Corporate Business Sickness – Causes, Revival and Survival

Businesses are setup to operate and live a long life. They are not setup to die at their infancy stage, shortly after their incorporation. However, during their life span they often and frequently face multi-facet problems of both mild and serious nature. Many times, some of such problems happen to be so serious that they even threaten the very survival of business. The basic four ingredients on which business survival rests are Profits, Growth, Financial Stability and Liquidity. Currently, even during past twelve years since 2008 onwards of slowdown of global economy, many businesses have either closed and wound up, or are at the verge of closed down and in order to survive they had to retrench a substantial number of employees from their employment, resulting in a mass unemployment. Such retrenchment has also resulted in dissatisfaction among the employees in general. It has happened so, even when these businesses are availing the services of talented MBA Graduates of renowned Global Business Schools. Hence, it is now high time to think deeply and probe the probable causes giving rise to such said business conditions. This article seeks to identify such causes and suggest remedial actions.

Causes of Business Sickness and Remedies

Business sickness is the result of cumulative effect of several factors which are generally co-related and interlinked to each other. While most of such factors are of Monetary nature, some of them are of Perceptional, Macro-Economic, Socio-Environmental nature. The Monetary and the Perceptional causes are mainly internal and can be controlled by Corporate Management. The Macroeconomic, Socio-environmental causes are mainly external over which corporate management has practically no control.

A. INTERNAL CAUSES

1. Monetary Causes

(i) Adversity in Profits

By adversity in profit, we mean continuous fall in profit over the period of time as a result of which the positive profits continue falling and over the period, turned into loses. Fall in profit is caused either by a fall in revenue or an increase in cost and expenses or cumulatively both of them. For ascertaining the precise and proximate causes of adversity in profits, resulting from a fall in revenue or increase in cost, a comparative in-depth and detailed analysis of revenue and cost is vital.

Profits can be improved (and loses curtailed) by:

• augmenting the generation of revenues from sales, services and other activities, and
• controlling and curtailing the related cost and expenses.

The revenues can be augmented by:

• value addition of product and services through improving product quality and product use and betterment of services rendered.
• Effective marketing efforts such as marketing several individual products as a single product package, providing attractive incentives to the customers, and concentrating on high value items.
• Concentrating on high Profit-Volume Contribution Ratio products and services.

The Cost can be controlled and curtailed by:

• Efficient and effective inventory control.
• Reduction/minimization of production cycle time span.
• Linking wages/salaries with productivity.
• Elimination of non-viable discretionary costs.
• Standard costing and budgetary control.
• Elimination of high cost / low PV contribution ratio products and services.

From the above exposition, it is evident that analysis, planning and management of profit, requires basic and understanding of three main subjects/spheres of management studies, namely Production Management, Marketing Management and Financial Accounting. The control of costs and betterment of product quality fall primarily within the ambit and scope of production operation management. The augmentation of revenue through value addition and pricing policy/mechanism is primarily a subject matter of Marketing Management. The techniques for analysis and evaluation of costs and revenues mainly form part of Financial Accounting subject. It is also important to realize and understand that these three subjects are not totally mutually exclusive and independent but are even interlinked with each other. For instance, Inventory Control which is an important factor in Profit Management, is a subject which is taught in detail in Production/Operations Management, and also in Cost Accounting and Management Accounting branches of Accounting subjects. Though it is not taught in Marketing Management but in our view, Inventory Control of marketable (Finished) goods/trading goods is a topic/subject which should form part of Marketing Management. It should also be realised and understood that as the investment in Inventories, forms a substantial portion of Working Capital, and it also ropes in the ‘Subject’ of Financial Management as well. Thus, management of profit involves and requires an in-depth, integrated and inter-disciplinary understanding of Production / Operation, Marketing, Finance and Accounting subjects.

