An income statement is an important tool for managing your finances and planning your business strategy. General and administrative (G&A) expenses are one category of operating expenses you’ll have to include on your income statement.
In this article, we’ll explain what G&A expenses are, how they factor into your business’s income statement, and how to manage them.
What are G&A expenses?
General and administrative expenses, or G&A expenses, are operating expenses that do not include overhead costs related to the production or sale of goods and services. A type of indirect cost, G&A expenses are those costs that a business must spend throughout the year to maintain operations regardless of revenue or sales.
Some examples of G&A expenses include rent, insurance, office supplies, and fixed employee salaries.
Importantly, general and administrative costs should always be differentiated from costs related to specific projects that are designed to increase revenue, such as research and development (R&D) or production costs.
For example, the monthly rent paid to occupy a manufacturing facility would fall under the category of G&A, whereas the cost of manufacturing a certain product within that facility would fall under the category of cost of goods sold (COGS).
What’s included in general and administrative expenses?
General and administrative (G&A) expenses encompass the overhead costs associated with running the day-to-day operations of a business, which may include:
- Salaries and wages: This includes the pay for administrative staff, executive compensation, and other non-production personnel salaries
- Rent and utilities: The costs of leasing office space and paying for utilities such as electricity, water, and internet services
- Office supplies and equipment: Costs incurred for items like stationery, computers, printers, and other equipment necessary for administrative tasks
- Legal and accounting fees: Fees paid to lawyers and accountants for their services in managing legal and financial matters of the company
- Insurance: Premiums for various insurance policies covering liability, property, and other business risks
- Depreciation and amortization: The allocation of the cost of assets over their useful life, affecting the company's book value and income statement
- Miscellaneous administrative expenses: Other administrative expenses such as permits, licenses, and fees paid to regulatory bodies for compliance purposes
What is G&A vs. SG&A?
General and administrative expenses (G&A) refer to the overhead costs associated with day-to-day business operations. Selling, general, and administrative expenses (SG&A) are a broader category that includes selling expenses in addition to G&A expenses.
G&A expenses, such as executive salaries, office rent, and utilities, are the general overhead costs necessary for running a business, while selling expenses, like sales commissions, advertising, and promotional materials, are the costs associated with selling and marketing the company's products or services.
In a financial statement, these expenses are often aggregated under the SG&A line item. However, some companies may choose to separate selling expenses from general and administrative expenses for more detailed reporting.
Semi-variable vs. fixed expenses
G&A costs are separated into two distinct expense categories: fixed expenses and semi-variable expenses.
Fixed expenses are operating costs that an organization expects to incur regularly at a predetermined price point. For example, if a business enters into a 12-month rent agreement for office space at a monthly rate, each monthly payment would be considered a fixed cost and recorded as G&A. By definition, fixed expenses always remain the same and therefore can’t be brought down or eliminated through cost-reduction strategies.
Semi-variable expenses, on the other hand, are operating expenses that an organization expects to incur but are not necessarily fixed. This means you can strategically reduce or eliminate them.
One example of a semi-variable expense is electricity. While most businesses require electricity to remain operational, you can take actions to reduce your electricity bill. Another example of a semi-variable expense might be office equipment or supplies. You might need to purchase certain supplies each month to keep the office stocked, but you can always reevaluate how, when, and from which vendor you buy the supplies, potentially bringing down the overall cost.
Most G&A expenses are either fixed or semi-variable, but exceptions do exist. For example, the depreciation of office equipment or furniture falls under the category of G&A expenses but doesn’t correlate with outgoing cash flows.
Why are G&A expenses important to track?
It’s important to track G&A expenses because they demonstrate how well you manage funds across your company. Furthermore, overspending on operational costs or not having accounting processes in place to effectively manage G&A can hurt your bottom line, especially as a small business or startup.
Strategically managing G&A expenses can help increase revenue by reducing the overall cost of operations. In fact, if you’re specifically looking to reduce costs across the organization, G&A expenses should be one of the first costs you evaluate. This is because you can significantly reduce if not entirely eliminate some costs that fall into the G&A category without any negative impact on production or sales.
Additionally, you factor in G&A expenses when calculating and reporting revenues on your income statement. When operational costs are higher, net income is lower, and vice versa. It’s also crucial to remember that most G&A expenses will be tax-deductible. To maximize your benefits, you’ll need to demonstrate that each cost incurred was in fact necessary for the company to operate during the accounting period.
How and where do you record G&A expenses in your books?
