Every business incurs selling, general and administrative expenses (SG&A), which are often a part of the business’s operating expenses. SG&A can be compared to revenue to indicate whether the business is spending too much (or too little) on operating costs compared to how much product it’s selling or services it’s providing.
What Are Selling Expenses?
The S stands for selling expenses, which include the cost to promote, sell and deliver goods and services. Selling expenses are things like sales collateral, travel to customers or potential customers, advertising costs and the salaries and commissions of sales employees.
- Selling expenses are different from the expenses that make up the cost of goods sold (COGS) or cost of sales.
- Selling expenses are an area that should be monitored closely for growth opportunities and cost savings.
Selling Expenses Explained
COGS are all of the direct costs associated with producing or acquiring products for sale. For a manufacturer, this would include raw materials, the costs associated with getting the materials to the manufacturing site and the wages of the people making it.
Selling expenses, on the other hand, are indirect costs — the things needed to sell the finished product or service. Selling expenses include the costs associated with getting orders for the products or services as well as getting those things into the hands of the customer, as opposed to COGS, the explicit costs of producing the product or service. The salesperson’s salary, that person’s commission, the cost of any marketing materials they use in the sale, the cost of travel associated with customer visits and delivery costs are all selling expenses.
Selling Expenses vs. Administrative Expenses
Selling, general and administrative (SG&A) expenses include — in addition to the S from selling — general and administrative expenses. Often, general and administrative expenses are pushed under the moniker of “corporate.” They’re the costs associated with people and infrastructure that isn’t in the field selling things or performing the services, but provide support for all of those activities. These include human resources, IT, accounting, finance and billing functions, as well as the infrastructure for the business — rent, utilities, and more.
Why Are Selling Expenses Important for Businesses to Track?
By tracking selling expenses, a business can:
Correctly assess its tax burden: Tracking selling expenses is important for tax compliance and for ensuring the business is correctly calculating deductions to reduce its tax burden.
Control spending: While the general and administrative bucket is often where companies start cost reduction measures, the items in the selling expense bucket are some of the biggest opportunities to better control costs. For instance, travel expenses are a selling expense that represents a cost containment opportunity. Accenture research shows that travel expenses comprise 10% to 12% of a business’ annual budget and represent about 1% of its revenue.
Start to develop KPIs: Accurate selling costs help the business work toward getting key sales metrics such as the Customer Acquisition Cost (CAC). That’s calculated by dividing the total cost of getting customers by the total number of customers acquired for a given time period.
Types of Selling Expenses
Let’s look at types of selling expenses using the fictional business, Bella’s Ballet Supply.
Selling expenses in this example include the salesperson’s salary, commission, the shipping and transportation costs of delivering the slippers, money spent on creating marketing materials and advertising.
Examples of Selling Expenses
Let’s consider the differences in operating expenses required to run Bella’s Ballet Supply Company. Bella’s corporate headquarters is in New York City and it has a very small manufacturing facility in Stamford, Connecticut. Bella has a staff of 10 people at corporate that cover all typical business functions plus five sales representatives.
One of the sales representatives recently traveled to Green Bay, Wisconsin and sold 100 pairs of ballet slippers. She brought a laptop computer to show a video testimonial from a happy customer, and handed out printed marketing materials. That sale satisfied the quota for a sales commission, which was processed by an accountant at headquarters. The slippers were made and sent to the customer.
In this example, the salesperson’s salary and commission are selling expenses. The cost of marketing materials is as well. The salaries of people who work at corporate but aren’t in sales or marketing functions, as well as depreciation on the computer the sales rep used, are general and administrative expenses. Note, the depreciation of the computer would be an expense, but not the computer itself — this may seem like semantics, but assets and expenses are separate and distinct categories.
The costs associated with making the slippers fall under cost of goods sold, while the costs of shipping them to the customer is a selling expense.
Selling Expense Analysis
In addition to reducing labor and materials costs, SG&A expenses are an excellent place to look for savings opportunities because they take up so much of a company’s operating budget. Their mention is a staple on earnings calls, lately in the context of a phrase like, “discretionary spending cuts,” in relation to those line items. Controlling these costs as demand for products or service grows is crucial to a business’ profitability, but finding a balance is crucial to sustaining that growth.
One way to use selling expenses as part of a profitability analysis is the ratio of SG&A to sales. Divide SG&A by gross profit (revenue minus the cost of goods sold) to get the percentage of the gross profit that is going into SG&A expenses. There is no hard and fast number on what that should be. It will differ according to the industry as well as the consistency of the gross profit number overall.
However, within the SG&A bucket, one study showed that best in class wholesale distribution companies concentrate spend in the selling category, including making investments in the sales force, account management and technology to support it all.
Is Depreciation a Selling Expense?
What if in that example Bella’s purchased a truck to deliver the slippers to customers within 500 miles of Stamford to decrease its 3rd party logistics costs? Would depreciation be a selling expense in that case?
The truck itself would be a depreciated expense under selling expenses. If the truck cost $40,000 and it was depreciated over five years, each income statement would reflect depreciation expense of $8,000 a year.
How to Calculate Selling Expenses for Your Business
The general ledger will contain all of the information needed to calculate selling expenses. But as the business sells more products in more geographies and possibly in more currencies, this will become increasingly complex to do with basic small business software — which increases the need for advanced accounting software that to reduce the time and resources needed. CFOs surveyed by NetSuite Brainyard reported that they spent 2.25 hours every day in spreadsheets and that better and faster reporting was a top priority. Better integration among accounting, sales and inventory and order management systems will result in more accurate and streamlined accounting processes for finance team.