Selling, general and administrative expense definition

In practice, many large corporations budget their SG&A expenditures based on how much revenue the company will generate. For example, let’s say a company will generate $5,000 of revenue next year. If the company spends sg and a expense 20% of revenue on SG&A, then that implies $1,000 of SG&A Expense next year. Most companies group record SG&A as a single line on the Income Statement. Apple groups selling, general and administrative activities together into a single expense line. SG&A will not include interest expense since interest expense is reported as a nonoperating expense.

• This means that SG&A is reported after total sales (revenue) but before operating income.
• Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.
• In addition, most businesses have competition that target the same customers for the same products.
• The most common examples are rent, insurance, utilities, supplies, and expenses related to company management, such as salaries of executives, admin staff, and non-salespeople.
• SG&A can also be used to calculate the SG&A ratio, which is an additional metric that calculates SG&A as a percentage of sales.

Usually, through careful budgeting and periodic reviews for ways to cut costs. When times get tough, SG&A is often the first place managers look to trim spending, though they have to be careful not to cut too deep since that can end up hurting operations. Remote or hybrid work models can be an easy way to reduce costs for companies that don’t need workers in the office every day of the week.

How to Calculate SG&A Expense?

• A company incurs these expenses to support the company’s administrative functions and management activities.
• SG&A costs are typically the second expense category recorded on an income statement after COGS, like on this simple income statement for XYZ Soaps Inc.
• Below is a break down of subject weightings in the FMVA® financial analyst program.
• Some include only a single SG&A line within operating expenses, while others may break out multiple expense types and separate selling expenses from general and administrative costs.
• If the expense is directly related to producing a good or service, it is a product cost.

By tracking SG&A expenses, a company can make informed decisions about investments, cost-saving measures, and other financial initiatives. Selling, General, and Administrative expenses (SG&A) are the costs incurred by a company in its daily operations, excluding the costs of producing goods or services. As an operating expense, SG&A includes essential expenses for a company’s day-to-day operations yet excludes COGS and any costs related to producing goods and services. SG&A accounts for the costs that are essential to running the business, such as rent, salaries, office supplies, and more. Tracking G&A expenses isn’t just about knowing where the money goes; it’s about making sure your business’s spending serves a purpose.

And as you can imagine, they play a big part in a business’s profitability. Our bookkeeping team completes your books and generates a monthly income statement and balance sheet for you. Bench’s easy-to-use software let’s you quickly see how your business is doing so you can make smarter decisions with your money and master your spending. They work with our client research team to get the answers you need to make informed decisions for your business strategy.

These expenses are then subtracted from revenue to calculate the company’s operating income, which you use to determine the company’s profitability. The report typically includes information about a company’s selling, general, and administrative expenses and is used to track the company’s spending on overhead costs. SG&A includes all non-production expenses incurred by a company in any given period. It includes expenses such as rent, advertising, marketing, accounting, litigation, travel, meals, management salaries, bonuses, and more. On occasion, it may also include depreciation expense, depending on what it’s related to.

Depreciation and amortization expenses

Therefore a balanced amount should be spent keeping in mind the structure of the company (more fixed costs than variable costs and vice versa). Remember that the classification of certain costs might depend on the specific context and industry. For instance, research and development (R&D) costs are considered SG&A expenses in most industries. Still, in certain industries, such as pharmaceuticals, these costs might be treated as product costs due to their direct relationship with developing new products. Selling (S) expenses are either direct, meaning incurred only once a product is sold, or indirect, meaning incurred before or after a sale.

Non-operating expenses

Do you need all of that office space you’re currently using, or could you sublease some of it to another business? Are you being as efficient with your electricity and heating costs as you could be? Think you could renegotiate your company’s internet and phone bill? Look through each of your business’ monthly expenses and make sure you aren’t overpaying for them.

The different types of operating expenses

SG&A includes all other non-production costs, such as marketing and administrative costs. Payment processor Visa reports on operating expenses in more detail. The company’s year-end income statements include seven line items within the operating expense bucket. When a business needs to reduce spending, leaders often first look for cost efficiencies in SG&A expenses. The rationale is that cutbacks in the selling, general, and administrative areas are less likely to affect product or service quality.

Selling expenses are listed in the form of “marketing,” and “general and administrative” has an individual line item. It’s common to use the terms SG&A and operating expenses interchangeably, but keep in mind that SG&A is only one type of operating expense. For instance, a company may sometimes report selling expenses separate from G&A expenses if one is significantly higher than the other.

Given below are some examples of total SG&A expenses that will help us to understand the concept better. Given below is a list of all the different categories of expenses that are included in it. Generally speaking, the lower a company’s SG&A expense, the better – since that implies the company is more profitable, all else being equal. The 25% ratio means that for each dollar of revenue created, $0.25 gets spent on SG&A expenses. For example, let’s say that we have a company with $6 million in SG&A and $24 million in total revenue.

SG&A expenses include various costs, including salaries, rent, utilities, marketing expenses, and other overhead costs. Analyze the company’s cost structure to understand where most of its SG&A expenses come from. This helps you identify areas where the company can reduce costs or improve efficiency. In summary, SG&A costs encompass various expenses related to a company’s daily operations that are not directly tied to producing goods or services. These costs are crucial for businesses to manage effectively, as they can significantly impact a company’s profitability and financial performance. SG&A expenses are an important financial metric impacting a company’s profitability and efficiency.

SG&A in Financial Statements

These expenses may include salaries and wages, rent, utilities, office supplies, insurance, travel, marketing, and other expenses related to selling, general, and administrative activities. SG&A expenses are mostly comprised of costs that are considered part of general company overhead, since they cannot be traced to the sale of specific products. For example, sales commissions directly relate to product sales, and yet may be considered part of SG&A. When an SG&A cost is considered a direct cost, it is acceptable to shift the cost into the cost of goods sold classification on the income statement.

SG&A Expenses Influence Profitability

In contrast, operating expenses are focused on the day-to-day operations required to produce and sell those products or services. A company incurs SG&A expenses in the daily operations of a company, excluding the costs of producing goods or services. These expenses are necessary for the company’s sales and administrative functions and support its operations, regardless of whether it generates sales.

G&A expenses are generally considered a subset of OpEx that cover indirect costs like salaries, office supplies, or rent. OpEx goes beyond general and administrative expenses and includes selling costs and other spending that supports the overall running of the business. Both G&A and OpEx appear on a business’s income statement, but whereas G&A covers overheads unrelated to goods sold or manufacturing, OpEx extends to sales and production costs.