Is there a particular framework that managements need to follow during a slowdown?
A slowdown is a given in any economic cycle. But there are some defensive businesses such as staples, pharma and FMCG, which are not as impacted as commodities. Hence, commodity companies have to exercise a lot more prudence in financial management. One needs to constantly monitor the environment. Since it is never possible for managements to predict a slowdown, one should keep enough cash reserves to deal with a downturn. Just ensure that your liabilities can be met during a downturn — either have cash or credit lines. You have to stay prepared for cycles.
Many a times you can’t predict a downturn, how can managements be prepared then?
It’s important to develop sensors like a canary in the mine. So, when I was the finance director at Tata Steel a few decades ago, three to four products would signal quite early that things were slowing down. One was bearings, as it is used across sectors and industries such as auto and electrical goods. Second was roofing sheets. Every industry will have these lead indicators. You have to watch closely. In short, you create your own forecasting tool that will detect any change in the environment.
Management is all about managing risks. Every decision you take as a manager, you have to constantly weigh the risk. It can’t be someone else’s job. I am honestly astounded by the concept of a risk management committee, because I believe, it’s integral to management anyway.
Where do you think managements go wrong?
The trouble is that when times are good, you tend to throw caution to the wind and take on a lot of costs. It is human nature to believe during good times that good times won’t en