14 – Sickness in Small Business Enterprises

Introduction

Various agencies have defined the term ‘illness’ in multiple ways. Still, the term has yet to gain universal recognition, which would support the idea of sickness in small-scale companies. This significant impediment has contributed to a failure to recognise the actual state of illness in these industries. The lack of clarity in the conceptual framework has added to uncertainty and has resulted in SSIs’ health deteriorating more while they recover. It would be appropriate to critically evaluate some official definitions before arriving at a plausible conclusion that hints at the concept’s structure.

14.1 The State of SSI Sickness in India

In humans, illness is a gradual process that does not occur suddenly. The same is true for industrial units. As a result, a sick industry is not healthy, while a healthy unit produces an acceptable return on capital invested and accumulates reserves after reasonable depreciation.

A sick industrial unit does not consistently generate surplus and relies on regular external cash infusions to stay afloat.

According to the Reserve Bank of India (RBI), “a small-scale entity shall be considered sick if it has amassed losses equivalent to or surpassing 50 percent of its peak net worth in the immediately preceding five accounting years at the end of any accounting year.”

The Sick Industrial Companies Act of 1985 defines sickness as cash losses for two consecutive financial years and accumulated losses equal to or exceeding the company’s net worth after the second financial year.

As a result, sickness in industry has an almost perfect positive association with profitability, liquidity, and solvency. Internal or external factors can cause industrial illness.

Small-scale industries (SSIs) continue to play an essential role in the manufacturing sector. Around 40% of the gross industrial value added to the economy comprises SSIs, and the SSI industry directly accounts for around 44% of overall manufactured exports.

Over the years, the small-scale sector has expanded dramatically. The growth rates have been particularly spectacular during the various plan years. From an estimated 0.87 million units in 1980–81 to over 3 million in 2000, the number of small-scale units has expanded dramatically.

Next to agriculture, the SSI industry in India provides the most job prospects for the Indian population. Four people are anticipated to be employed for every 100,000 rupees invested in fixed assets in the small-scale economy. The SSI sector is critical to India’s current export performance. The SSI sector accounts for 45-50 percent of Indian exports, and its direct exports amount to roughly 35% of total exports.

Many people are surprised that non-traditional products comprise more than 95% of SSI exports. In this decade, the SSI sector’s exports have grown at an impressive rate. This has been fueled mainly by the performance of this sector’s clothing, leather, stones, and jeweller units. Sports items, ready-made clothing, woollen garments and knitwear, plastic products, processed food, and leather products are the product groupings the SSI industry exports the most. The SSI industry is refocusing its export strategy to align with the WTO’s new trade system.

Because of the following factors, the potential in the small-scale sector is enormous:

• Extensive government promotion and support
• Reservation for exclusive manufacture by the small-scale sector
• Project profiles
• Funding – finance and subsidies
• Machinery procurement
• Raw material procurement
• Manpower training
• Technical and managerial skills
• Tooling and testing support
• Reservation for exclusive purchase by the government
• Increased demand for ancillary units due to an increase in the number of greenfield units coming online in the large-scale sector
• Increased export potential for Indian products
• There is increased demand for ancillary units due to an increase in the number of greenfield units coming online in the large-scale sector. Our country’s small industry sector has fared exceptionally well, allowing us to attain various goals.

The government’s promotional and protective policies have guaranteed that this industry is present in an amazing range of products, notably consumer goods. Inadequacies in capital, technology, and marketing, on the other hand, have been the sector’s Achilles’ heel. As a result, the liberalisation process and government backing will draw just these items into the industry. The small business sector has done admirably, allowing our country to achieve significant industrial expansion and diversity.

14.2 Sickness Causes

Numerous causes of illness in small-scale manufacturing are unrelated to one source. Industrial sickness is the result of the combined action of several factors/causes operating simultaneously, some of which may or may not be closely related or even interdependent. There are two leading causes of industrial sickness: external and internal.

External Causes: External causes are beyond the industry’s control and frequently affect the entire industry group; for example,

• A shortage of raw materials (or irregular supply or availability at high prices).
• A general economic downturn impacts the overall performance of industrial units.
• High production costs combined with low sales revenue realization.
• Inconsistent supply of critical inputs such as electricity, water, and transportation.
• Fiscal irregularities include excise duties, import duties, and so on.
• Changes in government/institutional policy that are unfavourable.
• Strikes, riots, and other forms of unrest.
• Droughts, earthquakes, floods, and other natural disasters.

Internal Causes: The industry influences internal causes. It could result from internal flaws or deficiencies in many functional areas such as marketing, management, production, finance, etc. The majority of industrial illnesses are caused by internal reasons such as:

• A lack of control over critical areas such as management, finance, marketing, inventories, and so on.
• Inadequate working capital.
• An incorrect forecast of demand for the products to be sold.
• Inappropriate technology selection, inflexibility of fixed assets, and incorrect industrial location or layout.
• A flawed capital structure, mainly due to delayed construction and operations, leads to cost overruns and unbudgeted borrowing interest costs.

