Guide to G&A expenses for your startups
Managing general and administrative costs in any given period is crucial for the profitability of a business. But with operating costs and ongoing expenses, breaking even or obtaining revenue growth is challenging, especially when your company spending more than what it makes, inevitably reducing your gross margin. Therefore, companies must navigate in deducting expenses, both direct costs and indirect expenses.
There is no doubt that companies are spending large amounts of money to keep up with their day-to-day costs in hopes of achieving sustainable growth.
One key takeaway would be tracking expenses and keeping them under control to avoid cash flow problems. In this article, we will learn everything about general and administrative costs.
What is a general and administrative expense (G&A)?
General and administrative expenses represent direct and indirect costs resulting from day-to-day operations to wages employee salaries of a company. Such expenses may not be directly tied to the production of goods or services sold.
General expenses are operational costs, and costs related to overheads affect the entire company. An administrative fee cannot be directly linked to a specific department within the company, such as manufacturing, production, or sales.
Some of a company's expenses incurred with operating and other costs may be included as part of its public and administrative expenses when it is not included as its own line item. These expenses are shown on the company's income statement, usually below the cost of goods sold (COGS). They are combined with selling expenses to form the selling, general, and administrative expense line items.
Although the expense list for general and administrative cost varies in different industries or companies, G&A expenses commonly include the following:
- Building expenses
- Consultant fee
- Depreciation fee of office furniture and equipment
- Office space rent
- Insurance cost
- Marketing and Advertising cost
- Wages and benefits
- Office Supplies
Are general and administrative expenses the same as overhead costs?
The general and administrative expense is a type of overhead cost. Companies usually split their overhead costs into manufacturing, sales ads, and administrative overheads. Overhead costs refer to indirect costs that are not expenses typically linked to producing a good or service.
Manufacturing overheads are called indirect costs incurred while manufacturing a product. It is included in the cost of goods sold (COGS) calculation and direct material and labor costs.
Are general and administrative expenses the same as fixed costs?
Whether a company is making a profit or not, it will still be generating G&A expenses, as expenses such as rent and building expenses, electricity, human resources, fringe benefits or other benefits to employees, and office equipment, are usually stable and ongoing. Therefore, any company, no matter the size, should control its G&A expense. A business can consequently take measures to cut such costs and other fees reflected within their G&A by reducing unnecessary spending.
On income statements, G&A expenses generally do not include research and development expenses, accounting for operational costs to develop, design, and enhance a company's products, services, technologies, or processes.
What do general and administrative expenses mean for startups?
General and administrative expenses differ depending on the kind of business, all businesses are not similar, and each company has unique features. Some of the essential costs incurred by startups include marketing and advertising expense.
How are general and administrative expenses calculated?
Calculating general and administrative expenses is essential to determine the business expenses in an accounting period and have an expense list on hand. Typical expenses include:
- Employee perks and bonuses.
- Advertising expenses.
- Costs of promotional materials.
- Sales and marketing employees' payroll taxes.
Determine the business's fixed and variable expenses, including salaries, sales commissions, utilities, rents, and marketing budgets. These costs are complex to calculate and require advanced accounting knowledge, so hiring an accountant or bookkeeper may be necessary. While certain expenses, such as employees' salaries and monthly bills, tend to remain fixed, marketing budgets and purchasing specific equipment and supplies may vary monthly.
How to measure general and administrative expenses for your business?
When you own a business, you want to ensure that every dollar spent is worth something. Managing general and administrative expenses to a reasonable level and maximizing their efficiency is an essential consideration for every company, especially for small businesses in their first stages.
Businesses commonly use general and administrative expenses as a percentage of revenue to get an idea of how efficient the company's overhead costs are. This metric also allows investors to compare their rates to other businesses and set targets to control costs, primarily operating expenses and additional costs.
The optimal range for general and administrative expenses percentages
The benchmark for management to evaluate how efficiently it manages its general and administrative expenses differs depending on the industry and the company's size. For instance, according to a McKinsey & Company report, G&A expenses are between 3% and 5% of the company revenue for top industry performers.
Energy and materials companies typically have an SG&A percentage of 10% or less, while industrial manufacturers usually average 10% - 20%. A 25% G&A ratio is not uncommon for consumer goods companies. Pharmaceutical, biotechnology, and healthcare companies often report SG&A expenses of 40% - 50% or more SG&A expenses, sometimes due to higher sales and marketing costs.
For example, ARRs with over $100 million spent 20% of their revenues on general and administrative expenses. VC-backed startups with revenues below US$10 million are expected to spend an average of 70% of their incomes on these expenses. This shows that general and administrative expenses are enormous and how crucial it is to manage them and adopt a cost-cutting strategy when necessary.