15-01-2013, 09:19 AM
Financial Management of Sick Units
Financial Management.ppt (Size: 4.98 MB / Downloads: 53)
Definition
The Companies Act, 1956
According to sec 2(46AA) sick company means a company which has:
(i) The accumulated losses in any financial year equal to 50% or more of its average net worth during four years immediately preceding such financial year.
or
(ii) Failed to repay its debts within any three consecutive quarters on demand made in writing for its repayment by a creditor or creditors of such company.
RBI’s Definition
Sick company: It is a company(registered no less than 5yr’s) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth.
Potentially sick company: If the accumulated losses of a company as at the end of any financial year have resulted in the erosion of 50% or more of its peak net worth during the immediately preceding 4finanicial year’s.
Weak unit: A company which is potentially a sick unit and the bank reports such company to BIFR(Board of industrial & financial reconstruction) in terms of SICA(Sick Industrial Companies Act) it is a weak unit.
Symptoms of sickness
The sickness can be identified and detected with the help of analyzing the following situations:
1.Continuously cash losses and the trend likely to continue
in future.
2.Insufficient working capital to carry on daily operations.
3.Operating and cash conversation cycle too long.
4.Working under the situation of negative working capital.
5.Low level of capital utilization.
6.High operation cost compared to sales revenue realization
7.Too much reliance on outside funds.(Financial risk)