14.2.1 Mismanagement

A poorly managed unit is an unhealthy unit. Intelligent, wonderfully capable, decisive, innovative, highly efficient, and reassuring management is required. Management in most ill units fails to make timely judgments on regular topics. Site selection, production method, promotion routes, marketing management, and other critical factors are frequently overlooked.

Due to the nature of a single management band, small business management is intrinsically more demanding and complex than large-scale industries. An entrepreneur with only a few years of experience in one or two roles, such as production and sales, typically runs a small business. As a result, he is more likely to make mistakes in other critical operational areas such as auditing, human resource management, planning, finance, and so on. Because these activities necessitate highly specialized talents, a single guy can’t possibly specialize in them. As a result, all aspects of a small firm are under-managed. As a result of ineffective management, small-scale units are especially susceptible to illness.

Furthermore, these units are frequently found to lack management dynamism. The majority of ancestral and traditional firms are averse to change.

For example, M/s Ashgar Ali Mohammad Ali chose to sell their famous rose water in the same crude, old-fashioned bottles as before, using the same old sampling procedure. Generally, the senior-most (old) man makes product decisions, and he follows the same old pattern. The unit would not adapt to the market’s shifting conditions. The unit is bound to get sick in such a stagnant environment. Introducing change does not imply that management should become overly energetic or excited and begin indiscriminately diversifying the product or the entire firm.

14.2.2 Marketing

The majority of the sick units had ineffective marketing management. Small businesses typically use a traditional marketing strategy in which ‘more’ is equated with ‘better.’ If marketing relies on the promotion of material consumption indefinitely, it will lead to a successful stage of industrial development. This concept worked well initially, but with increasing limits such as limited resources, economic issues, environmental factors, and so on, continuing down the same, traditional marketing paths become doubtful. One of the biggest causes of illness in SSIs is the old marketing method.

Most small-scale industries become sick due to their inability to market their products for various reasons, including poor product quality, a lack of market information, poor advertising, obsolete technical back-ups, lower competitive potentials, and a lack of professionalism. Despite the government’s protective measures in designating roughly 860 items solely for SSIs, the sector continues to suffer significant marketing challenges. Most SSIs that serve as auxiliaries to large industries are constrained to limit their sales to the local market, resulting in stock accumulation, a lack of demand, and a lack of working capital to acquire raw materials and other physical resources to keep the unit operating. The constrained marketing environment that SSIs are forced to operate in forces them to limit their size of operations and forego economies of scale that may propel them to a better position.

Example: The ancillary businesses frequently encounter marketing issues such as:

1. a lack of a structured pricing system,
2. inadequacy of technology support,
3. delayed payments by their parent units, and so on.
4. Parent industry influence in decision-making,
5. Noncompliance with quality and delivery schedules Mismanagement.

14.2.3 Gaps in Implementation

In the case of a newly founded small firm, the implementation of its strategies is frequently delayed.

For example, if the building is not completed on time, the installation of plant and machinery will be delayed, and the working capital will not be available promptly, etc.

If the first functions are delayed any longer, production and sales will suffer. Failure to implement the contingency plan promptly will result in financial institutions delaying the release of additional loan instalments. Costs rise at the same time, rendering demand predictions obsolete. It is self-evident that in such circumstances of sequential delays in plan implementation, sickness is expected from the start of a project.

14.2.4 Inadequate Information System

Accounts, cash flow planning, costing, budgetary management, breakdowns, sales revenues, financial statements, statements of chargeable current assets, and other items are not adequately recorded daily in SSIs, a common occurrence. At the same time, communication and information systems are at a shallow level. To enhance small units, an information department must be established.

14.2.5 Energy Issue

In most areas, power shortages have caused irreversible damage to SSIs. The Haryana State Electricity Board refused power to 2000 SSIs employing over 20,000 people only a few years ago. The HSEB was criticized for its general indifference to the demand for SSIs, which led to the closure of these facilities. Similarly, the majority of the engineering and plastic sectors in UP, Orissa, and MP have suffered tremendously due to the severe power constraint. To prevent SSIs from becoming ill as a result of this unnecessary gap, the power sector and energy policy must be effectively handled.

14.2.6 Improper Technology

One of the main causes of sickness in tiny units has been obsolete and unsophisticated technology. In many industries, frequent failures, inefficient machinery performance due to poor maintenance, and delays in remodelling or replacing machinery are all common occurrences. The situation worsens when these liquid monies are redirected to new and unrelated operations instead of being used for depreciation or development refunds. While this may be beneficial in the short term, it will always make things more difficult in the long run. “In recent years, there has been an increasing infusion of contemporary technology, and as the market has gotten more competitive, the weak, infirm, and static among the units have found it impossible to survive.”

