Whether you're running aconstruction company, arestaurant, or any small business, you'll need to cover general and administrative expenses (G&A).
These are costs crucial to your company's day-to-day running, like supplies for your office and accounting fees.
So what exactly is the full meaning of G&A, and why is it important for you to track G&A expenses? We'll cover all that and more, so let's dive in!
What is G&A in a Company?
General and administrative expenses are costs thataren'trelated to sales or production that you take on when running your business—like internet and power bills, executive salaries, and rent. These exist whether you generaterevenueor makeprofitsor losses.
When you look at a company'sincome statement, you'll find these costs in Operating Expenses or SG&A expenses (selling, general, and administrative)—both of which are listed below cost of goods sold (COGS). COGS, however, are the direct costs of making the products a business sells.
Although selling and G&A expenses are grouped together, they aren't the same. Selling expenses are related to marketing, distributing, and selling a product.
What Are Some Examples of G&A?
Some examples of G&A expenses include executivesalaries, rent, and utilities. As the name implies, we break G&A expenses into two groups: general and administrative costs.
Your business takes on general expenses as part of its day-to-day operations. Examples include rent, utilities,insurance, and general supplies. Administrative costs relate to the management of your company. They include executive salaries and accounting, legal, and professional fees.
Here's a quick breakdown of both types of expenses:
Examples of G&A Expenses
| General Expenses | Administrative Expenses |
|---|---|
| Rent | Executive wages and benefits (CEO, CFO, etc) |
| Insurance | Salaries for IT staff, bookkeepers, admin assistants, data entry clerks, etc. |
| Utilities, like water and electricity | Finance and accounting staff salaries, plus applicable fringe benefits, like health insurance and paid vacation |
| Depreciation on office equipment and furniture (the value your equipment loses yearly through regular use) | Consultation fees |
| General office supplies, such as employee snacks and perks | Legal fees, like contingency fees for property damage cases, personal injury cases, or other cases involving financial losses |
| Software and internet subscriptions |
Does G&A Include Salaries?
The only salaries included in G&A expenses are for employees who don't directly work in the production or sales departments. These employees include:
- C-Suite executives (CEO, CFO, CIO)
- Information technology (IT) support staff
- Human resources (HR) staff
- Internal and external legal counsel
- Finance and accounting staff
You include the salaries and wages of employees working in the production unit in the COGS section and those working in the sales unit in the Selling section of SG&A.
The good news is that you don't need to worry about salaries when using payroll software likeHourly. It can help you automatically calculate your employees' compensation and pay them in one click, regardless of whether they appear in the G&A orCOGSsection.
Now, let's look at another way of breaking up general and administrative costs—into fixed and semi-variable expenses.
What Are Fixed and Semi-Variable Costs?
Fixed and semi-variable costs appear on the income statement as indirect costs since they aren't directly related to production or sales.
Fixed costs don't rise or fall based on how much or little a company produces or sells its products. That means you must pay for these costs even if you don't generate revenue. Examples include G&A expenses such as rent, insurance, and executive or admin staff salaries.
You can always look for ways to reduce fixed costs since they have no direct impact on revenue or profits. For example, switching to a more affordable insurance company can reduce your insurance costs. You can also minimize rent by changing offices or salaries bylaying off employees.
Semi-variable expenditures have fixed and variable elements to them. Variable means that costs rise when production and sales go up and fall when they go down.
The most common example of semi-variable cost is electricity. Your business needs power and lighting to run, and what you pay may be constant, say $1500 per month up to a certain production level. However, power consumption and electricity bills go up as production goes past that level.
How Is G&A Different from Overhead?
Most people use the term overhead and G&A interchangeably, but the difference between the two is that overhead is related to production while G&A isn't.
For example, say your business has a manufacturing plant and offices: the portion of rent that's paid for the manufacturing plant is called overhead since it's related to producing goods. However, the rent paid for the office space falls under G&A since it's not used to physically make anything.
