A modern guide to general and administrative expenses
Every company needs to spend money to make money. It's a cliché, but it's also undoubtedly true.
We typically think of these costs as being directly tied to sales. You need to buy stock in order to sell it. You need to hire salespeople (and pay them) too.
But you also have costs that aren't so closely linked to profit. These operating expenses are the things that you'd probably rather not pay, but have no choice: rent, power and Internet bills, legal fees.
These are often what we think of as "expenses," and they're usually a pain to manage. In this post, we're going to look at the kinds of general and administrative costs your business might incur, the challenges you'll come across, and the best way to stay on top of them.
Let's start with a clear definition of what we're talking about.
What are general and administrative expenses?
Very simply, general and administrative expenses are the costs associated with running a business that don’t relate to your products or sales. These are the necessities (and sometimes the luxuries) that most companies require.
They include rent, some salaries, employee perks, office supplies, and much more. If it doesn’t directly bring in revenue, it’s likely to be a G&A expense.
Broadly speaking, your business will have three main types of expense on its books:
Sales, general and administrative expenses
Costs related to investments
As you can see, selling costs are often lumped in with G&A in a company’s income statement. They’re kept distinct from production (manufacturing) costs.
But for the purposes of this article, we’re choosing to focus only on general and administrative expenses. Sales and marketing will have their own budgets and managers, and we want to look at what makes G&A a unique challenge to manage.
Why are they important?
An office doesn’t just run itself. Your teams need a high-functioning environment in which they’re comfortable and can work without sweating the small stuff.
This sort of environment also helps you find the best talent and keep them around for longer. The little things - a nice colour scheme and an open feel - can be the difference between signing the person you want, and seeing them walk.
And as we’ll see, G&A expenses speak directly to a company’s efficiency. This is one of the first areas for a business to prune if it wants to increase profits. Per InvestingAnswers, "because [G&A] often houses the salaries of the top executives, as well as many other expenses, it is often the target of cost-cutting when a company has cash flow problems."
And cash flow really is a significant issue. As PreferredCFO explains, "82% of the time, poor cash flow management or poor understanding of cash flow contributes to the failure of a small business."
So the easier it is to track these costs, the better.
Classic G&A expenses
While businesses will have their own typical office expenses, there are several categories that most would consider standard.
The types of expense are of course different. But one thing remains the same: companies need to find an easy way to pay for these and track their costs.
We’ll look at your expense management options later in this article. For now, let’s look at the types of expense.
[U.S. companies will find a great list of G&A expenses with accounting codes courtesy of The Strategic CFO.]
When we think of salaries as a G&A expense, we’re talking mostly about corporate staff: management, finance, accounts, custodial, and IT. Your sales, marketing, development, and design all contribute directly to selling, so they usually wouldn’t count.
This is mostly a technical distinction to help you separate operational costs from revenue-generating ones. From a practical perspective, you’re going to pay salaries for most (if not all) staff the same way.
[For fun, here's an interesting calculator to compare the cost of using freelancers versus full-time employees. (Toptal)]
Keeping a roof over your employees’ heads is another significant expense. This is one reason why many companies are choosing to forgo an office altogether, and remote work is the “new normal.”
Of course, remote culture has a long way to go. And for now, most businesses maintain a fixed address.
Food and drink
When employees are happy and comfortable, it’s easier to show up and do their best work. Companies are usually happy to offer some nature of food and drink to keep team members at their best.
At the very least, tea and coffee are usually provided. Some businesses will add biscuits or fruit to stave off mid-morning or afternoon hunger pangs.
And large corporations and factories even have cafeterias that provide hot lunches for workers. For instance, this is required in France for companies over a certain size. Otherwise, meal vouchers need to be given to staff to ensure they have a suitable meal.
Changing dietary preferences mean some companies now offer vegan meal plans for those with plant-based diets. Others use food delivery services to ensure every employee has options suited to their dietary needs.
Food and drink are just one example of a growing number of employee perks in modern workplaces.
On top of food and drink, employees often enjoy other benefits. These can range anywhere from a team meal at a restaurant for new staff, to a weekly yoga class, to the annual Christmas party.
