Sickness in man is gradual process and does not develop suddenly. Similar is the case with industrial units. Therefore, in common parlance, a sick industry is one which is not healthy and a healthy unit is one which earns a reasonable return on capital employed and builds up reserves after providing reasonable depreciation.
A sick industrial unit may be defined as one where it fails to generate surplus on a continuous basis and depends upon frequent infusion of external funds for its survival.
According Reserve Bank of India (RBI), a small-scale unit should be considered as sick if it has at the end of any accounting year, accumulated losses equal to or exceeding 50% of its peak net worth in the immediately preceding 5 accounting years”.
The Sick Industrial Companies Act 1985 identifies sickness in terms of cash losses for two consecutive financial years and accumulated losses equaling or exceeding the net worth of the company at the end of the second financial year.
Sickness, in industry therefore, indicates more or less a perfect positive correlation with profitability, liquidity and solvency. The reasons of industrial sickness can be either internal or external.
The various internal causes are inadequate technical know-how, locational disadvantages, outdated production process, high cost of inputs, uneconomic size of project, unduly large investment in fixed assets, inadequate mobilization of finance, poor quality control, poor capacity utilization, high cost of production, high wastage, excessively high wage structure, weak market organisation, faulty costing, lack of professionalism, control and diversification etc.
The various external causes of sickness are non availability of critical raw materials, chronic power shortage, transport bottlenecks, non-availability of adequate finance, government control on prices, fiscal duties, market saturation, natural calamities, and multiplicity of labour unions etc.