Most business executives emphasise growth, acceleration, and expansion during the good economic times. But not the billionaire Carlos Slim. On many occasions, the Mexican businessman has underscored the need for restraint when business is booming in order to cope with challenging times ahead.Slim’s principle says that the austerity of the good times makes the company stronger. It further enriches and accelerates the development of the company, helping it to avoid harsh adjustments in periods of crisis. It is among the best descriptions of the businessman’s business philosophy. Though conservative-sounding, the principle is considered a very realistic approach to understanding the business cycle by most experts.Why good times create dangerous business behavioursHigh revenue inflows create an illusion of safety. As a result, businesses start making excessive expenditure because the high income makes those decisions safer. This could be reflected in hiring too many people, office improvements, an increase in the cost of doing business, or launching marketing campaigns that only draw attention but provide no return on investment.Harvard Business Review found that companies tend to get less disciplined when the business environment favours them because growth hides the company’s inefficiency. Slim’s business principles counteract this inclination. Rather than considering periods of economic growth permanent, Slim views them as opportunities to create stability.What Carlos Slims means by austerityThe term “austerity” may seem harsh, yet Slim’s business principles do not imply an avoidance of investments entirely. In addition, his wider business principles include concepts such as modernisation, efficiency, training, and continual improvement. The goal is not frugal spending, but waste prevention.This nuance is essential because many organisations often confuse growth with success. In contrast, Slim’s model proposes that a company gains strength by retaining flexibility rather than increasing costs during profitable times.Many experts weighed in on the sustainable corporate development and capital allocation, revealing that it’s not about spending nothing. Rather, it’s about spending with discipline.
The surprisingly strict rule Carlos Slim follows when business is booming. Image credit – Wikimedia
Why financial reserves are important in times of declineAnother reason why Slim’s principle appeals to many economists is that periods of economic decline often reveal inadequacies in cash reserves. The U.S. Small Business Administration advises entrepreneurs to keep emergency funding sources since unexpected changes in the market, disruptions in the supply chain, or overall economic recession may lead to lower revenues rapidly.Firms that have financial buffer zones typically do not take drastic measures such as layoffs, borrowing, and operational changes. Slim’s approach may be viewed as considering resilience as a competitive edge. The more a company keeps resources ahead of time, the greater its ability to adapt becomes. This could be crucial during recessions and volatile market periods.How founders can apply the rule todayThe insight is highly applicable to small firms and entrepreneurs due to the tendency to indulge in emotional expenses during growth phases. According to experts, there are several practical approaches to implementing “good-times discipline”:
- Set spending caps in advance of peak growth – Firms can set maximum spending limits on certain areas even before their revenues rise and start pressuring the organisation to develop all departments simultaneously.
- Create a resilience budget – Many financial advisors advise allocating a portion of profits to reserves aimed at responding to any future disruptions.
- Apply hiring triggers wisely – Rather than hire employees based solely on increased revenue, some organisations prefer to use performance benchmarks associated with stable workloads.
- Run a stress test – Many business consultants recommend posing a straightforward question: what if the revenue suddenly dropped drastically next quarter? That exercise may help to understand which expenditures are sustainable and which can be afforded only in extraordinary conditions.
The misunderstanding of the notion of disciplineToday’s corporate culture encourages bold growth and development. The philosophy of Slim is more conservative as it puts durability above everything else. However, it is not about being conservative. It is about being prepared for anything without unnecessary fragility.According to research by McKinsey & Company, firms with better discipline and financial flexibility recover quicker from economic shocks. This often implies the necessity to avoid treating short-lived successes as permanent ones.The long-term benefits of being disciplinedEven today, Slim’s recommendation remains relevant since economic cycles repeat themselves. Periods of growth increase confidence in the economy but may create unhealthy behaviours.Companies hardly ever feel sorry for developing their reserves, reducing unnecessary expenses, and securing their flexibility when times change. This is what makes Slim’s recommendation so valuable and relevant. His rule strips crisis management of all its excitement and makes it a routine.The conclusion is simple – when firms strive to gain additional freedom of action in crisis periods, they should cultivate discipline long before they face those challenges.
