What Does SG&A Stand For in Finance & Accounting?

SG&A, or Selling, General, and Administrative expenses, represents operational costs not directly tied to the production of goods or services. Understanding SG&A provides insights into a company’s operational efficiency and its ability to manage non-production expenditures. It helps evaluate how effectively a business controls its overhead for financial reporting.

Components of SG&A

SG&A encompasses costs categorized into selling expenses and general and administrative expenses. Selling expenses are directly related to generating revenue. This category includes:
Marketing and advertising
Sales commissions
Product distribution
Travel and entertainment for sales teams
Salaries for sales personnel

General and administrative expenses cover broader overhead costs necessary for overall business operation, not linked to sales or production. These include executive salaries and compensation for administrative staff in human resources, finance, and accounting. Other common expenses involve office rent, utilities, office supplies, professional fees for legal and accounting services, and insurance premiums.

Where SG&A is Found

SG&A is presented as a line item on a company’s income statement, also known as the profit and loss statement. This distinguishes these indirect operating costs from the direct costs of producing goods, or Cost of Goods Sold (COGS). SG&A appears after the gross profit line, calculated by subtracting COGS from revenue.

Placing SG&A below gross profit separates expenses directly tied to production from those for general operations and sales. These costs contribute to the company’s total operating expenses. Deducting SG&A from gross profit helps determine a company’s operating income, showing profitability from core business activities before interest and taxes.

Analyzing SG&A

Analyzing SG&A provides insights into a company’s operational efficiency and cost management. Businesses and financial analysts examine SG&A expenses over time to identify trends. An increase might signal investments in growth initiatives or administrative expansion. Conversely, a reduction could suggest successful cost-cutting or improved operational streamlining.

A common analytical approach involves calculating SG&A as a percentage of revenue, known as the SG&A ratio. This ratio assesses how efficiently a company manages its overhead relative to sales volume. Comparing this ratio against industry benchmarks or competitors provides context, revealing if spending on sales, general, and administrative activities is proportionate or inefficient. This analysis helps stakeholders understand a company’s financial health and capacity for sustained profitability.