As a finance employee or business leader, keeping track of expenses is highly important. Without a standardized categorization of expenses, your company will be at risk of financial losses.
While some expenses are related to profit, others are not – and this is what we call general and administrative expenses.
Find out what general and administrative expenses are, along with some examples and best practices for more hygienic budgeting.
What Are General and Administrative Expenses?
General and administrative expenses are non-product or sales-related operational costs of running a business. Some quick examples are rental fees and salaries. Such expenses are part of selling, general, and administrative costs.
While direct selling expenses directly affect a company’s profit, indirect costs such as general and administrative expenses don’t. Still, G&A expenses play an important role in the company’s overall management and operations.
When determining whether an expense is considered G&A, ask yourself if it generates revenue. If the answer is no, then it’s likely that the expense falls under G&A.
Examples of General and Administrative Expenses
For a better categorization of your company’s financials, understand different types of budgets in G&A:
- Salaries and payroll
- Rent and utilities
- Employee benefits (insurance, retirement plans, paid time-offs)
- Electronic and office supplies
- Depreciation on building and equipment
- Legal and consulting fees
- Professional development and training expenditures
- Sales, marketing, and advertising expenditures
- Travel costs
How Does the G&A Expense Work?
To understand how G&A expenses work in a professional setting, let’s examine a case study.
To operate, a manufacturing company needs labor, raw materials, and equipment. These expenses do not qualify as G&A expenses since they are directly related to sales and the production of goods.
Nevertheless, the company must pay its employees and executives wages and salaries. Additional costs include office rental, supplies, and legal fees. All of these expenses fall under the G&A category.
How to Calculate G&A Expenses
The general and administrative expense ratio calculates a company’s total revenue divided by its general and administrative expenses.
G&A Expense Ratio = (General + Administrative Expenses) / Revenue
In order to use the G&A expense ratio formula, follow the steps below:
- Analyze the income statement and identify the G&A expenses.
- Subtract the cost of goods sold from the net revenue to get the gross margin
- Subtract the G&A expenses from the gross margin to figure out the business’s net income.
A company that has a high G&A spending ratio indicates that it spends most of its sales on administrative expenses, which reduces profitability. This means the company will need to implement control stages in their budgeting.
On the other hand, a company that has a low G&A expense ratio likely regulates its administrative costs properly.
Investors and analysts use the G&A spending ratio as a key statistic to evaluate the company’s cash flow health and overall financial performance.
Example of the Calculation
Here’s an example of G&A expense calculations.
AI & Robot Company. General and Administrative Expenses for February 2022.
|G&A Expenses||Cost (USD)|
|Research and Development||15,000|
How to Manage G&A Expenses
If you’re planning to save on your operating expenses, here are some tips to effectively control G&A costs:
- Sort expenses into categories: Classify your expenses into groups such as rent, utilities, salaries, legal fees, and so forth. Doing so will give you a general idea of where your money is going.
- Set strict budgets: Plan out a strategy for your G&A spending and specify how much you’ll spend on each budget item. This will help you keep tabs on your spending and decide where to cut spending if required.
- Bargain with suppliers: Try your best to get lower prices or discounts from suppliers. To minimize administrative costs and simplify the process, consider working with fewer or smaller vendors.
- Limit business debts: Make sure to pay bills on time before they begin incurring late fees. At a glance, late payments might not be huge in amount but can harm the organization if such occurrences happen to a lot of bills. Using accounts payable software will streamline your payment processes.
- Go remote: Office rent can be expensive and can add up significantly to the total expenses. Working hybrid or remotely will be just as efficient as working offline, and is more economical in the long term.
- Evaluate human resources: Ensure that you have the right number of employees and that their functions are in accordance with your company’s goals. Think about outsourcing non-core jobs or automating some tasks to improve productivity.
- Track budgets regularly: Review your financial statements from time to time, make necessary adjustments, and look for areas of improvement. Take an action before your budget exceeds the limit. Peakflo helps stay on top of spending with automatic notifications that your teams will receive before, when, and after the budget reaches the limit.
- Leverage financial software: Peakflo can be your source of truth that will ensure all of your financial data is up-to-date and 100% accurate. Set up a budget with a couple of clicks and gain insights from the monthly summary of spending. Save costs by automating redundant tasks such as invoicing and bookkeeping. Take our product tour now!