G&A is accounting shorthand for general and administrative expenses. Some business expenses can be allocated to specific departments or projects, for example, labor and supplies for a manufacturing project or the sales force's driving to the sales department. G&A refers to expenses that benefit the entire company rather than one department or project. Administrative expenses examples include legal fees, accountant fees and business insurance.
G&A Versus Overhead
Administrative expenses in accounting are very similar to overhead. Both concepts refer to expenses that can't be assigned to specific activities. Salary for, say, a physicist working on cold fusion, can be assigned as an expense to that research project. The lab supervisor, however, may be managing the cold fusion research and three or four projects at the same time. The utilities for the lab contribute to all the different research done there. Project-based costs are sometimes called direct costs, where G&A and overhead are indirect.
While people use overhead and G&A interchangeably, there are differences. Overhead expenses are project-related, but not to specific projects. Expenses for the lab supervisor, or a manager who oversees two or three different projects, count as overhead. So do utilities or the cost of holding a project-review meeting for all your project managers. If you don't have any projects underway, you don't have any overhead.
G&A expenses apply to your whole organization. Even if your company doesn't have any contracts or projects, it will still run up G&A bills:
- Accounting fees.
- Legal fees.
- General liability insurance.
- Bank fees.
- Corporate licenses.
- Human resources training new workers.
- Office supplies.
All these costs exist even if there's no billable work being done or any sales closed.
Administrative Expenses in Accounting
Your accountant has to track G&A expenses just like everything else you spend money on. Accountants report G&A for a given period on the income statement. The income statement tracks money earned and expenses incurred during the previous year or quarter, say. The top line of the statement reports your revenue for the year. Below that you report the cost of goods sold, then administrative expenses.
The accounting becomes more complicated if you're working on a federal contract. Government contracts require you to tie all your bills to specific projects. If your billing includes overhead or G&A, you'll have to allocate a portion of those expenses to the relevant project.
G&A is often a challenge for the company's bean-counters. These expenses don't contribute directly to profits, so it looks like they're a drag on the business. That makes them a natural target for cost-cutting. The trouble is, many of the general and administrative expenses are fixed, such as rent, insurance and legal fees. That makes it hard to eliminate or lower them without a lot of work and planning. Some companies get by with very little G&A because they're decentralized. A business with a stronger central command usually requires greater G&A spending.
Carefully cutting G&A by making support and administrative functions more efficient can reduce expenses and increase the company's value. If management cuts too aggressively or prunes the wrong branches, it can hurt the company's value in the long run. If the company reduces G&A carefully, it can free up money for more profitable uses such as investments or R&D. No one solution works for everyone; it's going to vary with the company's industry, size and it's competitive strengths.
Generally, though, it's better to reduce G&A when the company is doing well than wait until it's underperforming. At that point, management is more likely to slash away at G&A in desperation rather than planning carefully.