(ii) Decline in Growth

Growth in common parlance means the increase, augmentation or development of a substance. In the context of a business, it means an increase in its activity base and it is measured in terms of augmentation or increase in quantity and monitory value of trading activity, physical assets and owner’s capital. Growth and profit are co-related. Generally, there is a positive correlation between them. Profit yields positive growth while loss yields negative growth. However, in some cases there may also be a negative correlation between them and even a decline in growth, despite an increase in profits. It can be so when a product yielding loses is eliminated from the trading activity as a result of which the overall profit will increase but the sales volume will decline, and yet despite a decline in sales volume the physical assets and the owner’s capital will increase, consequent to increase in profit.

Growth of business is primarily the result of Product Market Matrix. A business can attain growth through:

• Product Diversification: may be done by adding new products and expending the product’s base. The new products may be introduced and marketed in existing markets areas or in new markets areas or in both, and either along with existing products or independently.
• Market Expansion: may be done by venturing into and developing new market areas for marketing its existing and new products.
• Intensive Marketing: may be done by undertaking intensive marketing efforts for the marketing of existing products in existing markets.

It can be realised from the above exposition that growth is mainly the result of marketing efforts. However, to the extent it is attributable to products diversification which involves the production of new goods, it also ropes in the production/operations activities. It is also vital to realise that the overall growth should be a balanced growth – it should not be confined to quantitative growth or monitory growth alone in-isolation of each other, but the concentration should always be on attaining a balanced growth, both in quantity and monitory terms cumulatively.

(iii) Shaking Financial Stability

Financial stability is akin to and depends on financial soundness. A business corporate is considered to be financially sound if aggregate realisable value of all its Assets is greater than the aggregate value of all Liabilities payable by it. For the survival of a business, its financial stability is as important and vital, as are its profits and growth. Financial stability depends substantially on the soundness of investment decisions. In some cases, a business corporate may not be financially stable and sound, despite its positive profits and growth, which may be due to its unsound investments and as a result of which the realizable value of its Assets may fall short of the aggregate value of Liabilities payable by it. If such short fall exceeds value of owner’s equity, it is indicative of its financial insolvency, which may even result in closer or winding up of the business entity itself. It is thus important to take care and ensure that its investments are financially sound and that their realizable value is greater than their investment/book value. To ensure this, the business corporate should consider the following factors:

• Make provision for such excess of the book value of assets over its market value, by creating a reserve or provision in the books of accounts.
• If any long-term investment has been financed from short term working capital fund, then substitute/re-arrange such short-term financing, by long term financing arrangement.

Sometimes Financial Stability may shake because of fluctuating market conditions in respect of specific investments in which the business funds are invested in context of present macro-economic conditions, the investment in real property and corporate equity shares may be considered as falling in this category. However, the depressive market conditions in some sectors of the economy are not long lasting and they do revive and recover over the period of time. And therefore, they may be considered as of temporary nature, and to meet such odd situations, it is advisable that the Business Corporate should arrange additional funds to meet the probable contingencies instead of liquidity in the assets, to the extent possible. From this, it can also be realized that maintenance of financial stability is mainly dependent on sound financial decisions and requires an in-depth, integrated and co-related understanding of Financial Management.

(iv) Liquidity Crunch

For the survival of a business, adequacy of liquidity is also as vital as other factors namely profits, growth and financial stability. Substantially it is even more vital. Lack or crunch of liquidity may even cause a serious threat to business which may even lead to closure and winding up of business entity itself, despite its positive Profitability, Growth and Financial Stability. Liquidity refers to and means quickness in the conversion of short-term current assets and investments into cash. For adequate liquidity, it should be ensured that:

• There is no unnecessary heavy investment in trading stock.
• The aggregate amount payable to trade creditors does not exceed the aggregate amount recoverable from trade debtors.
• Period of credit allowed to trade debtors for payment, is shorter, than the period of credit obtained from trade creditors for making the payment.
• Reasonable unutilised bank overdraft limit is maintained, for meeting the business contingencies.
• The short-term investments are encashed on due/maturity dates, without any lapse or failure.
• Invest the surplus cash funds/bank balance (over and above the extent require to meet the payment obligations), in short period deposits/investments, in order to generate additional income.
• Restrict the withdrawals of business funds, for non-business personal purposes.

