General expenses definition
General expenses are overhead costs, such as rent, utilities and office supplies, that help your business function.
What are general expenses?
General expenses are the costs a business incurs as part of its daily operations. They can be found in the selling, general and administrative expenses (SG&A) section of the income statement, with the three together making up a company’s operating expenses.
Examples of general expenses include rent, utilities, postage, supplies and computer equipment.
“General expenses are directly related to the operation of the business,’’ says Alex Barros, Business Advisor with BDC Advisory Services in Edmonton. “Rent, insurance, utilities, office supplies—all of the costs associated with the day-to-day running of the business. It’s also called overhead.’’
What’s the difference between cost of sales, cost of goods and general expenses?
On a company’s income statement, general expenses are categorized as indirect expenses because they do not contribute directly to the making of a product or delivery of a service. They are fixed costs since they tend to remain stable even when production volumes change.
This differs from the cost of sales (COS), what a business spends on the products it purchases from suppliers for resale, and cost of goods sold (COGS), the sum of all direct costs associated with manufacturing a product. Both are variable costs that tend to go up when your sales and production rise or decline when sales and production fall.
“Whatever you manufacture or whatever service you provide to your clients, your SG&A is not related to those products or services,’’ Barros says. “They’re the indirect costs of running a business.’’
General expenses are directly related to the operation of the business.
What falls under general expenses?
While general and administrative expenses are frequently grouped together, the two are quite distinct.
Barros explains the nuance: “General expenses cover overhead costs, while administrative costs relate to the management of the business.” He says administrative costs include staff payroll, professional fees, accountants and lawyers, while rent, insurance, office supplies and computer equipment fall under general expenses.
General expenses include rent, utilities, postage, supplies.
Where do general expenses appear on the income statement?
The graphic below shows where general expenses appear on a company’s income statement and how they are used to calculate total costs, and earnings before interest and taxes.
“If you look below the gross margin (on the income statement), you have the selling, general and administrative costs, which add up to the overall cost of running the business,’’ Barros says.Enlarge the image
What is a typical level of general expenses in a business?
The short answer is … it depends. “Generally speaking, the SG&A can go from 15% to 25% of revenues,’’ Barros says.
However, some businesses may have SG&A expenses ranging from 20% to 30% of sales. “It changes depending on the industry or business that you’re in,’’ Barros adds.
Labour-intensive businesses, like restaurants and hotels, may have higher SG&A expenses, in percentage terms, than capital-intensive industries such as manufacturing, which produce goods.
For example, a restaurant might have COGS or COS of 50%, leaving a gross margin of 50%. In this case, the restaurant may have SG&A expenses of 30%, leaving a 20% operating profit.
Manufacturing could have COGS representing 65%-70% of revenues, leaving 30%-35% left over for SG&A and operating income.
“If your COGS are up to 70%, you have 30% left over. If you have 30% remaining, then your SG&A must be a maximum of 20%. That leaves 10% for operating profit before taxes.’’
Are general expenses tax deductible?
As general expenses are part of the operating expenses of a business, they are deducted from the gross profit (revenues minus the cost of sales or cost of goods sold), to produce the operating profit or earnings before interest, taxes, depreciation and amortization (EBITDA).
Other expenses, like interest, depreciation and amortization, are then deducted to produce the net operating profit or earnings before taxes (EBT).
So, yes, general expenses, like other legitimate business expenses, are tax deductible.
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