Because technology is an essential part of the scenario, arrangements must be made immediately to ensure it spreads as widely as possible. The rise in capital over the last decade has been 6.24 percent, but technology’s contribution to modernization has been one percent. Technology might be equated with risk capital at times. More crucially, the state government lacks the management talent and dynamism needed to fill critical roles in the entities that will be taken over. Even if the government can locate such technically qualified and business-oriented individuals, they should be given sufficient autonomy. More of these tactics, however, will never work until the staff realises that it, too, has a stake in the unit’s survival.” New Delhi: The Economic Times, August 25, 1994.

14.2.7 Overtrading

The companies expand quicker than they can fund through internal cash flow and bank borrowings. The company is solely focused on sales, regardless of whether or not they are profitable. Profit margins are slashed, and unprofitable customers are courted solely to boost (unprofitable) sales growth. There is also a cash shortfall because the unit’s sales, stock levels, and general sales are all increasing quicker than their capital allows. A unit administered in this manner is sure to get ill.

14.2.8 Psychological Melodrama

Surprisingly, the entrepreneurs – promoters of sick units never assume responsibility for their units’ sickness. External causes such as the government, institutions, and erratic facilities are blamed. Self-analysis is absent. Lack of exercise, heavy smoking and drinking, lack of sleep, and other factors contribute to a decline in their efficiency, which hurts the unit’s health. On the other hand, owner-managers of such sick units would not agree that the unit is on the verge of being sick. “Sometimes the entrepreneur considers it lucrative to make his unit experience chronic losses,” writes Goutanga P. Chattopadhyay in Industrial Sickness – A Psychodynamic Interpretation. To satisfy his craving for self-indulgence, the entrepreneur, who is psychologically ill, is damaging the lives of several employees and defrauding several debtors and financial institutions. However, society will never blame itself for failing to check the carelessness and corruption of many of its so-called stalwarts.”

Reluctance to report industrial bribes, ignorance of managerial incompetence, non-realization of the work-man ratio, overloaded labour surplus, and non-awareness of the need to replace obsolete machinery and equipment are only a few of the unhealthy behaviours contributing to unit psychological disease.

14.3 Sickness Symptoms and Treatment

During the conduct of the authors’ survey for detecting sickness in small industries in over 50 industries, it was generally felt that rather than searching for causes or rehabilitation packages for industrial units after a crisis has hit them, it is more important to be able to identify the symptoms of sickness in its early stages. In most industries visited it was discovered that the unit displayed some definite indications before being ill. The units, however, were caught in a disaster due to various factors, including the lack of a symptom detector, a refusal to grant cognizance, a complete disregard for facts, and a lack of precise knowledge of symptoms. More intriguingly, the reasons were not complicated and could have been neutralized with little effort, saving the units. It was also noted that none of the units under investigation had suddenly become ill. Sickness had crept up in the units gradually and in phases over a long period. As a result, it is regarded to be helpful to define the symptoms precisely so that management and concerned authorities can be equipped with tools and protections to detect illness early on. In any event, these methodologies should be able to predict the type and severity of illnesses and when the illness first appears.

14.3.1 Sickness Symptoms

Sickness in the human body can be easily treated in the early stages – when the symptoms first appear – but when it reaches an advanced level, it can be fatal or resist treatment. External factors such as natural disasters, war, government rules and regulations, new policies, and so on can cause the unit to be unable to play an influential role. In most cases, however, when the symptoms are internal, no extraordinary measures are required to correct the issue. The initial signs of illness usually catch up in the unit’s everyday activities. These can be adequately addressed. If the unit does not take adequate action after detecting the following indications, the anguish will undoubtedly be extended and, in some cases, deadly. As a result, financial institutions, banks, and entrepreneurs should be required to have a system in place that allows them to receive indications of illness promptly so that corrective action may be performed on a scientific basis. As a result, it would be prudent to begin by enumerating the key indicators for detecting illness in its early stages:

1. There is no movement in the stock or only a small movement.
2. Production and sales are on the decline.
3. Consistent requests for increased credit limits.
4. Amount of monetary credit that is consistently inconsistent.
5. Bills, checks, and other negotiable instruments are frequently returned unpaid.
6. The borrowing unit has a high cash draw.
7. Reconstitution of the firm on a sporadic basis.
8. Account turnover is sluggish.
9. Buyer rejections or restrictions on the items supplied regularly.
10. Expenses that may be written off may continue to rise since they have not yet been written off.
11. Workplace issues.
12. Excessive reliance on outside funds.
13. Losses are continuing to rise.
14. Suppliers’ refusal to furnish raw materials.
15. Assurance of shares and other assets is unreliable.
16. Consistent discord or disagreement among the board of directors or partners.
17. Accounts that the units have dressed up.
18. Employees’ low morality is number 18 on the list.
19. Payments to suppliers, employees, banks, and other financial institutions are sloppy.
20. Unnecessary delays in the annual accounts.
21. Attempts by the borrowing unit to move transactions through other banks.
22. Recessionary trends are gripping the industry.
23. Market reports with a low profile.
24. Inflationary patterns in stock valuation that are not supported by economic factors.

