Are SG&A Considered Operating Expenses?

Businesses incur various expenditures to generate revenue and sustain operations. Proper categorization of these costs is fundamental for accurate financial reporting and analysis, providing insight into a company’s financial health and aiding informed decision-making.

Understanding Operating Expenses

Operating expenses are the costs a business incurs through its normal day-to-day activities to keep its operations running and generate revenue. These expenses are distinct from the direct costs of producing goods or services, known as the cost of goods sold (COGS). Operating expenses are necessary for a business to function, regardless of whether a sale is made.

Common examples of operating expenses include rent, utilities, and salaries paid to administrative or non-production staff. Marketing and advertising costs also fall into this category.

Understanding SG&A

SG&A stands for Selling, General, and Administrative expenses. These represent a broad category of costs necessary for a company’s operations that are not directly tied to the production of goods or services. These expenses are sometimes referred to as overhead, reflecting their indirect nature in supporting the business.

Selling expenses include costs related to marketing and distributing products or services, such as advertising, sales commissions, sales personnel salaries, and delivery costs. General and administrative expenses cover overall management and operational costs. These typically include executive salaries, office rent, utilities, accounting and legal fees, and depreciation of office equipment.

SG&A as Operating Expenses

Selling, General, and Administrative (SG&A) expenses are considered operating expenses. These costs fit the definition of operating expenses because they arise from the normal, day-to-day activities required to run a business, even though they are not directly involved in production. Both selling and general and administrative expenses are essential for a company’s ongoing operations.

SG&A represents a significant portion of a company’s total operating expenses. While some companies might list specific operating expenses separately, SG&A serves as a comprehensive category for most non-production operational costs. It is consistently presented as a component of operating expenditures on financial statements.

Impact on Financial Statements

SG&A expenses are displayed on a company’s income statement, also known as the profit and loss statement. They are listed below the gross profit line, which is calculated by subtracting the cost of goods sold from total revenue. This placement allows for a clear view of a company’s operational profitability.

Subtracting SG&A from gross profit contributes directly to the calculation of operating income, often referred to as Earnings Before Interest and Taxes (EBIT). This helps financial analysts and investors understand a company’s core operational efficiency, as operating income reflects profit generated solely from primary business activities before interest and taxes.