We have heard a lot about sick industry or sick
commercial institutions. What do we really mean by the sickness of a
unit? To find the real disease one has to analyze the identification of
the disease, look into the cause of disease, its extent and degree of
sickness, and diagnosis prescription for its recovery, revival and
rehabilitation coupled with suggestions for future preventive measures.
Causes of sickness are the general problem to be interrogated. The sick
industry is an institution which has resulted in low or negative
productivity, operating below break-even point, with no profitability,
consuming all its working and paid up capital and still under financial
constraints with no possibility of capital returns. To have an
understanding of the nature of sickness and identifying areas where
policy measures can reduce the occurrences of the industrial and
commercial units sickness in future, some common measures are
highlighted for preventive action.
During 1970-80 the incidences of industrial sickness
wide spread like an epidemic disease, although the highest incidence of
sickness is noticed during 1970-71 to 1975-76. This is the period, which
includes a number of developments that significantly de-stabilized the
national economy. These ill considered developmental policies include
devaluation of Pak Rupees, nationalization of industries,
nationalization of banks, introduction of fiscal/monetary/taxation
policies unfavorable to the manufacturing sector and failure to
establish healthy labour-management relations.
At times, it was a general mis-conception that sick
units are only in the public sector, which were taken over and
nationalized by the government in the decade of 1970-80. This impression
was not entirely correct, as there were large number of units in private
sector, which were also reported sick for various reasons.
According to a survey made by the industrial
department, Government of Sindh, indicated that the highest-incidence of
sickness and closures of industrial units in terms of numbers has been
the units falling in the chemical group of industries and in terms of
investment in textile group. The evil of sickness began when the private
sector textile failed to overcome the crisis created mostly due to
international situation in the early seventies, and further situation
was aggravated after massive devaluation of 1972.
It is a fundamental principle of sickness that its
treatment should commence immediately without loss of time; otherwise,
it may turn to be a chronic case for big operation and surgery.
Unfortunately the rescue operations of the sick industries in our
country commenced so late that the entire operation became an exercise
in-futility, whereas the country could not afford to waste its resources
in the name of revival and rehabilitation. Every sickness irrespective
of its nature has to be properly checked and laboratorically tested for
its correct diagnosis and correct treatment. Our society has developed a
habit that if the unit becomes sick, we put the blame on the government
policies and economic developmental system or international pressures
which are the exclusive reasons for the promotion of un-healthy
industrial environment which ultimately tentamount to industrial
sickness. Sickness of an industrial unit can be due to many other
factors or any one, as narrated below, the major basic reasons can be:
GOVERNMENT POLICIES AND ACTIONS.
MANAGEMENT'S OWN DEFICIENCIES.
IMPROPER USE OF MODERN BUSINESS TECHNIQUES AND
The further elucidation and microscopic analysis of
the basic reasons of sickness may be due to:
GOVERNMENT POLICIES AND ACTIONS
Lack of adequate protection to the domestic industry & trade houses.
International agencies pressure on the domestic policies and political
MANAGEMENT'S OWN DEFICIENCIES
Lack of managerial ability
Lack of adequate finance
Change of technology
Non-utilization of the profits generated for modernization and
Import of wrong and defective technology
Labour management relations, and
IMPROPER USE OF MODERN BUSINESS TECHNIQUES AND
Lack of proper planning for development and research
of new products to replace out dated ones.
Improper Inventory control.
Credit sales without proper credit worthiness checks.
Mounting up of bad debts.
Improper cash management & financial constraints.
High cost of non-productive expenses.
Deployment of excessive labour for the production achieved.
Lack of control over recurring and non-recurring expenditure.
Non-flexibility in operation by quick action to face changing
environment and conditions.
Occupational hazards, safety, environment and diseases protection.
Uncalled for litigation
Internal Audit, and Administrative and Operational Constraints.
Pak Rupee was devalued in June 1972, to the extent of
approximately 131%. The revaluation of assets and liabilities (foreign
investment and equity) following this drastic devaluation increased the
debt/debt servicing liabilities of industrial units manifold. The high
cost of finance as well as significant increase in the cost of
production. A number of industries particularly in textile sector become
uncompetitive in the international market.
The government fiscal policies play a very important
role in maintaining the health of an industry. The excise duty and sales
tax, imposition of surcharge, turn over tax, tariff etc. are the
examples. Such fiscal policies and anomalies invariably lead to closure
or shrinkage of the units and had badly affected the health of the then
LACK OF ADEQUATE PROTECTION TO DOMESTIC INDUSTRY,
PRODUCTS AND TRADING HOUSES
Instances have been noticed where industrial units
and commercial trading houses had to close down their operational
activities because either domestic industry protection could not be had
or where such protection provided, were withdrawn prematurely and
imports of similar items were allowed without realizing the impact on
the domestic industry.
Smuggling of products/items that are already produced
locally is a great nuisance. The smuggled products are available in the
open market at a rate cheaper than the locally fabricated and
manufactured. Large scale smuggling badly affect the local products as
the product remains on the shelf for years, resulting in jamming of
working capital, reduction in production activities and adverse cash
flow which ultimately lead to bad health and closure of the unit.
