Administrative expenses: What exactly are they? How do you control them?

Good company management involves knowing exactly what your main expenses will be and how they will directly influence your daily operations.

Among the expenses you have to manage are administrative expenses, those that are necessary for you to manage your business.

But do you know exactly what administrative expenses are and how they work? In this article, we'll share this information with you, along with details on how you can improve your company's administrative expenses. Read on and find out.

Administrative expenses: what are they?

Administrative expenses are a company's expenses that are not directly related to production or its core business. They include expenses such as cleaning, maintenance, office supplies, etc.

In other words, administrative expenses are the expenses necessary to manage the business, but which are not directly related to the production or sale of products or services.

It's important to control administrative expenses to ensure the company's financial health. This can be done through financial planning, which should include a forecast of administrative expenses for the period.

Controlling administrative expenses can also help a company reduce costs, which can increase profitability.

Types of administrative expenses and some examples

Administrative expenses can be classified into three main types: overhead expenses, personnel expenses, and other expenses.

Administrative expenses can also be classified according to their nature, as fixed expenses and variable expenses.

General administrative expenses

General administrative expenses are those common to all companies, regardless of size or sector. They include expenses such as:

• Rent and condominium;
• Water, electricity and telephone;
• Internet;
• Office supplies;
• Cleaning;
• Maintenance.

These expenses are necessary to keep the company running, but they are not directly related to the production or sale of products or services. For example, renting an office is a general administrative expense because it is necessary for the company to have a place to operate.

Administrative personnel expenses

Administrative personnel expenses are those related to the company's employees, such as salaries, social security contributions, training and development.

These expenses are necessary to keep company employees motivated and productive. For example, salaries are an administrative personnel expense, as they are the payment employees receive for their work.

Other administrative expenses

Other administrative expenses are those that do not fall into the previous two categories. They include expenses such as taxes and fees, insurance, marketing and advertising, legal services, accounting services, and consulting services.

These expenses can vary depending on the company's specific needs. For example, marketing and advertising expenses are necessary to promote the company's products or services.

Fixed administrative expenses

Fixed administrative expenses are those that do not vary according to the volume of production or sales.

These expenses are typically calculated based on the company's size or number of employees. For example, office rent is a fixed administrative expense, as the rent doesn't change based on the company's sales volume.

Variable administrative expenses

Variable administrative expenses are those that vary according to the volume of production or sales.

These expenses are usually calculated based on the company's production or sales volume.

For example, office supplies are a variable administrative expense, as the value of office supplies consumed varies according to the company's sales volume.

Cleaning supplies, which need to be purchased, but the volume and cost will vary each month.

Administrative and operational expenses: what's the difference?

Administrative and operating expenses are accounting categories that represent different types of expenses incurred by a company.

Administrative expenses, as already mentioned, refer to costs related to the company's general management and administration. These expenses are associated with the support and management of the company as a whole, not directly linked to the production or sale of goods and services.

Operating expenses refer to the costs incurred in the main business activities, that is, those related to the production and sale of goods and services.

Costs of raw materials, direct labor, sales, marketing, transportation and distribution expenses, depreciation of production equipment, among others are examples of operating expenses.

These expenses are directly related to the company's operational functioning, directly impacting the production and sale of products or services.

Thus, while administrative expenses are more focused on the general management and administration aspects of the company, operating expenses are associated with the main activities that generate revenue.

Both are crucial to the efficient and sustainable functioning of a company, and are recorded separately in the financial statements for better analysis and understanding of the costs involved in the different aspects of the business.

And what is the difference between fixed and administrative expenses?

The main difference is in the purpose of the expense: “fixed expenses” is a categorization based on the stability of costs, while “administrative expenses” is a categorization based on the function of these costs, which are related to the general management and administration of the company.

In terms of function, expenses can be administrative or operational. In terms of stability, they can be fixed or variable.

Thus, you'll have fixed administrative expenses, that is, expenses necessary for running the company and that will always have the same cost. Likewise, you'll have variable administrative expenses, which will have different costs per month.

Understand the importance of reducing administrative expenses

Reducing administrative expenses is an important practice for companies for several reasons, contributing to operational efficiency, financial sustainability, and profit maximization.

