How to Calculate SG&A Expenses for Your Company

Selling, General, and Administrative (SG&A) expenses represent a business’s operational costs not directly tied to producing goods or services. Understanding and accurately calculating these expenses is important for assessing a company’s overall operational efficiency and financial health. These costs are incurred to support the core business functions, from marketing and sales efforts to administrative oversight.

Identifying SG&A Components

These costs are generally categorized into selling expenses, general expenses, and administrative expenses. Properly classifying each expenditure is the first step toward an accurate calculation, ensuring that only non-production costs are included.

Selling Expenses

Selling expenses are those incurred to market, sell, and deliver products or services to customers. Common examples include advertising costs for campaigns across various media platforms and marketing salaries for staff involved in brand promotion. Sales team salaries and commissions, which can often be a percentage of sales, are also included. Travel expenses for sales personnel to meet clients or attend industry events also fall under this category.

General Expenses

General expenses cover the day-to-day operational costs of the business that are not directly related to selling or production. This category includes administrative salaries for staff such as office managers and executive assistants, as well as office rent and utilities like electricity, water, and internet services. Office supplies, insurance premiums for general liability or property coverage, and professional fees such as legal fees for contract reviews or compliance, and accounting fees for services like bookkeeping, payroll processing, or tax preparation, are also part of general expenses.

Administrative Expenses

Administrative expenses are often grouped with general expenses but specifically relate to the overall management and corporate governance of the company. This can include executive compensation for top leadership and the costs associated with the human resources department, such as recruitment, training, and benefits administration. It is important to clearly differentiate these from the Cost of Goods Sold (COGS), which includes direct materials, direct labor, and manufacturing overhead directly tied to production.

Sourcing Financial Information

Before performing any calculations, it is necessary to gather the relevant financial data from your company’s records. The general ledger (GL) is the primary source for detailed financial transactions, serving as a comprehensive record of every financial entry.

Income statements, also known as profit and loss statements, offer a summarized view of revenues and expenses over a specific period, such as a month, quarter, or year. While the income statement may present SG&A as a single line item, the underlying details are found in the GL. For employee-related costs, individual expense reports for travel, meals, and entertainment provide granular data.

Modern accounting software systems like QuickBooks, Xero, SAP, or Oracle Financials automate much of the data recording and categorization. These systems allow users to generate detailed reports that can be customized to show specific expense categories. Within these systems, you can navigate to the general ledger or expense reports to identify accounts or line items that correspond to selling, general, and administrative expenses.

Performing the SG&A Calculation

After identifying the relevant expense components and sourcing all necessary financial information, the next step involves systematically adding these figures together. This calculation involves summing up the non-production costs. You will need to access your company’s general ledger or detailed expense reports for the specific financial period you wish to analyze, whether it is a month, quarter, or an entire fiscal year.

Compile all individual expense line items that have been correctly classified as either selling, general, or administrative. If calculating SG&A for a quarter, sum up all quarterly figures for each expense. Ensure you are extracting the monetary value of each identified expense.

For example, consider the following hypothetical quarterly expenses: Sales Salaries: $50,000; Marketing Expenses: $15,000; Office Rent: $10,000; Utilities: $2,000; and Legal Fees: $3,000. To calculate the total SG&A for this period, add these amounts together: $50,000 + $15,000 + $10,000 + $2,000 + $3,000. The sum of these expenses would be $80,000, representing the total SG&A for that specific quarter. Verify that no production-related costs, which belong to the Cost of Goods Sold, have been inadvertently included in this sum.

Interpreting Calculated SG&A

The calculated SG&A figure represents the total amount a business has spent on its non-production operations over a defined period. This single number provides a broad understanding of the overhead required to run the company, beyond the direct costs of creating products or services. To provide greater context, this figure is often expressed as a percentage of revenue.

Calculating SG&A as a percentage of revenue involves dividing the total SG&A by the total revenue and then multiplying by 100. This ratio indicates how much of each dollar of sales is consumed by these operational costs. Alternatively, SG&A can be expressed as a percentage of gross profit, which highlights the proportion of profit remaining after production costs that is used to cover overhead.

Comparing the current SG&A figure to previous periods, such as the prior quarter or year, allows for trend analysis. Observing whether the percentage is increasing or decreasing can offer insights into changes in cost management practices or operational scale. Furthermore, benchmarking the company’s SG&A percentage against industry averages can provide external perspective. Industry reports often publish typical SG&A ratios, which vary significantly across different sectors, offering a valuable point of comparison for a company’s operational efficiency relative to its peers.