A Guide to General and Administrative Expenses (G A Expenses)
Small businesses have to keep track of expenses to stay afloat. While some of these expenses are obvious, such as the cost of goods sold or payroll, others can be more subtle. General and administrative expenses are two costs that often go unnoticed by small business owners. In this article, we’ll look at what general and administrative expenses are and how they can impact your bottom line.
What are general and administrative expenses?
General expenses are costs that are not directly related to the production of a good or service. For example, the rent on your business’s office space is a general expense, as is the cost of utilities like electricity and water. Operating costs can be divided into two categories: fixed and variable.
Fixed Costs
The general expenses category includes any costs that are not directly related to the production of a good or service. Fixed costs are the same amount each month and include rent, insurance, rates and payroll. They are an amount agreed upon in advance.
Variable Costs
On the other hand, variable costs can vary depending on the industry or business needs. Common examples include stationery, advertising, and legal fees. While it’s essential to keep track of both types of expenses, businesses often closely monitor their variable costs to better control their overall spending.
How do General and Administrative Expenses Impact my Bottom Line?
General and administrative expenses can significantly impact a company’s bottom line. They often account for a significant percentage of a business’s total expenses. Therefore, it is crucial to be aware of these costs and do what you can to keep them as low as possible.
A business might have solid sales, but once operating costs are taken into account, it may make a loss. Even if a company has low sales, it can be profitable if its general and administrative expenses are low.
General and Administrative Expenses on the Company’s Income Statement
The income statement is one of the most important financial statements a company produces. It shows a business’s revenue, expenses (operating costs) and profit over a specific period of time. There are three main sections on an income statement: sales revenue, gross profit and net profit.
Sales Revenue
The company Revenue is the total amount of money a company has earned from the sale of its goods and services.
Gross Profit
Gross profit is the difference between revenue and the cost of goods sold. It shows how much money a company has made after deducting the cost of the products or services it has sold.
Net Profit
Net profit is the final figure and is calculated by subtracting all expenses from gross profit. General and administrative expenses are listed under the ‘operating expenses’ heading. It is a general category that includes all the company’s costs to generate revenue. It includes things like wages, rent, advertising and utilities.
Below is an example of an income statement.
How to Calculate General and Administrative Expenses
The total of general and administrative expenses is calculated by adding all the individual expenses that fall into this category. This might include things like office supplies, postage, telephone costs, and repairs and maintenance. It’s important to keep track of these expenses as they can impact a company’s bottom line.
Tracking Expenses
The easiest way is to use accounting software to track your expenses. It will help you keep tabs on how much you’re spending and see where you can cut costs. Some of the top packages allow you to add expense accounts to the dashboard, making seeing the costs effortless.
What are General and Administrative Expense Examples?
Below are a few examples of a company’s operating expenses incurred in their day to day operations; every business will be different. Some might be a one-off cost for the year, while others might be a monthly cost.
Advertising and marketing costs will include Google AdWords, Facebook advertising, website, printing and Yellow Pages. Some of these costs are linked directly to making sales, while others are general business expenses.
Depreciation is the process to write off fixed assets over their useful life.
Employee salaries will exclude salaries that relate to making a product, as they are a cost of sales.
Insurance – if you pay for the insurance in one payment, you will need to create an accrual so that only the expense for the financial year is included.
Office supplies include stationery, toner, paper, but exclude office furniture as it is classed as a fixed asset on the Balance Sheet.
Postage excludes post to ship goods to customers as that is a direct cost.
Professional and legal fees will include solicitors, accountants, and other professionals a business might need to help it run.
Rates will include business rates.
Rent of premises. It excludes the rent of manufacturing premises.
Repairs and maintenance include anything that needs repairing or fixing in the office.
Sales Commissions are a selling expense and are, therefore, part of the g a expenses.
Software and IT are costs related to running any software, including cloud storage, accounting software, other software and fixing IT problems.
Telephone costs, including mobile and landlines.
Utilities might include Electricity, Gas and Water.
Direct and Indirect Costs
There are two types of business expenses: direct and indirect.
Direct costs incurred from making a product or providing a service. This might include the cost of materials, labour, and shipping. On the other hand, indirect costs are not related to making a product or service. This might include rent, advertising, and utilities.
Direct Selling Expenses
Direct Selling expenses are costs related to generating sales. It might include things like advertising and marketing and commissions paid to salespeople. It’s essential to track these expenses as they can impact a company’s bottom line.
Companies might incorporate selling costs into the administrative expense for larger companies; they might list them separately.
How to Reduce General and Administrative Expense
There are several ways to reduce general and administrative expenses in a business. The most effective way is to track your expenses and see where you can cut costs and stop unnecessary spending. It might include office supplies, postage, telephone costs, and repairs and maintenance.
One way to keep track of g a expenses is to create a cash flow forecast. It will show you how much money you are likely to spend in the next few months and help you plan for future expenses. We have created a cash flow forecast template for free download.
The template will help you to see if you have any future cash flow problems or when additional company spending is available to invest.
Cost of Revenue Ratio
The cost of revenue ratio is a calculation that helps business owners to understand how much it costs to generate sales. This figure is important as it can help you see where you need to make changes to improve your profitability.
The calculation is simple – divide your cost of goods sold by your total revenue. This will give you a percentage that will help you understand your business’s efficiency.
Ideally, you want this number to be as low as possible as it means that you are generating more sales with less expenses. However, it is essential to note that there will always be some cost associated with making sales.
Example
For this example, let’s assume that a business has the following figures:
Cost of goods sold: 10,000
Total revenue: 15,000
The ratio for this business would be 66.7% (10,000 / 15,000).
While this number is high, it is essential to remember that there will always be some level of cost associated with generating sales.
You can also include the operational expenses of 2,000.
The ratio is now 80% (12,000 / 15,000)
Find out more about financial ratios and how they can help the business understand its financial health.
Conclusion on General and Administrative Expenses
The general and administrative expense are the costs that a company incurs in their day-to-day costs to generate revenue. It includes office supplies, postage, telephone costs, repairs and maintenance.
General and administrative expenses can significantly impact a company’s bottom line, so it is vital to keep track of these expenditures. One way to reduce operating expenses is by tracking your expenses and seeing where you can cut costs.
This concludes our article on general and administrative expense. We hope you found this information helpful. If you have any questions, please don’t hesitate to ask. Thank you for reading!