INTERNATIONAL AGENCIES PRESSURE ON DOMESTIC POLICIES
The dictation of terms by the donor agencies at times
becomes so hard to be adjusted. Withdrawal of subsidy, and imposition of
additional taxes, duties and levies ultimately increase the cost of
production and the product become non-competitive in the national and
international market, resulting the dis-continuation of the products.
Political Constraints which affect the health of an
industry comprises of:
• Un-expected changes in the government policies,
• Instable political conditions,
• Insecure political environments and
• Disturbed political situations.
LACK OF MANAGERIAL ABILITY
The fiscal, monetary and taxation policies of the
government change frequently without prior indication, whereas changes
in technology are occurring with such rapidity that the management has
to be extremely alert and responsive for both the changing environment
as well as the changing economic parameters. The failure on the part of
the business houses and industrial units to employ the capable,
experienced and competent managers has also contributed to the ill
health and closers of the units. If the top management insists on
certain guidelines for its management, they are bound to follow it
rigidly and ultimately cause a problem for healthy unit to fall sick. A
unit can be well managed if sufficiently required guidelines are timely
available to the management.
LACK OF ADEQUATE FINANCE
Timely availability of the required funds is most
essential requirement of a unit, where the management fails to tap the
additional resources required to meet the challenge of the competition
or other un-called for emergencies, it is generally found that the
industrial concern or the trading house takes a turn by fall of the
graph which eventually lead itself to dis-reputation, discredit and
closure. It is observed that the lending institutions in the bad days of
falling graph make it difficult for the management to allow the
additional funds requirements as the advances are highly in secured.
CHANGE OF TECHNOLOGY
Changing technology and the socio-economic changes
has a direct impact on the cost of production, as well as the quality of
the products. An industry, therefore, which fails to take care of
changes in technology and does not modernize its plant and machinery,
and systems at the appropriate time tend to become in-competitive in the
national as well as in the international market. Where the management is
stuck with outdated process and obsolete machinery and systems, there is
no alternative but to close down the unit completely. Technology is
advancing at a terrific pace and requires replacements frequently, if
one wish to remain in existence with good health of the unit.
NON-UTILIZATION OF THE PROFITS GENERATED FOR
MODERNIZATION AND BALANCING
The frequency of non-utilization of the profits of
the unit generated is high in the private sector enterprises where
mostly the profits are distributed by way of bonus to the employers and
high dividends to the shareholders and high non-operational expenditure
etc., leaving not much for reserves for improvement, modernization and
balancing and the replacement of the plant, machinery and the systems.
It is an acknowledged fact that the life of a plant is extended by
induction of new technology which is brought about by balancing and
modernization within the existing plant, thus bring about high level of
efficiency and economy in cost of production as a replacement of the
entire unit requires induction of large capital and burden on the profit
not only on account of high depreciation but high rate of financial
IMPORT OF WRONG AND DEFECTIVE TECHNOLOGY
The advance technological countries commonly carryout
experiments of their technology in the third world and with the
experience keep on improving their own technology at the cost of third
world. If the unit falls into the trap, importing wrong or defective
technology, it will be a constant headache and the unit may turn sick
since its birth as the plant may not yield the product to be competitive
with the sophisticated technology coupled with cost of production being
out of proportion.
The commercial service-oriented houses and the
industrial units where the management has failed to establish harmonious
relationship with the labour force and on the other hand the exorbitant
demands of the labour go beyond the means and limits of the
establishment for it to remain competitive. There is no choice but to
face the bad situation and ultimately consider to close down the unit.
The worst effected period of this particular problem has been
experienced during 1970-71 to 1976-77 when the labour-management
relationships were far from satisfactory position. The labour unions
demanded sky-high increase in wages and additional benefits consequently
there was go-slow, lockouts, strikes etc., which seriously affected
overall production and profitability of the units. The continuing
friction between labour and management created an environment of
confrontation and hostility.
The general problems causes the sickness of the unit
can be due to the following:
— Delay start in the execution of the unit.
— Faulty project formulation, leading to frequent amendments,
revisions and changes.
— Omission of certain items in the original plans.
— Under estimation of cost.
— Under estimation of completion period.
— Changes in the scope of the unit at later stages.
— Inflation during completion period.
— Natural calamities.
— Award of works, supplies and contracts to non-deserving parties.
— Delay in obtaining various permissions, licenses, utilities
— Changed market conditions may cause alteration of the project.
— Lack of coordination within the management, organization.
Lack of proper planning for
development and research of new product to replace out dated ones
Expenditure on research and development was rarely
incurred in the past in Pakistan. Now a trend has developed and having
realized the importance of research and development, the industry is
making investment therein. Research and development is one item in which
all our organizations are bit weak. The strong point in any industrial
nation is the constant factor of research and development and the
regular introduction of new products or new methods of economical
manufacturing. In the absence of developing new products and new
technology, a progressive unit should keep a watchful eye on the
research that is taking place in the trade by the advanced countries to
adopt the same.
