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Pakistan:Industry deterioration

By Irfan alam
June 14 2014

 

The year 2011-12 posed enormous challenges not only for Pakistan economy but the world at large. Conditions at home were more adverse due to depreciation of dollar, high level inflation, acute energy shortfall and deteriorating law and order situation. The overall business activity in country remained slow and due to very tough competition in market coupled with above constraints the turnover of industry couldn’t touch the desired level. There was however, no demand during the year so couldn’t fetch reasonable business.

Operating expenses during the year decreased by 30 % compared to pre-year mainly due to decrease in sale. Fixed overheads couldn’t be absorbed properly by the products as production remained below the break-even point. Other reasons were raw-material constraints, non-renewal of credit facilities from banks, lesser orders in hands at beginning of year, frequent electricity break downs and gas load shedding, intensive competition. Cost of goods become high because of increase in price of raw material. On other hand the industry have not much skilled labor with upgraded technology. This may also be the reason for enhanced cost of goods sold resulting in raw material devastation. These factors are one of the major problems other than electricity shortage & inflation.

Most of the companies, in industry, are suffering loss from past some years. They are injecting more cash by borrowing loans and using reserves. Rather than this, they should analyse, which part of the operating assets is utilising efficiently or less. If company’s assets are giving production round about 30 % and cost is around 40% then company may discontinue that particular operation and close that operating asset. By selling some of that asset, company should pay off their debt which may increase their Altman’s Z score to secure their company from bankruptcy.

Not every asset will be treated like this. Each company has to make benchmark of percentage output operating asset. Priority should be to control cost especially by making their operations more efficient rather than to sack current employee. Because sacking current employee and hiring new may cost more than to train the old one. On the other hand, it may be some operating asset (machinery) that became old and causing for more cost. This cost may cause more loss and needed to be replaced. Replacing cost is one time cost that couldn’t stick with the operations.

 

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