These are warning signs in the UP sick units before they were labelled ill. If management had been more aware of the signals, most units could have been rescued. As a result, if the sources of these signals are not documented for future reference by emerging small businesses, this conversation will be ineffective.

14.3.2 Sickness Cure

Rehabilitation of a sick unit begins only once a viability analysis of the small unit in question suggests that it be revived, along with any suggested reliefs, packages, or other options. Sickness must be addressed with a sense of urgency and commitment. Regardless of the origins, the issue of rehabilitation requires rapid attention from all parties involved. In this case, the focus should be on long-term solutions rather than palliatives. There is a pressing need to increase the skill base of small businesses to raise workers’ technical and general education levels. Besides improving academic education, partnerships with large industries, particularly public sector operations, are essential to develop practical experience.

Industrial disease is a byproduct of the industrialization process. Its consequences include unemployment, capital blockage, state revenue loss, and asset non-utilization. As a result, adequate actions must be taken to rehabilitate the ill industry. The government is worried and will make the following efforts to combat illness and revive sick industries.

Small Sector 

1. State-Level Committee: To help small businesses recover, a State-Level Committee, chaired by the Director of Industries, will be formed. Its members include representatives from banks, financial institutions, the Reserve Bank of India, the Industries Association, experts, and the government.
2. The committee would be given the appropriate statutory authorities to rehabilitate the ill industry and ensure the approved rehabilitation program is carried out correctly.
3. The Reserve Bank of India/IDBI/SIDBI recommendations would be used to determine sickness in sick and small units. An appropriate rehabilitation package would be approved for their rehabilitation.
4. The sick industries being revived will no longer require an annual sickness certificate; instead, the revival package will define the period during which the sick units will be revived.
5. According to RBI directives, the industry declared sick by the State Level Committee is eligible for relief and concessions from banks and financial institutions. These concessions and reliefs will be granted within a specific time range.
6. If an illness was identified within a specified time limit, a rehabilitation package would be produced, and state-level organizations would monitor the sick industries and their rehabilitation.
7. Those ill and closed units that have previously benefited from an Industrial Policy can use the facilities under this policy a second time. Suppose a sick or closed plant seeks to use the Industrial Policy advantages for the second time. In that case, it can only use the difference between the previously used and planned amounts under the new policy. However, this facility for unit rehabilitation would be made accessible only at the proposal of the State Government’s concerned committee. Only two times can such a facility be made accessible to the unit.
8. Exemptions from the Annual Minimum Guarantee (AMG), Monthly Minimum Guarantee (MMG), and Delayed Payment Surcharge (DPS) will be offered to sick and closed units from the date of declaration of the unit as a sick unit. This facility would be pretty helpful.

Sickness in Large and Medium-Sized Businesses

1. Under the chairmanship of the Secretary of Industry, a committee would be formed to investigate the possibility of and determine remedies for the revival of medium and large-scale industries, as well as Public Sector Undertakings (PSUs) that are sick but have not been referred to the BIFR but have the potential for revival. The high-powered committee, which has the Chief Secretary as its chair, will receive recommendations from the committee above outlining the reliefs and concessions for approval.
2. The rehabilitation package proposed by BIFR/IRB I/BICICO/BSFC/Bank and the state-level inter-institutional committee shall be presented to the committee chaired by the Secretary of Industry for consideration and government recommendation.
3. The Board of Industrial and Financial Reconstruction (BIFR) has registered a sick industry.
4. A State Level Committee chaired by the Secretary of the Industries Department will make decisions about shuttered industrial units.
5. Those ill and closed units that have previously benefited from an Industrial Policy can use the facilities under this policy a second time. Suppose a sick or closed plant seeks to use the Industrial Policy advantages for the second time. In that case, it can only use the difference between the previously used and planned amounts under the new policy. However, this facility for unit rehabilitation would be made accessible only at the proposal of the State Government’s concerned committee. Only two times can such a facility be made accessible to the unit.
6. Sick and closed units: From the date of the unit’s declaration as a sick unit, it will be exempt from the Annual Minimum Guarantee (AMG), Monthly Minimum Guarantee (MMG), and the delayed payment surcharge. This facility will be provided for five years.