How to Plan for G&A Expenses
Amidst the COVID-19 crisis, businesses across the board are taking a hit. About half of finance leaders expect revenue declines of more than 10% this year.
As was the case during the 2008 crisis, cutting costs is crucial for companies to survive. But unlike the last economic downturn, it’s not enough to just make blunt cuts. In 2008 companies made too many labor cuts without changing underlying work, which took years to recover from.
Initial CoVid shutdowns forced small businesses to cut their workforce dramatically. The prolonged uncertainty and impact on revenues is forcing companies to cut even deeper. No one wants to repeat the mistakes of 2008, where talent loss hurt the ability to grow. Focusing on cutting overhead is a more challenging but effective route.
General and administrative expenses, or G&A, is the accounting term for overall business expenses that are not directly related to production or sales. This line item appears on a company’s income statement below the cost of goods sold. Typically, G&A includes top executive salaries, rent, office supplies, meals and entertainment expenses, and employee perks. The functions covered include Human Resources, Legal, Finance, and IT.
G&A expenses are often at the top of the list because they are viewed as indirect costs not immediately critical to sales. In a Deloitte global survey of 1200 senior executives, 71% of respondents plan to undertake cost-reduction initiatives over the next 24 months. For comparison, in a similar Bain survey from 2019, executives expected that they would have to cut general and administrative expenses by only 7% in the next economic crisis.
How can companies achieve these cuts without sacrificing competitive advantages?
Categorize your G&A expenses
Business management author Peter Drucker famously said, “If you can’t measure it, you can’t improve it.” By looking at the company's income statement, you’ll know how much is spent overall on G&A, but drilling down further allows you to control those costs. This starts with identifying and analyzing the line item costs incurred. While such detail is often applied to sales, operational, and manufacturing expenses, companies can be crippled by a lack of comprehensive data on support function costs.
Shadow costs are a great place to start. Shadow costs are G&A expenses duplicated within department budgets in some way. A common example is fragmented business intelligence software, where teams running independently at full speed buy their own tools separately.
While cutting duplicate expenses sounds intuitive, it requires significant work to categorize these expenses accurately across the company. This may explain why only 18% of respondents said their companies track them.
Software purchases are a critical component of infrastructure that often gets lumped into G&A. Separating out an infrastructure cost center allows allocation to departments based on the purchaser or even by usage; for example HubSpot for marketing or InVision for product design. Categorizing vendors by service offering makes it easier to spot any wastage. Companies often end up with forgotten shelfware, where they sign up for a free trial and never cancel, or pay monthly without taking advantage of annual discounts. Negotiating variable cost structures based on usage may also add cost savings.
Clear categorization of operating costs is also essential if your company hopes to pursue government contracts. Government contractors cannot group all operating costs into a single line item. They must differentiate between direct costs and indirect costs through separate pools, typically fringe benefits, overhead costs, and G&A. Detailed information on the government audit process can be found at the DCAA.
Apply the right benchmarks
Recurring functions that keep the lights on make up approximately 49% of G&A expenses, such as running payroll, audit support, IT as a service, or outsourced accounting services. Remaining G&A costs are project based, including outside counsel fees for M&A, HR specialists, product feasibility studies, and data analytics.
Separating costs into recurring and project based buckets helps managers apply different strategies. Recurring costs are primarily impacted by process efficiency. For example, streamlining the approval process for purchases can reduce accounts payable costs and is a driving force for spend management. Monitoring outsourcing costs versus hiring in house is also key to reducing these costs.
Performance metrics used to monitor cost cutting progress also vary. Recurring work like payroll, IT help desk, or calendar-centric budgeting and planning can be tracked using metrics like cost per transaction, error rates, prep time, and responsiveness. On the other hand, project work should be judged by business impact or return on investment.
Benchmarking also applies across peers. Within sectors, companies often allocate a similar percentage of revenues to G&A. The difference between the top-performing and bottom quartile of competitors can be striking, as much as 4% to 8% of revenues. If possible, find out where that standard is.
Use technology to drive G&A cost efficiency
Automation tools reduce manual repetitive tasks like expense reporting, and free up resources for the organization. Examples include using customer support chatbots, all in one cloud data platforms, automated accounting systems, travel management, and expense management platforms.
Plan your G&A budgets from scratch
During the budgeting process, companies typically use income statement and balance sheet numbers from previous years to come up with the following year’s budget. Zero-based budgeting doesn’t use those financial statements as a starting point. Instead, budget owners have to justify all costs for the upcoming year. Given how highly disruptive work plans have been during 2020, this might be the best way to plan G&A expenses for 2021.
An example of drastically reimagining work has been remote work forced on companies by the pandemic. Companies scrambled to introduce remote work even when it previously was not supported, creating policies with varying success. Instead of spending on company culture with free snacks and company events, businesses now have to fund work from home office setup costs.
Working from home has created another set of G&A budget needs, including IT investments in laptops, network upgrades, VPN access for everyone, and more cloud and business intelligence software. Even parental leave benefits need to change, accommodating working parents facing limited day care options.
As more businesses transition back to in person work, further demands arise in increasing sanitation or perhaps creating socially distant setups within the office. At the same time, empty office spaces could be an opportunity to add energy saving measures like smart thermostats. To reduce overall rental costs, commercial tenants can ask for abatement, deferral, or a temporary pause in payments in exchange for a lease extension.
Teams may find that certain types of workflows operate better virtually and rethink physical office needs entirely. Some of these companies may choose to switch to remote first arrangements, in which case office leases may be renegotiated or canceled entirely.
Stepping back and taking a holistic view of G&A involves looking across functions at structural changes that may be necessary, whether it’s in process or culture. Unfortunately, last year’s spending no longer serves as a meaningful reference point. Going back to the drawing board offers a unique opportunity to redesign from a clean slate.
Be Smart about G&A
Focusing on total cost reduction is a losing business formula. Focusing on improving efficiency by reducing overhead is a winning one. By categorizing your G&A expenses, applying benchmarks, investing in technology, and building a zero-based budget approach, you will save money, without sacrificing growth.