Regular, ongoing expenses are usually relatively easy to manage. If every employee is entitled to a Spotify Premium account, you know roughly how much that will cost you monthly since you know the number of staff.
But parties and lunches can also be expensive. And since they’re only one-off, it can be harder to keep track of them. Consistent spending is always much easier to manage.
We’ll look at solutions to this shortly, but just consider how you’d normally pay for a party at work. And if you know the process, does everyone else?
The main office furniture costs come upfront. You buy 100 desks, chairs, and lamps, and you’re pretty much set.
But you also have the small, ongoing expenses that continue to crop up. When a staff member needs an ergonomic chair or a standing desk, or when it’s time to replace the couch, for example.
As above, any one-off expenses can be tricky to manage. You want to move quickly and get the new furniture in place immediately, but you also need to keep clear records and pay for things correctly.
Electronics and technical supplies
The most obvious electronic expense in modern businesses is of course computers. Pretty much everyone needs one, plus a screen, keyboard, and mouse. Some - especially travelling staff - will also need a work phone to stay connected during trips.
Technical costs can also be a mixture of sales-related and office expenses. For example, if you have a website or CDN for marketing and sales, then of course that’s a production cost. But if you keep servers for your intranet or to store financial data, these will be operating costs.
Every business will need legal assistance from time to time. From setting up your first employment contracts, to handling a tricky tax situation, it’s unlikely that you’ll have this expertise on your own.
Legal fees can be both regular, ongoing costs or one-off. You might have a lawyer on retainer for a set number of hours a month to make sure that you’re compliant.
You might even have an in-house lawyer or compliance expert. Since this doesn’t contribute to sales, it will be a general and administrative expense too.
And from time to time you’ll need to shell out to solve a specific legal challenge. These costs can be significant, but they’re essential to keeping your company above water.
Company expenses versus revenue
The amount you spend on operating costs is really only relevant if you compare it with revenue. A small startup will likely have lower administrative expenses than an enterprise business, after all. So rather than obsessing about the payments themselves, you should think about them in context.
To make sure that your spending is “under control,” the simplest measure is to calculate operating costs against company revenue. This is also known as the efficiency ratio.
The formula for this is simple:
G&A expenses / Revenue x 100
That'll tell you operating costs as a percentage of your revenue. And then you can monitor changes in this percentage, rather than looking at costs on their own.
As Plan Projections explains, "a significant rise in the general and administration expense to revenue ratio may indicate that the investment in general and administration is not as cost effective as it should be."
This is mostly relevant for the CFO or Head of Finance. They’re charged with ensuring that the company’s finances are under control.
But it can be a good principle to keep in mind for office managers and other finance staff. If you can reduce the efficiency ratio this quarter versus last, you create value for the company.
Note: This calculation usually only takes into account typical, ongoing company expenses. One-off payments (a legal challenge, for example) shouldn’t be included in this figure. But ongoing costs (a monthly legal retainer, for instance) must be.
Which poses one major challenge: Do you truly know your company’s regular G&A expenses from quarter to quarter? And can you effectively manage those big, one-off payments?
Challenges with office expenses
As we've already indicated, general and administrative expenses are often tricky to manage. The main reason for this is that different people may handle different expenses, and the way that you pay for things can be all over the place.
Here's how some of these challenges can present themselves.
Who’s in charge of what?
Office furniture, electronics and other technical equipment will usually be the domain of the procurement person or team. Hopefully they have a clear system in place to make sure that payments are monitored and invoices and receipts archived correctly.
And for large-scale purchases this is usually straightforward. You pay for everything at once, the procurement team keeps detailed records, and everything's shipshape.
But when an employee needs a new mouse, will they know how to get it? Ideally, they don’t have to bother the procurement person every time.
And it’s also entirely possible that you don’t have a procurement person or team. The office manager handles all of this.
In this case, you definitely don’t want the office manager to handle every little payment. For one, they’re much too busy. And the employee in question should be able to choose the mouse (or whatever it is they need) and make the purchase quickly.
Most companies end up with a mix-and-match approach. Some employees follow the rules and ask for help, and some do what’s fastest and easiest for themselves. You end up with a lack of clear boundaries and expectations, and more unidentified payments show up on the company card or out of the petty cash box.
