Let’s Talk Administrative Costs

Every business has them, regardless of what type of business you’re in – they’re Administrative Costs. Also referred to as business costs, general expenses and overhead, they are the Cost of Doing Business. Sometimes it is a big cost!

Administrative Costs - also called general or business expenses, they refer to the cost of doing business.

Administrative or overhead expenses are the necessary “background” costs that keep the busines functioning. These administrative costs are separate from direct costs, aka the costs of producing products or creating services to offer. Overhead costs cannot be directly linked to the effort to manufacture products and sell services. Most of them are deductible.

Examples of Overhead Costs

Rent is an example of an administrative cost. Regardless of whether you’re actually selling a product or not (maybe you took a month off), you still have to pay rent or lose your space. Utilities, internet, and telephone costs all fall in this category as well.

Also in this category is insurance, merchant fees, bank fees, office supplies, postage, printing and copying, payroll fees, some taxes, some software costs, legal and accounting expenses, human resources costs. Finally, salaries and payroll taxes for people not directly involved in producing the goods and services that you offer.

Fixed, Variable, and Semi-Variable

Sometimes it is helpful to divide administrative costs into Fixed, Variable and Semi-Variable expenses. Dividing costs into smaller buckets helps you plan and budget for expenses. Administrative costs are also grouped this way for additional clarity into what costs your business has and why you have them.

Variable costs don’t change from month to month. For example, rent, insurance, salaries, telephone and internet, and many software costs don’t change month to month. You can make a list of these known expenses and put them into a budget. This way you can feel confident you know how much you’re spending.

Variable costs are just that – they change from month to month. Maybe you have a legal issue that pops up, so there’s a fee involved. Maybe your office needs repainting. Office supplies are something you can put a maximum cap on, but they’re not going to be exactly the same each month. Postage costs, merchant and bank fees, tax preparation, tax payments and similar are also variable and sometimes non-recurring costs. Budgeting for these things involves making a reasonable guess, and then putting placeholders in your budget for them.

Semi-Variable expenses are those which can change, but are usually things you can plan for. Utilities, for example, are variable costs but you generally know about how much they’ll be. Salary increases are something you can plan for. Hourly personnel have variable hours and therefore variable pay, but you can plan for that variance.

Tricky Administrative Costs

I’ve mentioned taxes a couple of times, but taxes are expenses that sometimes don’t show up in the P&L. For pass-through businesses, income tax is sometimes a distribution to owners. It’s a variable overhead expense that doesn’t appear on the P&L. Business taxes charged by some localities are more straightforward to deal with and count as variable overhead costs, and appear on the P&L.

Business owners also need to budget for distributions to themselves, another cost that doesn’t appear on the P&L. Dividends and loan payments also fall in this category. It’s important to review your Balance Sheet and Cash Flow in addition to your P&L to identify all the different types of expenses and cash outlays that your business has. Don’t be caugh without a plan for non-P&L expenses.

Direct Costs

Direct cost are expenses that directly relate to creating and manufacturing a product or providing a service. Advertising and marketing, costs of goods sold, equipment and many other things fall in this category. Your direct costs likely depend on what it is that you sell. Any cost you have that feeds directly into producing your product or service and getting it onto the market is a direct cost.

For example, if you’re a printing company, you likely have printing equipment, paper, delivery fees and ink charges. In another business, these would be (a) much smaller costs and (b) overhead costs. Since you’re in the printing business, though, these are direct costs.

Another example is the accounting business. For most business, Quickbooks fees count as an overhead cost. For an accounting firm they are a direct cost of doing business, as are some tax filing and reporting fees.

Tax Implications of Administrative Costs

Many administrative expenses are tax deductible. The IRS considers these expenses “reasonable, ordinary and necessary”, and they are therefore deductible in whole or in part. It is important to remember, though, that if you expect your costs to be deductible you must do certain things. First, keep a current (not after-the-fact) record of them – do your bookkeeping! (do your bookkeeping!) Second, you must have a receipt for them. You can find more information about what business expenses are deductible in IRS Publication 535, which is updated annually as they laws change.

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