What Are Selling, General, and Admin (SGA) Expenses?

Businesses incur various expenses to operate and generate revenue effectively. Selling, General, and Administrative (SGA) expenses represent a significant category of these costs. These expenses are classified as operating costs, which are distinct from the direct costs associated with producing goods or services that a company sells. Understanding the components of SGA expenses helps in evaluating a company’s operational efficiency and overall financial health.

Understanding Selling Expenses

Selling expenses encompass all costs directly incurred to market, sell, and deliver a company’s products or services to customers. These expenditures are directly tied to the generation of revenue. They include a broad range of activities aimed at reaching the target market and completing sales transactions.

Examples often include advertising campaigns, such as media buys for television or digital platforms, and the creation of promotional materials. Sales commissions paid to employees based on their sales performance are a common selling expense. Additionally, salaries for marketing department personnel and sales teams, along with their associated benefits, fall into this category. Costs related to shipping goods to customers, including freight, packaging, and delivery charges, are also typically classified here.

Understanding General Expenses

General expenses are costs associated with the overall operation and management of a business that are not directly tied to selling activities or the production process. These expenses are necessary for the day-to-day functioning of the business and support all departments.

Common examples include rent for the main office space. Utilities for the general office, such as electricity, water, and internet services, are also categorized as general expenses. The cost of office supplies, like paper, pens, and toner, used across various departments also falls under this heading. General business insurance premiums, covering aspects such as property and liability, are also included.

Understanding Administrative Expenses

Administrative expenses are costs related to the company’s executive, organizational, and clerical functions, supporting the overall governance and strategic direction of the business. These expenditures are incurred to manage the business as a whole, rather than being specific to sales or production.

Examples include salaries and benefits for executive leadership, such as the CEO, CFO, and other senior management. Legal fees for corporate compliance or contract review are administrative costs. Similarly, accounting fees for auditing, tax preparation, and financial reporting are administrative expenses. Human resources costs, covering activities like payroll processing, employee benefits administration, and recruitment for non-sales roles, also fall into this category. Information technology (IT) support expenses for general company operations, including network maintenance and software licenses, are also considered administrative.

Distinguishing from Cost of Goods Sold

Selling, General, and Administrative (SGA) expenses are fundamentally different from the Cost of Goods Sold (COGS). COGS represents the direct costs incurred in producing the goods or services that a company sells. For a manufacturing business, COGS typically includes the cost of raw materials, direct labor, and manufacturing overhead.

In contrast, SGA expenses are indirect costs of running the business and are not directly tied to the creation of a product. While COGS fluctuates directly with the volume of goods produced and sold, many SGA expenses tend to be more fixed or semi-variable. This distinction is important for financial analysis, as it allows stakeholders to understand a company’s profitability from its core operations (gross profit, calculated after COGS) separate from its overhead and selling efforts.

Presentation on Financial Statements

Selling, General, and Administrative (SGA) expenses are typically presented on a company’s income statement. They are usually grouped together as a single line item or as a subtotal under “Operating Expenses.” This placement occurs below the “Gross Profit” line, which is calculated by subtracting the Cost of Goods Sold from revenue.

The consolidated SGA figure is then subtracted from the gross profit to arrive at a company’s operating income, sometimes referred to as Earnings Before Interest and Taxes (EBIT). This structure clearly separates the costs of producing goods from the costs of selling them and managing the business.