What Is an SGA Expense and Why Is It Important?

Selling, General, and Administrative (SGA) expenses are operational costs that businesses incur to support daily activities. These expenses are essential for a company to function and generate revenue, yet they are distinct from direct production costs. SGA encompasses a broad range of expenditures necessary for running a business beyond manufacturing or direct service delivery, reflecting overall overhead.

What Constitutes SGA Expenses

SGA expenses are divided into two primary categories: selling expenses and general and administrative expenses. Both are non-production costs crucial for a business’s operations. They support a company’s core functions, enabling it to reach customers and manage internal affairs.

Selling expenses are costs directly associated with marketing, selling, and delivering products or services. These include advertising campaigns, marketing department salaries, and sales commissions. Other common selling expenses involve travel for sales teams, promotional materials, and shipping costs.

General and administrative expenses, often referred to as G&A, cover costs of overall management and general operations not directly tied to production or sales. Examples include executive and administrative staff salaries, office rent, and utility costs like electricity and internet. This category also encompasses professional fees, including legal, accounting, auditing, and business insurance premiums.

SGA on the Income Statement

SGA expenses appear on a company’s income statement as a distinct line item, typically below “Gross Profit” and before “Operating Income” (EBIT). After the cost of goods sold (COGS) is subtracted from revenue to determine gross profit, SGA expenses are deducted. This placement highlights their role as operational costs.

Subtracting SGA from gross profit calculates operating income, representing a company’s profitability from core business operations before interest and taxes. This structure provides a clear view of how efficiently a company manages overhead and sales efforts. The income statement can present SGA as a single combined figure or break it down into separate selling and general and administrative components.

Understanding the Significance of SGA

SGA expenses offer valuable insights into a company’s financial health and operational efficiency. They reveal how much a business spends on non-production activities and sales initiatives, providing a comprehensive view of its cost structure. Analyzing SGA helps assess how effectively management controls overhead and allocates resources to support growth and sales.

A high SGA relative to revenue can indicate inefficiencies or excessive overhead, raising concerns for stakeholders about cost management. Conversely, effective SGA management demonstrates better operational control, leading to improved profitability. Monitoring the SGA-to-revenue ratio over time is a common analytical practice, helping identify trends in expenses and the ability to convert revenue into operating profit.