Key Takeaways
- SG&A covers non-production operating expenses.
- Includes selling, general, and administrative costs.
- Impacts operational efficiency and profitability.
- Reported below COGS on income statement.
What is Selling, General, & Administrative Expense (SG&A)?
Selling, General, & Administrative Expense (SG&A) represents the operating costs a company incurs to promote, sell, and deliver products or services, along with managing daily operations. Unlike direct production costs such as cost of goods sold, SG&A includes expenses related to marketing, salaries, rent, and corporate functions under generally accepted accounting principles (GAAP).
These expenses are critical in evaluating a firm's operational efficiency and appear on the income statement below gross profit, impacting overall profitability and cash flow management.
Key Characteristics
SG&A encompasses diverse expenses essential for running a business beyond production costs. Key characteristics include:
- Selling Expenses: Costs tied to sales generation like advertising, sales commissions, marketing, and shipping.
- General Expenses: Overhead such as rent, utilities, insurance, and office supplies necessary for maintaining operations.
- Administrative Expenses: Expenses for executive management, legal and accounting fees, human resources, and IT support.
- Variable vs Fixed: Selling costs often vary with revenue, while general and administrative tend to be more fixed.
- Impact on Profitability: Effective SG&A control supports margin improvement and operational scaling.
How It Works
SG&A expenses are tracked and reported as a single line item or broken down on the income statement, helping you analyze cost structure and operational efficiency. Companies often use data analytics to monitor SG&A trends and identify opportunities for cost reduction, such as automating administrative tasks or outsourcing non-core functions.
Managing SG&A involves budgeting these expenses relative to revenue to maintain a healthy SG&A-to-sales ratio. For example, technology firms like Microsoft typically have higher SG&A due to substantial sales, marketing, and IT infrastructure costs compared to manufacturers.
Examples and Use Cases
Understanding SG&A can help you evaluate how companies allocate resources to grow and operate efficiently. Some practical examples include:
- Retail: Costco allocates significant SG&A to employee salaries, facility maintenance, and marketing campaigns to enhance customer experience.
- Technology: Microsoft invests heavily in administrative support and sales teams, reflecting in its SG&A expenses.
- Online Retail: Amazon reports SG&A including payroll, facilities, and corporate services, crucial for its expansive operations and logistics.
Important Considerations
When analyzing SG&A, consider that high expenses may signal growth investments or inefficiencies, so benchmarking against peers and revenue is essential. You should also be aware that some costs classified as SG&A can shift depending on accounting practices, such as sales commissions sometimes moving to cost of goods sold.
Effective SG&A management requires ongoing review, leveraging tools like zero-based budgeting or shared service centers, and understanding the role of C-suite leadership in controlling these expenses to safeguard profitability.
Final Words
SG&A expenses directly affect your company’s profitability by influencing operational efficiency beyond production costs. Regularly reviewing and benchmarking these expenses against industry standards can help identify cost-saving opportunities and improve overall financial health.
Frequently Asked Questions
SG&A refers to the operating expenses a company incurs to promote, sell, deliver products or services, and manage daily operations, excluding direct production costs like cost of goods sold and research & development.
Selling expenses include costs directly or indirectly tied to generating sales, such as advertising, marketing, sales commissions, sales staff salaries, travel, and product shipping.
General expenses cover overhead costs essential for basic operations like rent, utilities, insurance, office supplies, equipment, and facilities maintenance, which are mostly fixed and not directly linked to sales.
Administrative expenses include costs for management and support functions such as executive salaries, HR services, accounting and legal fees, IT infrastructure, and professional consulting.
SG&A impacts profitability and the break-even point, and since companies can control these costs through budgeting or outsourcing, analyzing SG&A helps measure operational efficiency and optimize scalability.
SG&A is shown below the cost of goods sold on the income statement, either as a single line item or broken down, and it is deducted from gross profit to calculate operating income.
Yes, certain SG&A items like sales commissions may be shifted to cost of goods sold if they are directly traceable to sales, reflecting their variable nature connected to revenue generation.
Retail companies often have significant selling expenses such as advertising and commissions, tech firms usually have higher SG&A due to sales, marketing, and IT costs, while manufacturers typically maintain lower SG&A levels.
