Selling, General & Administrative (SG&A) expenses are the costs a company incurs to promote, sell and deliver its products and services, as well as to manage day-to-day operations. Understanding and controlling SG&A can help companies manage their overhead, reduce costs and sustain profitability.
What Is Selling, General & Administrative Expense (SG&A)?
SG&A expenses comprise all the day-to-day operating costs of running a business that aren’t related to producing a good or service. This includes a wide range of expenses, such as rent, advertising and marketing, and salaries of management and administrative staff. SG&A does not include the direct costs of producing goods or acquiring goods for sale, which are calculated separately as cost of goods sold (COGS). It also excludes research and development (R&D) costs. The amount that a company spends on SG&A may play a key role in determining its profitability.
- Selling, General & Administrative expenses (SG&A) include all everyday operating expenses of running a business that are not included in the production of goods or delivery of services.
- Typical SG&A items include rent, salaries, advertising and marketing expenses and distribution costs.
- Analyzing SG&A can help companies reduce overhead costs and increase profitability.
Selling, General & Administrative Expense (SG&A) Explained
Many SG&A line items, such as rent and base salaries, are fixed costs that must be paid regardless of production or sales volumes. Other SG&A costs, such as distribution costs, are variable and typically change as sales volumes rise or fall. Still others may be semi-variable, including base costs plus an additional cost component that varies based on usage. Utilities are a classic example of a semi-variable cost: You pay the power company a flat rate for monthly service, plus additional costs for each kilowatt hour you use. Especially for businesses where most SG&A costs are fixed, SG&A is used to understand overhead or the costs a business must meet to break even.
What Are Some SG&A Typical Expenses?
Although it may vary depending on your industry, some common SG&A expenses include the following:
- Salaries, wages and benefits for executives and staff not directly involved in manufacturing or other production tasks
- Insurance payments
- Marketing, advertising and promotion expenses
- Accounting costs
- Legal costs
- Office supplies
- Equipment not associated with manufacturing, such as office computers
Types of Selling, General & Administrative Expense (SG&A)
The following sections take a closer look at examples of SG&A expenses, broken down by those associated with selling and those considered general & administrative expenses. Managers might decide to report these categories separately—for example, if a business has inherently high selling expenses that they want investors to understand.
Selling Expenses in SG&A
Selling expenses included in SG&A are often divided into direct and indirect costs.
- Direct selling expenses are incurred when a unit of a product or service is sold. For example, once a product is sold, it must be packed and shipped. If sold by a commissioned salesperson, representative or partner, a sales commission may be due. Unlike many SG&A expenses, direct selling expenses are often variable.
- Indirect selling expenses are costs generated before or after a sale. These typically include a company’s marketing, advertising and promotion expenses, including web and social media costs. They also include base salaries paid to salespeople whether or not they close business, as well as travel and other costs associated with sales activity that may or may not lead to revenue.
General and Administrative Expenses (G&A) in SG&A
General and Administrative (G&A) expenses are the day-to-day costs a business must pay to operate, whether or not it manufactures products or generates revenue. Typical G&A expenses include rent, utilities, insurance payments, and wages and salaries for administrative and management staff other than salespeople. Other costs may include ongoing information technology infrastructure costs, accounting and legal costs, human resources services and the purchase or rental of equipment that’s not used for manufacturing or sales.
Operating Expenses vs. SG&A
SG&A is part of a company’s operating expenses, and some companies, especially smaller firms, use the terms SG&A and operating expenses interchangeably. However, U.S. accounting standards treat R&D as a separate operating expense that’s not part of SG&A. Depreciation is typically reported as a separate line item within operating expenses, too. Both operating expenses and SG&A are key components of tracking net income, or what’s left over after subtracting expenses and taxes from revenue.
How to Calculate SG&A
To calculate SG&A costs, first identify each category of expense you incur that is not directly linked to delivering a specific product or service. As discussed earlier, consider breaking out each element: selling, general and administrative. Your accounting software and/or your accountant may offer advice on what to include in each category. Line items for each may include (but are not limited to) the following:
Financial ratios are ways to track and measure progress toward goals. They can simplify the data and make it easier to understand for potential lenders, as well as your own management team. SG&A is just one of several financial ratios you might consider when creating key performance indicators, or KPIs. To calculate total SG&A expenses, sum all related line items:
SG&A = Selling expenses + general & administrative expenses
To see where SG&A fits on a typical income statement, see this simplified extract from Caterpillar’s 2019 income statement (all numbers in millions):
What Is the SG&A Sales Ratio (or Percent of Sales Method)?
