Whether you’re running a small business or startup, it’s critical to ensure that reliable processes are in place to track and manage expenses across the organization. Beyond providing transparency regarding the financial health of a business, effective accounting procedures can help to reveal points of strength or weakness within the company and can lead to stronger, more comprehensive strategies surrounding financial forecasting, planning, and analysis.
Before effective processes can be conceived, however, business leaders must first understand how specific costs will need to be categorized on an income statement. One such category that all small business owners should be familiar with is general and administrative expenses, or G&A.
In this article, we’ll define G&A expenses, discuss their unique importance, and highlight some common challenges as well as how Ramp can help your business reduce costs and remove friction from the broader expense management process.
What are G&A expenses?
General and administrative expenses, most commonly referred to as G&A, are indirect costs that fall into the category of operating expenses, but that does not relate to the production or sale of goods and services. Put simply, G&A refers to the expenses that a business must incur throughout the year in order to maintain operations, regardless of revenue or sales.
Some immediate examples of G&A expenses are rent, insurance, office supplies, and fixed employee salaries.
Importantly, G&A expenses 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).
Semi-variable vs. fixed expenses
In order to properly calculate and manage G&A effectively, it’s important to understand that G&A costs will need to be separated into two distinct categories: fixed expenses, and semi-variable expenses.
Fixed expenses are operating costs that an organization expects to incur on a regular basis 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 expense 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, and therefore can be reduced or eliminated strategically.
The most common example of a semi-variable expense is electricity; while most businesses will require electricity to remain operational, actions can be taken to reduce the use of energy and bring down the electricity bill. Another example of a semi-variable expense might be office equipment or supplies; certain supplies might need to be purchased each month to keep the office stocked, however, a business can always reevaluate how, when, and from which vendor the supplies are bought, and potentially bring the overall costs down as a result.
Most G&A expenses will be fairly straightforward in that they are either fixed or semi-variable, and are correlated to a specific expenditure. However, exceptions do exist, such as the depreciation of office equipment or furniture, which falls under the category of G&A expenses but has no correlation to outgoing cashflows.
Why are G&A expenses important to track?
G&A expenses are important because they demonstrate how well funds are managed across an organization. Moreover, overspending on operational costs or not having the accounting processes in place to effectively manage G&A can have a negative impact on the bottom line, particularly for small businesses and startups.
Perhaps most importantly, taking a careful, strategic approach to manage G&A expenses can be an opportunity to increase revenue on an income statement by reducing the overall cost of operations.
In fact, when looking specifically to bring down costs wherever possible across an organization, G&A expenses are often the first costs to be evaluated. This is because some costs that fall into the category of G&A may be significantly reduced, if not entirely eliminated, without any disruption or negative impact on production or sales.
Additionally, G&A expenses are factored in when calculating and reporting revenues on an income statement. When operational costs are higher, net income is lower, and vice versa. It’s also crucial to keep in mind that most G&A expenses will be tax deductible, and in order to maximize the benefits, businesses will need to demonstrate that each cost incurred was in fact necessary for the company to operate during the accounting period.
How and where do I record G&A expenses in my books?
G&A expenses will need to be recorded and listed clearly on your company’s income statement. G&A should appear below the cost of goods sold, and will ultimately be used to determine your company’s net income for a given accounting period.
The overall complexity of an income statement will vary dependent on the individual organization and business model, however, in almost all cases the same general formula will be applied. First, revenues will be factored in, minus all taxes, fees, and interest to determine net revenue. Next, the cost of goods sold will be deducted from net revenue to arrive at the gross margin. Finally, all G&A expenses will be deducted from the gross margin to reveal net income for the accounting period.
Importantly, in most cases, G&A expenses will not be listed and deducted from the gross margin as one line item, but rather categorized separately based on the nature of the expense and its relation to the operation of the company. For example, while the cost of both salaries and rent fall into the category of G&A, each would be featured as individual line items on the income statement.
3 causes of bloat in G&A expenses
When the G&A portion of an income statement becomes bloated, it simply means that operating costs have risen to a level that is already eating into revenue, or that may ultimately compromise a company’s ability to turn a profit. Bloat in G&A expenses can have a variety of causes, many of which are becoming more and more difficult to address as technology advances. Here are just a few common challenges that frequently result in bloated operating costs.