You’ll need to record and list G&A expenses clearly on your company’s income statement. G&A should appear below the cost of goods sold and will ultimately help calculate your company’s net income for a given accounting period.
The overall complexity of an income statement will vary depending on your specific organization and business model. In almost all cases, however, you’ll apply the same general formula:
- Factor in revenues, minus all taxes, fees, and interest, to calculate your net revenue
- Deduct the cost of goods sold from net revenue to arrive at your gross margin
- Deduct all G&A expenses from your gross margin to reveal your net income for the accounting period
In most cases, you won’t list and deduct G&A expenses from your gross margin as one line item. Rather, you’ll categorize them separately based on the nature of the expense and its relation to the operation of your company. For example, while the cost of both salaries and rent fall into the G&A category, you’d list each as an individual line item on your income statement.
3 causes of bloat in G&A expenses
When the G&A portion of your income statement becomes bloated, your operating costs may eat into your revenue, compromising your ability to turn a profit. Here are a few challenges that frequently contribute to bloated operating costs:
SaaS sprawl
The software as a service (SaaS) industry continues to boom, with no end to growth in sight. This isn’t a negative in and of itself; SaaS tools and platforms can be incredibly useful. However, the influx of services has led to a considerable challenge that many businesses have little to no experience addressing: SaaS sprawl.
SaaS sprawl happens when a company loses the ability to effectively manage the various services used across the organization. When this issue goes unaddressed, it often leads to overspending on services and platform licenses. Even one unnecessary expenditure can have a significant impact on G&A.
Zombie spend
Zombie spend occurs when a company accumulates recurring expenses for services and products that either aren’t being used or no longer create value. In many cases, zombie spend is directly related to issues like SaaS sprawl. For example, you might have started a subscription to a platform last year, and even though your team has since moved on to a different platform, you're still paying the monthly subscription fee for the old one.
But zombie spend isn’t exclusively a SaaS problem. It often manifests as a simple oversight, such as auto-purchasing office supplies when you already have more than you need. Continuing to spend funds on items or services you aren’t using naturally hurts cash flow and subsequently impacts how G&A expenses factor into your overall income statement.
Shadow IT
When it comes to adopting technology across the organization, IT teams must be aware of all the platforms your employees are using. However, there’s often a disconnect between individual employees or entire departments, and this lack of transparency results in shadow IT—specific technology being used without IT leaders or upper management knowing.
Shadow IT can create several issues. First, it’s a matter of security: teams or employees operating on networks that might be vulnerable to a data breach put your entire organization at risk. Secondly, even if the technology doesn’t compromise your security, you’re still footing the bill for tools you haven’t approved or evaluated for cost efficiency.
How to manage G&A expenses
Effectively managing G&A expenses requires both a thoughtful strategy and clear visibility into your operational expenses. Here are a few ways you can optimize your G&A expense management:
1. Establish and enforce spending policies
Establishing and enforcing expense policies is critical to managing G&A expenses. Unfortunately, rules around spending can be difficult to reinforce, and expense policy violations often go unnoticed until it’s too late.
You’ll want to create a business expense policy and have your employees sign off on it so they know exactly where and how much they can spend. You can also look for a company expense card that allows you to set customizable spending limits and vendor controls.
2. Automate your expense tracking
Modern accounting software can automate much of your expense management process. The right tools can help you categorize your operating expenses while automatically logging new transactions into the appropriate categories you’ve set. That way, you’ll know in real time how much you’re spending in each category.
3. Make a plan to reduce costs
The first step in designing a strategy to cut costs is having clear and constant visibility into your company-wide spending. Use a spend management platform that will track your spending and automatically categorize it for you, so you always know where you’re at with your budget.
Once you have a clear view of your spending, look for areas where you can reduce costs. This might mean reducing employee budgets in certain categories, canceling subscriptions you forgot about, or switching vendors. The best expense management tools will also offer insights into how you can save money. For instance, Ramp automatically finds ways for your business to save.
Manage G&A expenses with Ramp
If you’re looking to cut costs and more effectively manage G&A expenses across your organization, Ramp can help.
Our corporate cards let you set custom vendor controls and spending limits, and we integrate with popular accounting and finance apps. Ramp simplifies spend tracking by automatically categorizing expenses so you can identify and eliminate issues like SaaS sprawl and zombie spend.
Learn more about how Ramp’s expense management platform can offer real-time financial visibility, automate your expense tracking, and deliver AI-powered insights to save your business money.
