Key Takeaways

  • Selling, general, and administrative (SG&A) expenses include non-production costs such as rent, marketing, and administrative salaries.

  • These expenses are divided into two categories: selling expenses (direct and indirect) and general and administrative (G&A) expenses like rent, insurance, and utilities.

  • These expenses directly affect profitability and are a crucial line item on income statements, impacting operating profit and net income.

  • Managing these costs effectively improves profitability and cash flow.

  • Investors use the SG&A-to-sales ratio to evaluate a company’s financial efficiency; lower ratios indicate better cost control.

  • Regular audits and strategic investments help balance SG&A expenses, promoting business growth while keeping overhead manageable.

With a comprehensive understanding of SG&A expenses, you will have a better understanding of where to spend and where to save to boost your company’s profitability without sacrificing performance. 

What does SG&A stand for? Selling, general, and administrative expenses—expenses that often fall under what many refer to as "overhead," which refers to the cost of ongoing business expenses that aren't directly attributed to the creation of products or services.  

SG&A costs are all the non-production expense items that organizations typically incur. And as you can imagine, they play a big part in a business’s profitability.  

In this article, we’ll discuss what SG&A stands for, break down its components, how to calculate it, and explain why controlling your SG&A can affect your business’s overall success.

Components of SG&A Expenses

We can divide SG&A expenses into two primary categories: selling expenses and general and administrative expenses. 

Selling Expenses

These are costs directly linked to the selling of your products or services. 

Selling costs can further be divided into: 

  • Direct Selling Expenses: These occur at the time of sale, such as sales commission or delivery costs.

  • Indirect Selling Expenses: Expenditures incurred before or after the sale, such as advertising, marketing, and travel expenses for sales meetings. 

General and Administrative (G&A) Expenses

G&A expenses are overhead costs to keep a business's daily operations running. These typically include: 

  • Rent and utilities

  • Insurance

  • Legal fees, including in-house legal counsel

  • Salaries for non-production staff

How to Calculate SG&A Expenses

You can calculate SG&A by adding up all the expenses not related to production your business incurs over a given period. These costs are listed on the income statement and subtracted from gross profit to calculate your operating profit.

Formula for SG&A Calculation:

SG&A = (Direct Selling Expenses + Indirect Selling Expenses + G&A Expenses)

SG&A and Its Impact on Financial Statements

What you spend on SG&A directly affects your profitability. You will also need your SG&A cost values to calculate several vital financial metrics. 

For example, gross profit minus SG&A equals your operating profit (or earnings before interest and taxes [EBIT]).

SG&A vs. Operating Expenses

There are essential differences between SG&A and general operating expenses. The former refers to production-related costs but not specifically to the cost of goods sold.  

In contrast, operating expenses refer to all those costs needed to operate the business, including production and non-production-related ones. These can be fixed costs or variable costs. 

Here are a few examples: 

  • SG&A: Marketing, rent, and administrative salaries.

  • Operating Expenses: Production-related costs (including raw materials and manufacturing labor).

Importance of Managing SG&A

Properly managing SG&A directly influences your business's profitability. If you can control SG&A spending without sacrificing performance, you strike a balance between maintaining operational efficiency and maximizing profitability.  


Strategies to Reduce SG&A

Here are a few strategies to help you reduce SG&A spending without sacrificing performance: 

  • Outsourcing Non-Essential Functions: Companies can reduce overhead by outsourcing services like accounting or IT.

  • Automation: Investing in software that can simplify activities, such as payroll or marketing, to cut back-office costs.

  • Monitoring Marketing Spend: Marketing is important, but closely monitor your ad campaigns to be sure you're getting a good ROI on your ad spend.

SG&A in Financial Statements

SG&A is a critical line on your income statement, and it gives investors and financial analysts a clear view of a company's operational cost structure.  

Given that SG&A impacts operating profit, effective SG&A management tells investors a lot about a company's financial health. 

Why Investors Pay Attention to SG&A

The SG&A-to-sales ratio is a measure investors use to evaluate a company's financial efficiency. If the SG&A ratio is too high, this indicates overspending on overhead.  

If your SG&A costs concern investors about your company’s performance and profitability, this can hurt your stock price. Investors favor companies that spend less on SG&A.

Industry-Specific SG&A Variations

Different industries have different SG&A benchmarks.  

Here’s how SG&A expenses may vary across three major industries: 

  • Retail: Retail businesses often have higher selling expenses due to commissions, advertising, and storefront rent.

  • Tech: G&A costs can be high relative to gross profit in the technology sector because sales staff are paid well (high salaries) and R&D costs are high.

  • Manufacturing: These firms will likely have lower SG&A because production is their dominant cost driver, and less emphasis is placed on selling and administrative functions.

Optimizing SG&A for Business Growth

Balancing SG&A expenses is essential for long-term business growth.

A few best practices include: 

  • Regular SG&A Audits: A periodic review of SG&A expenses can help the firm identify unnecessary costs or areas for improvement. SG&A must be carefully controlled, or it will eat into profits. 

  • Scaling Efficiently: As your company grows, maintaining control over SG&A costs is vital to prevent profitability from being compromised.

  • Invest to Grow: Cutting costs can be beneficial, but investments are also critical to a business’s success. Intelligent investments in marketing or technology might get your business growing, and you can then recoup your investments with higher revenue.  

Final Thoughts on Managing SG&A for Financial Success

SG&A costs can be the difference between a company being profitable or not. Keeping these costs under control will ensure your business stays financially healthy and operationally efficient.  

Post a job on UpCounsel to speak with a business lawyer in your state to help with any legal or compliance concerns related to managing your SG&A expenses.

Frequently Asked Questions

What Is The Difference Between COGs And SG&A?

Cost of Goods Sold, or COGS, refers to the direct costs of manufacturing a product or providing a service. SG&A includes all other non-production costs, such as marketing and administrative costs.

How To Forecast Selling, General, and Administrative Expenses?

Depending on a company's financial strategy and historical performance, the SG&A figure can be estimated as a proportion of sales, a growth rate, or a fixed value.

What are Considered SG&A Expenses?

Rent, salaries paid to non-production staff, legal expenses, marketing expenditures, and office supplies are common SG&A expenses. Together, these can represent a significant percentage of a company’s expenditures.

Are Salaries COGS or SG&A?

Salaries for general and administrative personnel (non-production employees) are listed under SG&A, while salaries for production employees would be listed under COGS.