Fooling Ourselves

The Most Damaging Lie in Business

Since almost nobody sends checks these days, “your check is in the mail,” has probably dropped from its top-ten ranking among common business lies. I suspect it was replaced by either “your call is very important to us” or “our menu options have changed.”

From the “homemade” pies at the local diner to the “lowest prices in town” signs at every electronics store, most business lies are obvious and painless. We’d be less likely to order the pie if we really thought it was made in somebody’s home and we know there’s almost always a lower price somewhere, if we’re willing to burn up enough gasoline to find it.

There are lies that are truly destructive, however, and my nominee for the most damaging untruth is a statement business managers tell themselves. That lie is: It Makes a Contribution to Overhead.

In discussions with friends and clients, this comment is invariably a flashing alert to danger. First, it’s often untrue or, at the least, unknown. Quite often, the person who claims a contribution to overhead is guessing. He knows the unit cost is lower than the sales price, so it must be profitable. Of course, it doesn’t really work that way. A narrow gross margin can be obliterated by direct costs that make it more profitable to drop the product altogether.

Even if the product or service is making a contribution to overhead, though, it’s probably still a loser. The marginally profitable activity is capturing management time and overhead that ultimately has to be paid for somehow—and it’s not being paid by our “contributor.” Worse, that time and overhead expense could be redirected to more profitable ventures or trimmed over time. Either way, total profitability would increase if the company stopped getting that “contribution to overhead.”


Written by Michael Rosenbaum on May 31st, 2012. Posted in Uncategorized

Trackback from your site.

Leave a comment