What are Administrative Expenses?
Administrative expenses refer to the costs incurred by a company or organization that include, but are not limited to, the salaries and benefits of the administrative workers within the company or organization, as well as rent and managerial compensation.
In the context of accounting, administrative expenses can be considered an indirect expense because they are not directly related to the manufacturing of a product, such as an engineer or assembly line worker.
Understanding Administrative Expenses
Administrative expenses can be found on the income statement for the period upon which they occurred; however, they do not appear under the period for which they were paid. As a business scales and grows, like in the case of a tech startup, the administrative expenses tend to stay stable and proportional, while the front-line workers and engineers tend to scale up in size, e.g., when there is an increase in production or a push to develop a new revolutionary piece of software/hardware.
Below is a more comprehensive list of different types of administrative expenses, and what types of expenses fall into a different category:
1. Administrative Expenses
- Managerial team
- IT team
- Executive compensation
- Rent of equipment and buildings
2. Non-Administrative Expenses
- Sales Team
Administrative Expenses in Practice
If you are a small business owner or are attempting to launch a startup, understanding why operational, administrative, and sales expenses are often separated is crucial in budgeting and forecasting. Understanding where your expenses will grow and where they will stay stagnant will help you allocate capital and grow the business.
It can also help existing and potential investors see how you manage capital and that you, as a savvy business owner/entrepreneur, know how to properly scale and allocate resources.
Understanding Administrative Expenses as an Investor
As an investor looking to grow their savings, understanding a company’s administrative expenses can help you better contextualize the cost of goods sold. It can help you know what proportion of their capital a company is spending on such expenses relative to their other costs, as well as to their relative cash position.
It is important to better understand and qualify a potential investment and ascertain whether a company’s operations are sustainable or headed towards financial distress. ROI is critical to any investor, and knowing how a company is allocating their administrative expenses is a crucial facet of being a successful and savvy investor.
Role in Audit
If your company successfully employed an accounting information system and is currently undergoing an audit, it is possible that the auditors may use the administrative expenses to trace the allocation of capital and payments to management and leadership. It can be done for a myriad of reasons, including simply a routine randomized audit.
Putting it Into Context: Building Compliance
The successful deployment of an accounting information system can allow a company to better track, scrutinize, and provide transparency towards its administrative expenses. It allows for greater trust and compliance and will boost investor and public confidence.
A well-categorized income statement that includes administrative expenses is a central facet for any company to build a culture of compliance that reflects inward and to the investing public at large.
CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.
In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful: