Page 79 - Finance for Non-Financial Managers

Siciliano04.qxd 2/8/2003 6:38 AM Page 60
Finance for Non-Financial Managers
60
General and Administrative Expense: Running the Back Office
and Paying the Rent
The third common category of expense is general and adminis-
trative expense (G&A). This is sort of the “all other” category,
because it includes everything not grouped under some other
heading. If it’s not production, research, development, engineer-
ing, sales, or marketing, then it must be G&A. Examples
include the costs of executive salaries, accounting and human
resources personnel, many corporate and employee welfare
costs, and all the costs of supporting the company’s administra-
tive organization. Yep, another cost of doing business.

Operating Income: The Basic Business Bottom Line

The next important measure of overall profitability, operating
income is the profit that comes from doing what the company is
in business to do. This key number is not yet the “bottom line”
we so often refer to, but it’s close. More importantly, it’s usually
the final result of the company’s normal business activities,
before unusual, nonrecurring, or financially related items that
are often considered incidental to what the company is in busi-
ness to do.

Selling a Company Is Not Operating Income
During 2002 IBM was criticized for selling a small subsidiary
company at a profit and recording the profit in its income
statement under general and administrative expenses (G&A). Putting that
profit into its G&A effectively reduced the G&A expense reported for
that year. This is a desirable thing for stockholders to see in a report,
because it implies that a presumably ongoing expense has been
reduced. In fact, this was a one-time-only item, ongoing G&A had not
been reduced, and some stockholders and media reporters felt misled
by the presentation. IBM said the profit was so small it was immaterial.
But the idea still stuck in the minds of investors and the media, proba-
bly because it was seen as still another example of loose financial
reporting by public companies, an issue exploding on the news scene
at the time.