There are several reasons why you might consider making this reduction in your company:

• Increased Profitability: Reducing administrative expenses directly contributes to increased profitability, as reduced costs mean that a greater percentage of revenue is converted into net profit.
• Improved Competitiveness: Companies with lower administrative expenses can offer more competitive prices in the market. This can be a significant advantage in highly competitive sectors, attracting more customers and increasing market share.
• Financial Flexibility: Reducing administrative expenses creates additional financial headroom, giving the company greater flexibility to invest in strategic areas such as research and development, market expansion, or infrastructure improvements.
• Adapting to Economic Changes: In times of economic uncertainty, the ability to quickly reduce administrative expenses can help a company adapt to changing market conditions, avoiding more severe impacts on its finances.
• Investments in Innovation: By freeing up financial resources through reduced administrative expenses, the company can direct these resources toward innovative initiatives that drive growth and improve long-term competitiveness.
• Operational Efficiency: Reviewing and optimizing administrative processes often goes hand in hand with cost reduction. This can result in greater operational efficiency, reduced redundancies, and improved employee productivity.
• Financial Sustainability: Keeping administrative expenses under control contributes to the company's long-term financial sustainability. This is crucial for facing unforeseen challenges and ensuring stability during less favorable economic periods.
• Focus on Main Activities: Reducing administrative expenses allows the company to focus its resources and efforts on core activities, such as production, sales, and customer service, increasing efficiency in key areas of the business.

How to reduce administrative expenses?

Operational efficiency and financial management are crucial elements for the success of any company.

Reducing administrative expenses is a strategic approach that not only drives profitability but also strengthens organizational resilience.

So, we're going to give you some tips to reduce your administrative expenses:

Detailed Assessment of Administrative Costs

The first step to reducing administrative expenses is a thorough assessment of all costs associated with managing and administering the company.

Identifying and categorizing each expense allows for a complete understanding of spending, enabling informed decisions about where to cut or optimize.

Therefore, you must observe and categorize all fixed and variable expenses, analyzing how much the company invests per month in administrative expenses.

Automation of Administrative Processes

Automating routine tasks and administrative processes can result in significant efficiency gains and cost reductions.

Automated systems not only reduce manual workload but also minimize errors, freeing up resources for more strategic activities.

This is a great strategy for reducing administrative expenses in the long run, as implementing a system often incurs an initial cost. However, over time, this cost will lead to significant cost savings and improved spending accuracy.

Contract Review and Rate Negotiation

Regularly reviewing supplier contracts and negotiating rates can lead to substantial savings.

Companies often automatically renew contracts without considering more cost-effective alternatives. Proactive negotiation can result in more favorable terms and reduced costs.

Therefore, it is important to talk to third parties so that you can negotiate contracts and, therefore, reduce costs.

Financial Management Training for Employees

Investing in financial management training programs for administrative staff can have a significant impact on cost awareness.

When employees understand the importance of controlling expenses and proactively contribute to efficiency, the organizational culture aligns with cost reduction objectives.

Therefore, investing in good training and qualified professionals will, over time, lead to a reduction in administrative expenses.

Efficient Use of Information Technology (IT)

Efficiently implementing IT solutions can simplify processes, improve collaboration, and reduce administrative costs.

Tools like financial management software, unified communications systems, and cloud storage can transform the way administrative operations are conducted.

This saves you time and efficiency, minimizes errors, and reduces various costs that would otherwise be incurred by the company.

Centralization of Administrative Operations

Centralizing administrative operations, when possible, can reduce costs associated with multiple locations. By consolidating administrative functions, companies can eliminate redundancies, optimize resources, and improve coordination between teams.

Therefore, when conducting a comprehensive analysis of administrative expenses, you should consider which operations will be most efficient if centralized.

Energy Saving and Sustainability Policies

Implementing energy-saving policies not only contributes to sustainability but also reduces operating costs.

Initiatives such as using efficient lighting, energy-efficient equipment, and conservation practices can result in significant savings in the long run.

For this practice, it is essential to raise awareness among all company employees so that they participate in this action.

Continuous Monitoring and Adjustments

Reducing administrative expenses isn't a one-off action, but an ongoing process. Establishing a constant monitoring system allows for the quick identification of areas requiring adjustments.

The flexibility to adapt strategies as needed is essential for long-term success.

Reducing administrative expenses is not just a cost-cutting measure, but a fundamental strategy for sustainable growth. Adopting efficient practices, investing in technology, and fostering an efficiency-driven organizational culture are crucial steps toward achieving this goal and ensuring the company's long-term success.

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