii) Faulty costing.

(iii) Liberal dividend policy.

(iv) General financial indiscipline and application of funds for unauthorized purposes.

(v) Deficiency of funds.

(vi) Overtrading.

(vii) Unfavourable gearing or keeping adverse debt-equity ratio.

(viii) Inadequate working capital.

(ix) Absence of cost consciousness.

(x) Lack of effective collection machinery.

c. Labour Management:

(i) Excessively high wage structure.

(ii) Inefficient handling of labour problems.

(iii) Excessive manpower.

(iv) Poor labour productivity.

(v) Poor labour relations.

(vi) Lack of trained/skilled labour or technically competent personnel.

d. Marketing Management:

(i) Dependence on a single customer or a limited number of customers.

(ii) Dependence on single or a limited number of products.

(iii) Poor sales realization.

(iv) Defective pricing policy.

(v) Booking of large order at fixed prices in an inflationary market.

(vi) Weak market organization.

(vii) Lack of market feedback and market research.

(viii) Lack of knowledge of marketing techniques.

(ix) Unscrupulous sales/purchase practices.

e. Administrative Management:

(i) Over centralization.

(ii) Lack of professionalism.

(iii) Lack of feedback to management.

(iv) Lack of proper management information systems.

(v) Lack of controls.

(vi) Lack of timely diversification.

(vii) Excessive expenditure of R&D.

(viii) Divided loyalties.

(ix) Incompetent management.

(x) Dishonest management.

B. External Causes:

The external factors that cause industrial sickness are as given below:

i. Infrastructure Bottlenecks:

(i) Non-availability of irregular supply of critical raw materials or other inputs.

(ii) Chronic power shortage.

(iii) Transport bottlenecks.

ii. Financial Bottlenecks:

(i) Non-availability of adequate finance at the right time.

iii. Government Controls:

(i) Government price controls.

(ii) Fiscal duties.

(iii) Abrupt changes in Government policies affecting costs/prices/imports/exports/licensing.

(iv) Procedural delays on the part of the financial/licensing/other controlling or regulating authorities.

iv. Market Constraints:

(i) Market saturation.

(ii) Technological obsolescence.

(iii) Recession-fall in domestic/export demand.

v. Extraneous Factors:

(i) Natural calamities.

(ii) Political situation (domestic as well as international).

(iii) Sympathetic strikes.

(iv) Multiplicity of labour unions.

(v) War.

Reasons for Business Failure:

i. Accounting Manifestation of Failure:

(i) Too much working capital.

(ii) Insufficient working capital.

(iii) Too high interest charges.

(iv) Too much debt.

(v) Over & high dividends.

(vi) No cash.

(vii) Making a trading loss.

(viii) No growth.

(ix) Selling parts of the firm at a loss.

(x) Very poor profit margins.

(xi) Marginal profitability.

ii. Root Problems for Failure:

(i) Not selling enough.

(ii) Not selling at the right prices.

(iii) Not modernizing.

(iv) No product development or research.

(v) Buying useless assets.

(vi) Failure to control costs.

(vii) Failure to control working capital.

(viii) Reckless borrowing.

(ix) Having a cavalier dividend policy.