IMPROPER INVENTORY CONTROL
Where inventory controls on finished and raw
materials, packing material, and others is not properly and effectively
exercised the unit finds itself into financial difficulties. The mis-management
of inventory control generally arises by virtue of wrong planning either
in the purchases of raw material which is imported or locally fabricated
or massive finished products is produced in anticipation of meeting
season or flooding the market and eventually find itself landed with the
inventory in hand and blockage of the working capital, which create
problems for the unit for smooth operation.
CREDIT SALES WITHOUT CREDIT WORTHINESS CHECKS
At times under the pressure of sales target and/or
market shares, the products are supplied on deferred payment system,
without having a proper assessment of the credit worthiness of the
dealers. In other works it is a change of godown and not a sales in real
terms. The product credit supply system without credit worthiness
assessment is full of risk. The unit should determine the maximum amount
of credit it can afford in credit sales as well as the credit period and
must stick to that period, quantum and level, otherwise "Cash
Flow" problem would be unavoidable.
MOUNTING UP OF BAD DEBTS
A continuous and regular check and verification on
debtors and outstanding is absolutely necessary to weed out the
un-desirable elements so that the loss on bad debts is minimized.
IMPROPER CASH MANAGEMENT & FINANCIAL CONSTRAINTS
Cash control and timely availability of the required
funds is most essential for a commercial and industrial unit without
proper cash controls it may be a blind adventure. A proper cash-in-flow
and out-flow control can add to the efficiency of the unit. Lack of
cash-in-flow or out-flow control may lead to funds constraints and
compel to borrowings which may cost to the unit and ultimately affect
the profitability and creditability of the organization.
HIGH COST OF NON-PRODUCTIVE EXPENDITURE
High cost of non-productive expenditure like expenses
in administration, distribution, advertising, up keep of offices,
repairs and maintenance expenses beyond economical repairs and others
should be kept within reasonable and budgeted limits, Non-productive
expenses vary from unit to unit and product to product and an
experienced entrepreneur should take cognizance of the fact to avoid the
non-productive expenses for the adverse impact on the health of his
DEPLOYMENT OF EXCESSIVE LABOUR
Deployment of excessive labour force irrespective of
its ranks and portfolio than the real manpower requirements had been the
reasons for failure of many public sector units in the past. In the
first instance, right size employment should be the objective, however,
it is observed that under political pressure, particularly in public
sector units excessive employment was made. Flexibility should be
permitted to lay off surplus staff as and when it is required in order
to obtain profitability and in the interest of good health of the unit.
LACK OF CONTROL OVER EXPENDITURE
To exercise a proper and strict control over the
expenditure of a concern is the primary requirement of an organization.
A proper and effective budgetary control system with breakup in the
primary heads of expenses and its periodical review preferably on
monthly basis shall provides a better and affective control on the
expenditure such as telephone, telex, fax, entertainments, travelling,
gas, water, electricity, petrol, repairs and stationery etc. The
variances in expenses than the budgeted should be critically examined
for corrective measures.
NON-FLEXIBILITY IN OPERATION BY ACTION TO FACE CHANGING ENVIRONMENT
An immediate and quick action at times become
necessary to meet the changing circumstances like changes in government
policies, changes in production line, introduction of new product and
services by competitors. The flexibility must be available with the unit
so that necessarily required action may immediately be taken without
OCCUPATIONAL HAZARDS, SAFETY, ENVIRONMENT AND DISEASE PROTECTION
Some units deal with and under go manufacturing
process with such products which consists of such hazardous basic
material which is injurious to the human health and is the cause for
occupational hazards and diseases. Non-observance of proper occupational
safety, health and environmental considerations not only affect the
efficiency of the employees, but may affect a quick turn over of the
trained, experienced and skilled workers which is a share loss to the
organization and may ultimately affect the health of the unit itself.
UNCALLED FOR LITIGATION
Default in agreement performance, or litigation
amongst the partners and the sponsors and with others also lead to the
closure of an industrial and commercial unit.
In monitoring the operations of a company internal
audit play an important role, it save it from avoidable risks in an
uncertain environment. At times when the entrepreneurs are looking for
preventive measures to avoid corporate collapses, a strong, independent
internal audit, which performs its functions in an objective manner, is
the solution along with the management performance audit. An internal
audit monitor and review the business process, operations, financial
statements and associated risks on a continuing basis. At the same time,
the internal audit help the management to accomplish its objectives by
bringing a systematic, disciplined approach based on an objective
evaluation of the effectiveness of risk management and controls.
ADMINISTRATIVE AND OPERATIONAL CONSTRAINTS
The general administrative and operational constraints of the unit
can also be the reasons of the ill health of the unit such as:
— Inadequate qualified manpower.
— Optimistic assumptions.
— Incorrect placement of persons.
— Gas, electricity and other utilities un-announced failure.
— Delay in supply of spares and materials.
— Technical fault in manufacturing operations.
— In-correct selection of machinery & plant etc.