Companies and their investors often measure the ratio of SG&A expenses to sales revenue as one way of understanding the health of a business and managing its financial risks. The information for all these and other financial ratios will be found on your financial statements. The formula for the SG&A to revenue ratio is:
SG&A Sales Ratio = (Total SG&A expenses / total sales revenue) x 100
Why Do You Need to Know SG&A for Your Business?
If the ratio of SG&A to sales revenue increases over time, it may become more difficult to earn a sustainable profit. Reducing SG&A lowers the level of revenue needed to earn a profit, which is why companies often focus on SG&A when attempting to cut costs.
After a merger, for example, businesses often focus on reducing SG&A by consolidating duplicative functions and reducing headcount. Some firms also manage SG&A by outsourcing functions or relying more on temporary workers.
Benefits and Limitations of Selling, General & Administrative Expenses (SG&A)
Monitoring SG&A expenses is one way to control costs: An increase in expenses may indicate the need to cut selling or administrative costs.
Typical SG&A ratios vary widely by industry. For instance, energy and materials firms often run SG&A ratios of 10% or less, while industrial manufacturers often average 10%–20%. SG&A ratios of 25% are not uncommon for consumer product firms. Pharmaceutical, biotech and health care companies often report SG&A expenses of 40%–50% or more, sometimes due to high sales and marketing costs. For these reasons, SG&A expenses should be compared with similar companies, if possible.
Another reason to be careful when making SG&A comparisons: Not all companies report SG&A expenses precisely the same way. For instance, most companies subtract depreciation within SG&A, but some don’t. Companies may make different judgments about which employee salaries should be directly attributed to product manufacturing and which are SG&A. And as discussed earlier, some companies break out G&A costs separately from selling costs while others do not.
Companies may need to consider the trade-offs when attempting to control corporate costs by reducing SG&A. For example, some companies aggressively reduce spending on sales staff or advertising to achieve short-term improvements in profitability, but those benefits may be achieved at the risk of long-term revenue declines and a less sustainable business. So, too, strategies based on payroll reduction and greater use of temporary workers may sometimes reduce employee loyalty and sacrifice the productivity experienced employees can provide. As your business grows and matures, strategic business decisions will increasingly be made with finance as an important factor. Managerial accounting can help you see the comprehensive picture and effectively drive the decision-making process
How to Forecast SG&A
To accurately project future SG&A costs, some companies attempt to forecast each individual component. Some fixed costs, such as office rent, may be quite predictable. Other SG&A costs, such as shipping costs or sales commissions, will vary. Still others, such as the costs of renting new retail locations or deploying a new website, are linked to business strategy, and accurate SG&A projections depend on researching the potential costs. Fast-rising SG&A costs make it more difficult to sustain profitability, so if a company projects SG&A cost increases will outstrip revenue growth it may decide to prioritize cost-control measures for the relevant business areas.
Are SG&A Expenses Tax Deductible?
When SG&A expenses are “ordinary” and “necessary” to your type of business, the IRS typically allows you to deduct them for the tax year in which they were incurred.
To correctly track expenses and other important financial data, consider purchasing small business accounting software. It expedites and accelerates financial processes while ensuring accuracy and compliance. Some of the best business accounting software solutions also offer free accountant training programs to help you stay up to date on the latest functionalities and take advantage of the software. Especially as your company grows, tracking expenses can be a time intensive process and prone to error if done manually. Even small businesses and startups can benefit from accounting software that can unify your financial data, including expenses, sales and even payroll.
SG&A reflects the non-production, everyday expenses of running a business, such as costs to promote, sell, and deliver its products and services, as well as rent, salaries and advertising and marketing. For many companies, managing SG&A is key to controlling costs and sustaining profitability. Business accounting software can help accurately and efficiently track your SG&A and other expenses and help you improve your company’s financial health.