This is what we want to solve. If you can’t easily know what’s being spent in real time, you can’t effectively reduce costs in smart ways.
Regular versus one-off expenses
The other main challenge is due to the fact that costs have different timelines. You'll pay some things monthly (like utilities and salaries), others quarterly, and some annually (like a lease on the office).
A good finance team can keep this all on schedule.
The bigger hurdle is when you have unexpected one-off costs. These actually occur all the time. You may have a board meeting, so you run out for morning tea. Or perhaps the fridge is acting up and you call in a repairs person.
And there are the large payments that hit from time to time: significant legal fees, or new computers for the whole office.
You might have a smooth system for your regular payments, but mixing in one-offs is more difficult. You need to be sure that every payment is tracked, with approval from a manager. You'll also have invoices and receipts to file responsibly.
And while none of this is impossible, each payment adds administrative strain when you're not expecting it. Unless you're prepared.
How to manage general and administrative expenses
The real aim of this article is to show you how smart companies manage G&A expenses. These may not be as complex as travel expenses involving lots of transactions, but that's exactly why you want to make them as simple as possible. The less manual work, the better.
Your biggest goals here all relate to efficiency. You should aim to:
Reduce your overall efficiency ratio. The lower your operating costs, the more efficient the business.
Make tracking expenses easier. One-off costs, especially, can be hard to monitor and can waste a lot of time.
Make spending smoother for staff. The less time and effort that goes into small operating costs, the better.
To achieve all three, you need a robust spending strategy company-wide. And a petty cash box definitely doesn’t stack up.
Here’s what needs to be included:
Smart payment methods
This doesn’t mean blockchain. By smart, we mean payment methods that are built for businesses. A few rules to follow:
Move away from cash. Cash is inherently difficult to monitor. At the very least, you’ll need some sort of manual data entry (a ledger or Excel sheet) to keep on top of spending.
Avoid company credit cards. Again, these are hard to monitor. They get shared around, and it’s never quite clear who made which payment.
Find better card payment options. Card payments are good, just not the traditional company card model. Instead, you want individual prepaid cards that come with a way to track each person’s spending. Here are the best card payment options for businesses.
Forget about expense reports. The most time-consuming and error-prone method is to have employees pay with their own money and then seek reimbursement. If you have clean payment methods, your employees won’t need to bother with expense claims again.
So to recap: no more company credit cards or expenses. Instead, get a prepaid card solution that’s easy to monitor. Which is where the second step comes in.
A spend management platform
The only way to reduce operating costs is to first track your spending, then look for areas to cut. This is far more difficult if you can’t log and categorize every payment easily.
A good spend management tool will capture every payment your teams make, then categorize them and assign them to the right budgets. So you’ll know in real time - and without any data entry - how much you spend on food, electronics, rent, and utilities.
If it’s your personal responsibility to squeeze G&A expenses, this is perfect.
And it’s even better if this platform is linked directly to those payment methods we mentioned above. So you don’t have to log into your bank to see what’s been spent, or open Excel sheets to check in on cash spending.
If every payment is made through the platform, you have one source of truth. And you can use this to build your gameplan.
A plan to reduce costs
Once you have the above two in place, building an action plan is straightforward. You just look for unnecessary spending and make a conscious effort to cut it out.
This could be as simple as requiring approval from managers for every payment. It might also mean that team members need to make a formal request to the office manager for small things.
You may also discover ongoing payments that you didn’t even know about. Subscriptions to software that people stopped using months ago, for instance.
It may also be smart to set aside time each January to review your office management tools and make decisions as to which ones are crucial and those that could be cut.
If you have accurate spend tracking and a consistent way for teams to spend, you can quickly build a strategy to keep a lid on costs without wasting everyone’s time and energy.
Manage all company expenses with one process
Overall, your best bet is to handle all company spending the same way. Whether it's for travelling salespeople, subscription software payments, or office costs shouldn't matter.
You should have one spend management strategy, and every payment should fall under it.
And this is easy is you have the right payment methods and a great platform to track everything. Spreadsheets and data entry leave room for mistakes, plus they cost your company time. Take the headache out of general and administrative expenses by using an all-in-one spend management tool like Spendesk. Take proper control of company spending today.