What are General and Administrative (G&A) Expenses?
General and administrative (G&A) expenses are the day‑to‑day costs of running a business that are not directly tied to producing a specific product or delivering a specific service. They are a subset of operating expenses and typically include rent, utilities, office supplies, corporate salaries, insurance, professional fees (legal, accounting), certain IT costs, and depreciation on office equipment. G&A expenses are reported on the income statement below Cost of Goods Sold (COGS) and are deducted from gross margin to help arrive at operating or net income.
Key takeaways
– G&A are overhead and administrative costs that support the whole business rather than a specific production or sales activity.
– They appear below COGS on the income statement and reduce gross margin to arrive at operating/net income.
– Many G&A items are fixed or semi‑variable; some can be allocated to business units for internal costing.
– Most G&A expenses are tax‑deductible if they are ordinary, necessary, and reasonable (IRS guidance).
– Managing G&A requires identification, allocation, benchmarking, and ongoing control.
Where G&A fits in the financials
– Revenue
– – Cost of Goods Sold (COGS) = Gross margin
– – Selling expenses (if separated)
– – General & Administrative expenses = Operating income (or operating loss)
Note: companies may present selling and administrative separately or combine them as “Selling, General & Administrative” (SG&A).
Common examples of G&A expenses
– Rent and property taxes (for office space)
– Utilities (electricity, water) for corporate/office areas
– Salaries and benefits for corporate staff (executives, HR, finance, legal, IT)
– Office supplies and subscriptions (software as a service, trade publications)
– Professional fees: legal, audit, tax, consulting
– Insurance (general liability, directors & officers, property)
– Depreciation and amortization on office furniture, computers, and non‑production assets
– IT infrastructure and support (corporate systems, networks)
– Employee training and human resources programs
What qualifies as an overhead expense?
Overhead expenses are costs necessary to keep the business operating even if production or sales temporarily stop. Key characteristics:
– Not direct manufacturing or direct sales costs.
– Often fixed or semi‑variable (a base level of cost exists, with additional usage‑driven increments).
– Difficult to eliminate entirely without closing or materially changing the business.
Examples of overhead: rent, property taxes, core utilities, basic insurance, and core corporate payroll.
Fixed vs. variable (and semi‑variable) G&A
– Fixed G&A: predictable, recurring amounts (e.g., monthly rent).
– Variable G&A: scale with business activity (e.g., corporate travel tied to business opportunities).
– Semi‑variable G&A: base level plus additional costs when activity rises (e.g., minimum electricity to run lights + extra when using more equipment).
How companies allocate G&A to business units
To evaluate unit economics, companies often allocate G&A across divisions or cost centers. Common allocation bases:
– Revenue share
– Headcount
– Square footage
– Direct costs or machine hours
Allocation example (electricity by square footage)
Total monthly electric bill: $4,000
Facility square footage: 4,500 total (production 2,000; manufacturing 1,500; accounting 500; sales 500)
Allocated electricity:
– Production: (2,000 / 4,500) × $4,000 = $1,777.78
– Manufacturing: (1,500 / 4,500) × $4,000 = $1,333.33
– Accounting: (500 / 4,500) × $4,000 = $444.44
– Sales: (500 / 4,500) × $4,000 = $444.44
How G&A affects the income statement — quick numeric example
– Revenue: $100,000
– COGS: $40,000 → Gross margin = $60,000
– G&A expenses: $20,000 → Operating income = $40,000
Cost of Goods Sold (COGS) — quick refresher and formula
COGS is the direct cost to produce goods or services sold during the period. Formula (for a merchandising or manufacturing inventory model):
COGS = Beginning inventory + Purchases (or production costs) – Ending inventory
Include only values from the current reporting period.
Performance and efficiency metrics
– Sales‑to‑administrative expense ratio: Sales ÷ Administrative expenses. A higher ratio implies more sales generated per dollar of admin expense.
– Administrative expense percentage: (Administrative expenses ÷ Sales) × 100. This shows admin costs as a percent of revenue.
Example: Sales $500,000; Admin expenses $50,000 → Admin % = 10%; Sales‑to‑admin ratio = 10.
Decentralized vs. centralized management and G&A
– Centralized management often incurs higher G&A because corporate overhead and decision‑making functions are concentrated at headquarters.
– Decentralized management delegates authority to mid or lower management, which can reduce corporate overhead but may duplicate certain functions across units.
Choice depends on business complexity, regulatory environment, and control needs.
Tax treatment
Most ordinary and necessary G&A expenses are tax‑deductible in the year they are incurred, provided they are reasonable and properly documented. Follow IRS guidance (e.g., Publication 334 for small businesses) and retain invoices, contracts, payroll records, and other supporting documentation to substantiate deductions.
Practical steps to manage G&A expenses
1. Identify and categorize all G&A items
– Build a chart of accounts that separates direct costs, selling costs, and G&A.
– Tag expenses with cost centers or departments for easier allocation and analysis.
2. Allocate G&A consistently for internal decision‑making
– Choose an allocation base (revenue, headcount, square footage) and apply it consistently.
– Document the allocation method so management and auditors understand how unit costs are derived.
3. Benchmark and set targets
– Calculate administrative expense as a percent of sales and compare to peers or historical results.
– Establish reasonable targets and monitor trends monthly or quarterly.
4. Distinguish fixed vs variable components
– For semi‑variable costs, determine a baseline fixed amount and a variable rate per unit of activity.
– Use this to model the impact of growth or contraction on G&A.
5. Control and reduce costs where practical
– Negotiate leases and vendor contracts.
– Move routine tasks to lower‑cost jurisdictions or automate (e.g., automate invoicing).
– Review subscriptions and software licenses; eliminate unused seats.
– Implement energy efficiency measures to lower utility bills.
– Consider outsourcing noncore functions if it reduces total cost without hurting quality.
6. Use activity‑based costing (when appropriate)
– For complex operations, activity‑based costing can more accurately assign overhead to products or services and support better pricing and product mix decisions.
7. Monitor and report regularly
– Produce monthly management reports showing G&A by department, trend lines, and variance explanations versus budget.
– Tie performance metrics to managers’ incentives where appropriate.
8. Protect tax deductibility and compliance
– Keep contemporaneous records for expenses.
– Confirm that expenses meet “ordinary, necessary, and reasonable” standards for deduction.
– Consult tax counsel for large or unusual items (e.g., executive compensation, large one‑time fees).
Practical checklist for a financial review of G&A
– Do we have a clear chart of accounts that separates G&A from selling and COGS?
– Are all G&A costs allocated consistently for internal reporting?
– Which G&A items are fixed, variable, or semi‑variable?
– Have we benchmarked admin% against industry peers?
– Are there subscriptions or contracts we can cancel or renegotiate?
– Are payroll and headcount aligned with current business needs?
– Are tax records and supporting documents organized for deductions?
The bottom line
G&A expenses are essential overheads that keep a business operating but are not directly tied to producing goods or making sales. Effective management requires identifying and categorizing expenses, allocating them consistently to measure unit economics, benchmarking and setting targets, and taking practical cost‑control steps where possible. Most G&A expenses are tax‑deductible if they meet ordinary, necessary, and reasonable criteria and are adequately documented.
Sources
– Investopedia. “General and Administrative (G&A) Expenses.” (Dennis Madamba).
– AccountingTools. “Income Statement Definition.”
– Internal Revenue Service. Publication 334, Tax Guide for Small Business.