The Software-as-a-Service (SaaS) industry continues to boom with no end to growth in sight. And while this fact alone shouldn’t be viewed as a negative—SaaS tools and platforms can be incredibly beneficial, if not downright transformative in our digital age—the influx of services has led to a considerable challenge that many businesses have little to no experience addressing: SaaS sprawl.
Put simply, SaaS sprawl occurs when a company loses the ability to effectively manage each service being utilized across the organization. When this issue goes unaddressed, it often leads to overspending on services and platform licenses, and even one unnecessary expenditure can have a significant impact on G&A.
Zombie spend is when a company accumulates recurring expenses related to services and products that either aren’t being utilized at all, or no longer create value, and it’s becoming a serious issue for businesses of all sizes and across industries. In many cases, zombie spend is directly related to issues like SaaS sprawl; a team might have started a subscription to a platform last year, and even though it has since moved on to a different platform, the company is still paying the monthly subscription fee.
But zombie spend isn’t exclusively an SaaS problem and often manifests as a simple oversight, such as auto-purchasing office supplies when teams already have more than they need. Continuing to spend funds on items or services that aren't being used naturally has a negative impact on cash flows, and subsequently on how G&A expenses impact the overall income statement.
When it comes to integrating and leveraging new technologies, it’s critical that IT teams and information technology specialists are aware of all platforms being utilized across the organization. Oftentimes, however, there is a disconnect between individual employees or entire departments, and a lack of transparency around the tools being used results in the perpetuation of “Shadow IT,” or specific technology being used without the awareness of IT leaders or upper management.
Shadow IT can create a number of issues. First, it’s a matter of security; teams or employees operating on networks that might be vulnerable to a data breach put the entire organization at risk. Secondly, even if cybersecurity isn't being compromised by the use of an unauthorized technology, the business is still unwittingly footing the bill for tools that haven’t been approved or evaluated for cost-efficiency, and that might not even be creating value for the company.
How Ramp can help you manage your G&A expenses
Effectively managing G&A expenses requires both a thoughtful strategy and comprehensive insight into operational expenses. As mentioned earlier, widespread digitalization and the influx of costs related to SaaS services and other technologies have introduced novel complexities into the accounting process.
More often than not, poor or inadequate management of G&A expenses isn’t the result of accounting professionals not having the skillsets or experience to do the job, but can rather be attributed to the fact that they simply aren’t utilizing the right tools to maximize transparency and control spending.
Separately, it’s important to remember that managing G&A isn’t only about properly accounting for operational costs on an income statement; it's about doing whatever you can to curb unnecessary or superfluous expenses. While fixed costs such as rent will remain largely out of your control, variable or semi-variable expenses can (and should) be reduced wherever possible without disrupting operations.
This is where the Ramp platform comes in: By leveraging truly modernized, automated accounting tools, businesses can remove common hurdles from the expense management process, while also cutting costs and gaining a strategic advantage over competitors.
Here are just a few steps that can be taken using the Ramp platform to reduce operational costs and more effectively track and manage G&A expenses:
Establish and enforce policies and controls around spending
Establishing and enforcing expense policies is absolutely critical to managing G&A. Unfortunately, however, rules around spending can be difficult to reinforce on a regular basis, and expense policy violations often go unnoticed until it’s too late.
Using the Ramp platform, businesses can draft and upload flexible, simplified expense policies for the entire organization to sign and access as needed. Moreover, Ramp allows businesses to set automatically enforced limits on spending, barring transactions above a certain price-point or with a certain merchant or vendor.
Streamline expense categorization
As mentioned, managing and reporting G&A expenses isn’t as simple as adding up all operating costs and printing the total next to the G&A category on an income statement. Ramp utilizes automation not only to break down operational costs into appropriate categories but to add another layer of customization to the enforcement of expense policies.
With Ramp, transactions can be approved immediately based on custom control settings, while also being logged in the appropriate category to streamline bookkeeping and circumvent manual approval and intervention.
Make faster, smarter decisions with real-time reporting and insights
Beyond simply controlling G&A spend within an organization, Ramp provides businesses with the tools to easily analyze, forecast, and improve corporate spending habits.
Ramp’s AI-powered insights will automatically reveal ways your business can save money, and these insights can be accessed from a centralized, searchable database containing all expenses for a given accounting period. Additionally, Ramp provides specialized tools to help your company track and manage specific categories in real-time, such as our automated travel management software.
Looking to cut costs and more effectively manage G&A expenses across your organization? Click here to learn more about how the Ramp platform can boost efficiency and save your business money through modernized accounting and expense management solutions.