The administrative or administration budget is the amount of money it takes to run your company. It's defined in accounting as the part of your budget that isn't related to sales, construction or manufacturing. The administration budget appears on the income statement as general and administrative expenses.
TL;DR (Too Long; Didn't Read)
The administrative budget is the money you'd have to spend even if you had zero sales activity. It includes insurance, rent, legal expenses, office supplies, accounting and executive salaries and benefits.
The Administration Budget
The general and administrative budget, or G&A budget, is everything that you'd have to spend even if you stopped all your selling activity. That includes, for example:
- Building rent or mortgage payments.
- Consulting expenses.
- Salary and benefits for the C-suite executives and their supporting staff
- Depreciation on office equipment.
- Insurance premiums.
- Wages and benefits for the accounting department.
- Your legal bills, whether you hire an outside attorney or use in-house staff
- Office supplies.
- The costs of bringing in an auditor.
Sometimes, the G&A budget is combined with sales to create the selling and administrative expense. Accountants describe this as the budget for all the non-manufacturing departments.
Influences on the Budget
When it comes time to make the budget, you may find yourself pulled in two directions. Administrative expenses don't directly contribute to your income the way sales and manufacturing do, so it's tempting to slash them as much as possible. However, many of the costs are fixed, such as rent and utilities, so you don't have much leeway to trim them.
The bigger and more centralized your organizational structure, the more you'll have to spend on the administration budget. A rigid hierarchy costs more in administrative expenses than a flat structure, for instance.
About Incremental Budgeting
Where your manufacturing budget has to consider items such as the cost of raw materials, the administration budget is more about the costs of people. The most common way to set the budget for the fiscal year is with incremental budgeting. Take last year's G&A budget figures, adjust them by 5 or 10 percent and use the result as this year's budget.
Incremental budgeting is popular because it's simple. If you don't want to spend a lot of time crunching budget figures, the incremental approach is a quick and easy way to do it. However, it isn't perfect.
- If you simply increase the administration budget every year, your managers have no incentive to economize or trim costs.
- Department heads may exaggerate their budget needs so that they keep the department under budget without much effort.
- It doesn't encourage you to think about outside factors such as inflation or competition for employees. Upping the budget by 10 percent may not reflect real pressures increasing your G&A expenses.
Other Types of Budget
Although incremental budgeting is widely used, it's not the only game in town.
- Zero-based budgeting doesn't carry over anything from previous budgets. Instead, your managers have to justify every expense every time you draw up a budget. This can be really effective at spotting costs you can cut, but it requires a lot of effort.
- Value-proposition budgeting asks whether a budget item creates value for stakeholders and whether the value justifies the cost.
- Activity-based budgeting looks at what activities you need to meet your goals. Suppose your goal is $10 million in sales revenue this year. An activity-based budget would look at what sort of administrative expenses you need to meet that goal.
You may also want to draw up a cash budget projecting how much money you'll have to pay out over the fiscal period. Standard practice is that you draw up the cash budget for the entire company rather than creating one only for administrative costs.
Reporting the Costs
You report G&A expenses on the income statement below cost of goods sold. The entry may be for G&A alone or for selling, general and administrative expenses combined.
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com