What Are Selling General and Administrative Expenses?

Among various financial outlays, Selling, General, and Administrative (SG&A) expenses represent a significant portion of a company’s overall operational spending. This category encompasses the costs incurred to run the business beyond direct production. Analyzing these expenses offers valuable insights into a company’s efficiency and profitability, helping stakeholders comprehend the underlying financial health.

Understanding Selling General and Administrative Expenses

Selling, General, and Administrative (SG&A) expenses refer to the non-production costs that a business incurs to operate and sell its products or services. These expenses are sometimes referred to as overhead. On an income statement, SG&A is listed below the Cost of Goods Sold (COGS), distinguishing them from the direct costs of producing goods.

SG&A expenses encompass a wide range of costs that support the business infrastructure and sales efforts. While some SG&A components, like sales commissions, might fluctuate with sales volume, many others, such as office rent, tend to be more fixed or semi-fixed. The separation of these costs from production expenses allows businesses to evaluate their operational leverage, which indicates how changes in sales volume affect overall profitability. For many service-based businesses, SG&A expenses often constitute their most substantial operational cost.

Breakdown of Selling Expenses

Selling expenses are the costs incurred by a business specifically to market, sell, and distribute its products or services. These expenses are directly related to the sales function and are essential for generating revenue. One prominent example is advertising costs, which include expenditures for promoting products through various media channels like digital platforms, television, or print.

Another significant component of selling expenses involves sales personnel compensation, including salaries, wages, and commissions paid to the sales team. Travel expenses for sales representatives, incurred when meeting with clients or attending trade shows, also fall under this category. Delivery costs, encompassing logistics, shipping, and insurance for getting products to customers, are also classified as selling expenses because they are directly tied to the completion of a sale.

Breakdown of General and Administrative Expenses

General and administrative (G&A) expenses represent the overhead costs associated with the overall management and operation of a business, distinct from direct production or sales activities. These are the day-to-day costs that keep the business running, regardless of sales volume. Salaries for executive and administrative staff, such as human resources, accounting, finance, and IT personnel, are a primary example. These wages are subject to payroll taxes and withholding requirements, which are also part of the company’s administrative burden.

Office rent and utilities, including electricity, water, and internet services, are common G&A expenses that support the general workspace. Insurance premiums for property, liability, and other business risks also fall into this category, safeguarding the company’s assets and operations. Additionally, professional services like legal and accounting fees, incurred for compliance, audits, or contract reviews, are considered G&A expenses. The cost of office supplies, ranging from paper to computer equipment, further contributes to these operational overheads.

Distinguishing SG&A from Cost of Goods Sold

Understanding the difference between Selling, General, and Administrative (SG&A) expenses and Cost of Goods Sold (COGS) is important for analyzing a company’s financial performance. COGS represents the direct costs directly tied to the production of goods sold by a company. This includes expenses like the cost of raw materials used in manufacturing, the wages of labor directly involved in production, and manufacturing overhead. COGS directly fluctuates with the volume of goods produced; if more units are made, COGS increases.

In contrast, SG&A expenses are indirect costs, meaning they are not directly linked to the creation of products or services. While essential for the business to operate, SG&A supports the overall functioning rather than contributing to the physical production process itself. Many SG&A costs, such as executive salaries or office rent, often remain relatively fixed regardless of production levels, unlike the variable nature of COGS. This distinction is important for assessing a company’s operational efficiency and profitability, as managing both direct and indirect costs effectively contributes to a healthy bottom line.