Scale-ups struggle with cash flow – it’s a fact.

What’s obvious is that this can lead to further concerns and corner-cutting. Payment to the company’s suppliers, operational programs, and employees could all suffer. However, cash flow problems create a hidden, related knock-on issue: the ability to take on new work.

In fact, more than 3 in 5 small businesses in a global survey said they experienced a cash flow issue at some point during their company’s history, and 44% of small business owners who experienced cash flow issues say the problems were a surprise. More often than not, it’s because expenses outweigh the company’s profit. But a majority of these expenses are comprised of what’s known as “Selling General Administrative (SG&A) expenses.”

While usually only presented as a single line item on your invoice or income statement, selling general and administrative costs can surprisingly be some of the heaviest. But what do these costs really mean, and how can you control the numbers?

What are General and Administrative Expenses?

General and administrative (G&A) expenses are common costs that allow a business to run properly, and may not be tied to a specific department or unit of a company. G&A expenses are a subset of the company’s operating expenses, excluding selling costs. G&A expenses are not related to manufacturing, production, or sales. Instead, they involve every (often necessary) overhead incurred by a company.

G&A expenses are important since they directly affect cash flow. And yet, 64% of small businesses refer to cash flow problems as one of the primary obstacles for growth. While sales and revenue can be variable, the general and administrative expense is a fixed constant. So, these business expenses must be controlled from the very beginning.

Main Types of Expenses

Broadly speaking, a company would have three main types of expenses:

  • Manufacturing cost
  • Sales, general, and administrative expense
  • Costs that relate to investments

As you may have noticed above, general and administrative expenses are often lumped with sales on a company’s income statement as:

“Selling General Administrative Expense (SG&A): $2500”

Examples of General and Administrative Expenses

But in reality, they are completely separate. G&A expenses have no direct impact on the profit (thus are indirect costs) but instead refer to the efficiency of the business.

For example, general and administrative expenses include rent, utilities, insurance, salaries, and more. These are the costs associated with running a business and keeping the employees comfortable.

Marketing costs are also noted in the general and administrative expenses section of accounting. This is because operational fees are a fixed cost that occur with or without sales.

Other examples of common G&A expenses include:

  • Furniture and office supplies
  • Legal costs
  • Culture perks and activities

The costs associated with manufacturing the product or service, for example, as well as a company’s investment expenses are categorized differently from G&A expenses. Fees and interest are also kept as a separate one-line item on any income statement.

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Measuring General and Administrative Expense

To better understand G&A expenses, it’s important to provide more context.

Useless on their own, G&A expenses fit into the overall efficiency of the business through revenue. This helps analysts examine the relationship between the cost of goods sold and operational expenses, without considering ‘selling expenses’.

Business Efficiency Calculation

The easiest way to measure business efficiency relating to general and administrative expenses is to calculate operating costs against company revenue. This is also known as the efficiency ratio. The formula is as follows:

(General and Administrative Expenses / Revenue) x 100

It’s important to note that general and administrative expenses in the calculation refer to constant expenses rather than one-off costs. For example, unusual legal matters which require higher-than-average fees would not be included.

How to Work With the Efficiency Ratio

The efficiency ratio gives an indication of your operating costs as a percentage of overall revenue.

A significant rise in the general and administrative expense to revenue ratio may indicate that the investment in general and administration is not as cost-effective as it should be.

The major benefit of using the efficiency ratio is applying it every quarter to track progress over time. Each moment the business is reviewed, this calculation can determine whether the company is getting closer or further away from running at its most proficient. Typically, the higher the percentage, the better the ratio.

However, since the ratio is a percentage, it can also be used to compare multiple businesses in the same sector. In theory (with access to the right accounts), you could use the efficiency ratio to determine how proficiently your company runs compared to its competitors.

Managing Operating Expenses in Scale-Ups

General and administrative expenses are incredibly important for your scale-up since they are the fixed costs that occur regardless of the revenue generated. These administrative costs are hard to reduce when the normal day-to-day operations are already in place. So, you need to keep them under control as much as possible from the very beginning, while they are being set up, in order to set good habits and teach staff how to conserve the company’s revenue.

In a start-up or scale-up culture, there has been a real shift towards offering the best employee perks and benefits. Many believe that to attract the best talent, you should be growing your reputation through company culture. But this can create a strain on company resources since it’s an expensive way to grow.

Luckily, it’s a really common issue among new-wave businesses, which means there are several solutions depending on the situation of your business.

Apply for Funding

Applying for funding is a great way to increase working capital turnover. Revenue-based funding advances your future profit so that you can access the cash you need to grow, now. It means the operations of a business can continue at the same rate for long-term growth, without a short-term strain on resources.

The global revenue-based financing market size was valued at $901.41 million USD in 2019 and is emerging as a sustainable route for small businesses to expand. So this could be the right route for those who already have the plans to grow and require the means to execute it.

Regulate Team Management

While not every employee has the ability to contribute to sales, they do all count towards the financial costs of running a business. So each member of staff should be able to understand how to access the equipment and resources they require, without going through a complicated procurement process.

Without clear leadership and an outlined process, small expenses can easily slip through the cracks. Spending $50 instead of $20 on a mouse and keyboard sounds like a small difference, but this adds up to major losses across the board. Losses that could be avoided by simply having boundaries outlined.

While scale-ups have traditionally struggled with cash flow, it doesn’t have to be the case for all. If you’d like to learn more about how to access financing options for a scale-up, check our eligibility criteria now.

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Suneha Dutta

Suneha is digital marketing expert, helping innovative companies learn more about Fundsquire's seamless, timely, and innovative funding solutions. She brings diverse experience in creating compelling narratives and content across industries and markets.