Is SG&A Considered an Operating Expense?

Businesses incur various costs to operate and generate revenue. Understanding how these costs are classified is important for financial analysis. This article will explore Selling, General, and Administrative (SG&A) expenses and their relationship to operating expenses, clarifying their definitions and how they are presented in a company’s financial reporting.

Selling, General, and Administrative Expenses Defined

Selling, General, and Administrative (SG&A) expenses represent the indirect costs a company incurs to run its operations, distinct from the direct costs of producing goods or services. These expenses are essential for the day-to-day functioning of a business, though not directly tied to manufacturing or service provision. SG&A typically encompasses three main categories of costs.

Selling expenses include costs associated with promoting and selling products or services. Examples are advertising campaigns, marketing materials, sales commissions, and promotional event expenses. Costs related to distributing products, such as shipping and warehousing, also fall under selling expenses.

General expenses cover the overhead costs necessary to maintain the company’s overall infrastructure. This category includes rent and utilities for office spaces, general business insurance, and office supplies. These costs are often fixed, meaning they do not fluctuate directly with sales volume.

Administrative expenses are related to the management and support functions of the business. This includes salaries and benefits for executive leadership, human resources personnel, and administrative staff. Professional fees for services like accounting, auditing, legal counsel, and IT support are also classified as administrative expenses.

Understanding Operating Expenses

Operating expenses are the costs a business incurs from its normal, day-to-day activities to generate revenue. These expenses are fundamental to the company’s core operations and necessary for it to function regularly. They differ from the direct costs of producing goods, known as Cost of Goods Sold (COGS), which are directly tied to product or service creation.

Operating expenses also stand apart from non-operating expenses, such as interest expense on debt or income taxes. Non-operating expenses arise from activities outside the company’s primary business functions. An expense is “operating” if directly related to the company’s ongoing efforts to sell products, deliver services, or manage general business affairs.

These costs are recurring and crucial for sustaining daily business activities and achieving revenue targets. Examples include payroll, rent, utilities, marketing, and research and development costs. Higher operating expenses can impact profitability, making their effective management important for a company’s financial health.

SG&A as an Operating Cost

SG&A expenses are a primary component of a company’s operating costs. They fall under operating expenses because they are incurred as part of the normal business operations, even though they are not directly involved in producing goods or providing services. Such expenditures support revenue generation and overall company management functions.

These costs are considered indirect because they cannot be directly traced to a specific product or service unit, unlike raw materials or production labor. For instance, the salary of an accounting department employee supports the entire business, rather than a single manufactured item. SG&A expenses are necessary for a company to operate, sell its products, and maintain its administrative functions.

While not part of manufacturing or direct production costs, SG&A expenses are essential for a company’s operational efficiency. They represent the overhead that keeps the business running and allow for sales and administrative activities to occur. Therefore, managing these expenses effectively is important for a company’s profitability.

Reporting SG&A on Financial Statements

Selling, General, and Administrative (SG&A) expenses are presented on a company’s income statement. They are listed below the Cost of Goods Sold (COGS) and after the calculation of gross profit. This placement highlights that SG&A expenses are indirect costs, separate from the direct costs of production.

Companies may report SG&A as a single line item, or break it down into separate “Selling” and “General and Administrative” categories for more detail. Regardless of the specific presentation, these expenses are subtracted from a company’s gross profit to arrive at its operating income, also known as Earnings Before Interest and Taxes (EBIT).

This structured presentation on the income statement provides insight into a company’s core business profitability before accounting for non-operating items like interest and taxes. The position of SG&A clearly indicates its role as a cost of doing business, reflecting the efficiency of the company’s sales and administrative functions.