Is SG&A the Same as Operating Expenses?

Businesses incur numerous costs to generate revenue, and these are typically classified into distinct categories on the income statement. Two significant classifications often discussed are Selling, General, and Administrative (SG&A) expenses and Operating Expenses.

What is SG&A?

Selling, General, and Administrative (SG&A) expenses encompass costs a company incurs that are not directly tied to the production of goods or services. These expenses are necessary for the overall operation and management of the business, representing overhead beyond manufacturing or direct service delivery.

Selling expenses relate to marketing and distributing products or services. Examples include advertising campaigns, sales commissions, and the salaries of the sales department.

General and administrative expenses cover the day-to-day running costs of the business not directly linked to sales or production. This category includes rent, utility bills, office supplies, salaries of executive management, accounting department wages, and legal fees.

What are Operating Expenses?

Operating expenses are the costs a company incurs from its normal business operations to generate revenue. These expenses are distinct from non-operating expenses, such as interest paid on debt or income taxes. Operating expenses are fundamental to calculating a company’s operating income, reflecting profitability before financing and taxation.

This broad category includes the Cost of Goods Sold (COGS) and Selling, General, and Administrative (SG&A) expenses. COGS represents the direct costs attributable to the production of goods sold or services provided. This includes raw materials, direct labor wages, and manufacturing overhead.

Beyond COGS, operating expenses also encompass all the indirect costs necessary to keep the business functioning. These can include research and development expenditures aimed at creating new products or improving existing ones. Other examples might involve depreciation on administrative assets or amortization of intangible assets like patents and copyrights, which contribute to the company’s operational capacity.

How SG&A and Operating Expenses Relate

The relationship between SG&A and operating expenses is hierarchical, where SG&A is a subset of the broader category of operating expenses. This means that while all SG&A costs are operating expenses, not all operating expenses are SG&A. Operating expenses represent the total costs incurred to run the business before accounting for non-operating items like interest income or expense and income taxes.

On an income statement, operating expenses are typically presented after the Cost of Goods Sold to arrive at a company’s gross profit. SG&A is then often listed as a distinct line item or grouped within a larger “Operating Expenses” section. This structure allows financial statement users to understand both the direct production costs and the overhead costs separately, providing a clearer picture of operational efficiency.

For example, a company’s total operating expenses would include its Cost of Goods Sold, which accounts for direct material and labor, alongside its SG&A, which includes marketing, administrative salaries, and rent. Therefore, operating expenses provide a comprehensive view of the costs associated with a company’s primary business activities. Understanding this distinction is important for financial analysis, as it helps in evaluating a company’s ability to control its core business costs.