Administrative costs

Administration cost - needed but keep it low

Administrative costs is a bit popularly said cost of “office work” in the company.

The costs go to various activities that support the production and delivery of the company's products or services. They are not included in the cost of production (OPEX) as they do not directly contribute to production. Examples of administration costs are IT expenses, subscriptions to magazines, software, etc., consulting services such as lawyers and accountants.

How are administration costs analyzed?

A typical approach is to assess costs periodically (annually, quarterly). They rarely change drastically from month to month.

Then you assess whether there are items that have increased more than expected / desired, or whether significant functions have been cut off.

Another method may be to compare with other similar companies based on size and industry. This gives you a good impression of whether your own costs are high or low.

Especially in some industries, administration costs are calculated in relation to turnover. Thus, one can also compare between companies of different size. A smaller business can easily have a higher rate than a large one. This is because the price is rarely fully variable.

Consider the following to analyze the cause of a high value:

  • Are there subscriptions that no one uses? Or to support features / systems we no longer use?
  • Do we insure things, responsibilities or people who are no longer in the company? Do the sums reflect the real value of things?
  • Do we use consultants for tasks that our own employees could perform just as well?

How to optimize administration costs?

The goal is to keep administrative costs at the lowest possible level, where the necessary support for the company's operations still works. It is about using what is necessary, neither more nor less. One must therefore be careful that costs just continue year after year because no one actively takes a stand on them.

In this context, a method such as Nulbase budgeting can provide valuable insight. In short, it means pretending to remove all costs, and then putting them back on one at a time. If you can explain what a cost is used for, take it back. If no one can tell why a cost should be included, it is removed. The result is that you get rid of unnecessary costs.

Do not be afraid to remove eg subscriptions - they can usually be re-subscribed. Sometimes it's the only way to find out if they're actually used for something. If they are used, someone will probably complain about it.

Synonyms

  • Overhead

References

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