From the above exposition, it is clear that financial liquidity substantially depends on efficient management of working capital, which is primarily a topical subject of financial management. At the same time, it also involves and ropes in other spheres of management, particularly production, marketing and accounting. Generally, the substantial part of the working capital remains invested in inventories which in turn bear an impact on trade debtors and trade creditors. As has also been stated earlier, Inventory Management is a topical subject which relates to and is considered in different spheres of management particularly Production / Operations, Marketing, Accounting and even Finance as well. Maintenance of adequate liquidity therefore, requires an in-depth integrated and inter related understanding of these spheres of Management.

2. Perceptional Causes

(i) Erosion in Satisfaction of Stakeholders

For the smooth working of business operation and its survival, satisfaction of its various stake holders is essential. Its main stake holders include Employees, Finance Lenders (Banks and Financial Institutions) and Customers. If any of the stake holders particularly the Employees, the Finance Lenders (Banks and Financial Institutions) or the Customers is not satisfied with the operation of the business corporate, that may even pose a serious threat to the survival of business entity itself. Unsatisfied Employees may even leave for employment elsewhere, which will adversely affect the normal production and other business activities. The dissatisfied loan Creditors may start pressing for the repayment of their loan amounts which might create an adverse effect on liquidity. Dissatisfaction amongst Customers may result in substantial declined in demand for its products and services, which may in turn have an adverse effect on Profits and Growth. Hence, it is vital for business corporate that all of its stake holders remain adequately satisfied with its operation. It requires identification of the causes for that dissatisfaction and undertaking of suitable remedial action, to regain their satisfaction.

B. EXTERNAL CAUSES

1. The Macro-Economic Causes

Besides the above stated internal causes, the surrounding macro-economic environment within which the business corporate operates also bears substantial impact – favorable or unfavorable on working operations of a business corporate. Such macroeconomic environmental factors are external, over which the business corporate has practically no control. Some such macro-economic factors are:

• (i) Slowdown of Global Economy: The slowdown of global economy during recent past since 2008 which has resulted in fall in demand, which in turn has resulted in an increase in the cost of products, fall in stock turnover ratio and declined in profit – so much so, that many business corporates have reported the bottom-line profit in red.
• (ii) National Financial Policy and Regulations: Pressure by financial institutions for prepayment and recovery of their outstanding loans, in order to improve their own financial positions – but which has adversely affected the financial stability and liquidity of the business corporate.
• (iii) Fluctuations in Stock Markets: Sharp fall in market values of equity shares and other securities tradable at stock exchanges – which may also adversely affect the financial stability and liquidity of the business corporate. It may also reduce the net worth of the business entities, which in turn may result in financial instability, which may further lose the confidence of the supplier’s trade creditors and investors.

2. The Socio-Environmental Causes

The State/Government Policy is also an important factor which bears a significant impact on growth of a business. The State provides stimulus to and exerts control over business corporate through its policy measures, some of which are:

• (i) Labour Policy: The States have legislated many Acts to protect and safeguards the interest of workers. These Acts aim at promoting the welfare of the workers. However, these Acts have not simultaneously imposed duties on the workers which have developed a tendency among them to pursue their rights and neglecting their duties, which has generally become a heavy burden for the business entities, particularly during their infancy stage.
• (ii) Taxation Policy: Taxation policy of the State is an important mechanism for directing and promoting the development and growth in desired and selected geographical areas and of selected industries on the one hand and to discourage the growth of anti-social businesses by imposing curbs and heavy tax burden on the other hand.
• (iii) Pricing Policy and Control: Price control through Maximum Retail Price (MRP) and Minimum Support Price (MSP) measures is another important mechanism of the State, for directing and promoting the development and growth of sectorial businesses.

Conclusion

When a business corporate starts facing hindrances and obstacles in carrying out its normal business operations, it is a signal of the beginning of its sickness. In such situation, the business corporate should not wait for their automatic removal but should proceed to take the advice of independent professional business consultants to diagnose and identify the causes of such hindrances and obstacles and should start taking steps, as per his advice, as corrective treatment of and recovery, from such business sickness.