Now that we've answered that burning question, let's look at how you can calculate general and administrative expenses.
How Do You Calculate G&A Expenses?
You calculate the administrative and general expenses using the formula below:
G&A = General Expenses + Administrative Expenses
For example, let's say you own arestaurant, and these are your general and administrative expenses for the month:
G&A Expenses
| General Expenses | Cost | Administrative Expenses | Cost |
|---|---|---|---|
| Rent | $3,500 | Employees’ Hourly Wages | $20,000 |
| Utilities | $1,100 | Accounting Fees | $1,000 |
| Insurance | $150 | ||
| General Supplies | $600 | ||
| Software and Internet fees | $250 | ||
| Marketing Costs | $8,000 |
So, what are your total general and administrative expenses?
Let's do the math.
G&A = General Expenses + Administrative Expenses
G&A = (Rent + Utilities + Insurance + General Supplies + Software and Internet Fees + Marketing Cost) + (Employees’ Hourly Wages + Accounting Fees)
G&A = ($3,500 + $1,100 + $150 + $600 + $250 + $8,000) + ($20,000 + $1,000)
G&A = $13,600 + $21,000
G&A = $34,600
That means your restaurant's total G&A costs for that month are $34,600.
Why Is It Important to Track Your General and Administrative Expenses?
Tracking your general and administrative expenses is important because it shows how well you manage your money.
If your business expenses are lower, your net income will be higher and vice versa. Net income, also called thebottom line, is the amount of money you have after subtracting COGS, general expenses, interests and taxes.
So, let's say you want to lower the operating costs of your. First, take a hard look at your administrative and general expenses since you can significantly reduce them without disrupting or hurting production.
For example, if your energy costs are high, you can introduce energy-efficiency practices in the workplace. That can include turning off equipment and lights at the end of the day or when not in use. You can also move to a smaller office space if rent costs become a problem.
It's also important to note that most administrative and general expenses aretax deductible. And to be able to maximize the tax benefits, you'll need to show that each cost was necessary for your business to run during the accounting period.
Knowing Your G&A Costs Helps You Find the Overall Efficiency of Your Business
Knowing your G&A costs is also important because it helps you know how efficient your business is.
We calculate the efficiency ratio using the formula below:
(G&A Expenses / Revenue) x 100%
For example, if your total revenue is $100,000 and your G&A costs are $20,000. Your efficiency ratio will be:
Efficiency ratio = (20,000 / 100,000) x 100%
Efficiency ratio = 0.2 x 100%
Efficiency ratio = 20%
When your G&A expenses increase significantly, the efficiency ratio will also increase, which may indicate that your business isn't operating as efficiently as it should and you may need to cut down on the G&A costs. An efficiency ratio below 50% is considered good.
That's another reason why it's so crucial to track your G&A expenses.
How Do You Manage General & Administrative Expenses?
As a business owner, you're responsible for managing your company's G&A costs to keep things running smoothly.
But how do you do that?
Review your income statement and note which expenses are eating too much into your bottom line, and try to cut them or shop around for alternatives.
You can also eliminate or alter wasteful aspects of your business and focus on more valuable areas of your company. For example, if you're using a lot of printer ink and paper, you can consider going paperless and reduce these expenses significantly.
Another effective way to manage your G&A expenses is using a spending management tool to record every cost and assign each expense an appropriate budget. That way, you'll know how much you spend on general expenses—such as rent, office supplies, and utilities—in real time.
Once you get spend management software, look for unnecessary spending and try to cut down on it. It can be as simple as canceling subscriptions you don't need. You also could require team members to make formal requests to the office manager for any business purchases.
Increase Your Net Income by Tracking Your General and Administrative Expenses
We've said this before, but we'll say it again because it's so important: The lower your G&A costs, the higher your net income and vice versa.
So, what does that mean for you?
If you don't watch your day-to-day costs, they can eat into your bottom line. So, keep an eye on those expenses and cut them where you can to increase your company's net income. That way, your business can make more profit.
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