What Is Included in SG&A? A Breakdown of Expenses

Selling, General, and Administrative (SG&A) expenses represent the non-production operating costs a company incurs to run its daily business. Businesses report SG&A as a separate line item on their income statement, typically appearing below the gross profit figure. This placement helps stakeholders understand costs related to sales, operations, and administration. SG&A expenses are a significant part of a company’s total operating, distinct from direct production.

Common Expenses within SG&A

SG&A expenses encompass a wide array of costs necessary for a business to operate, categorized into selling, general, and administrative components. These costs are generally incurred regardless of production or sales levels, unlike manufacturing costs, representing the “behind-the-scenes” costs of running a business.

Selling Expenses

Selling expenses are costs directly related to promoting, selling, and delivering a company’s products or services. Examples include advertising and marketing costs like media buys, agency fees, and digital campaigns. Sales salaries and commissions paid to sales personnel are also included. Sales travel expenses, promotional materials, and rent for sales offices are additional components of selling expenses.

General Expenses

General expenses cover broader operational costs not directly tied to selling or production. These are day-to-day costs required to maintain a company’s operations. Common examples include general office supplies like pens, paper, and printer ink. Utilities for administrative offices, such as electricity, water, and internet services, fall under this category. Other general expenses include business insurance premiums and depreciation of administrative assets like office furniture and equipment.

Administrative Expenses

Administrative expenses are associated with the overall management and administration of the company. This category includes salaries and wages for executive staff, human resources, and accounting personnel. Legal and audit fees paid to external consultants for services like tax preparation and financial audits are also administrative expenses. Rent for corporate headquarters, professional development for administrative staff, and software licenses for administrative tools are further examples.

How SG&A Differs from Other Business Costs

Understanding the distinction between SG&A and other business costs is important for analyzing a company’s financial structure. SG&A primarily covers indirect, non-production operating costs, setting it apart from expenses directly tied to manufacturing or service delivery.

SG&A vs. Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) represents the direct costs of producing goods or services that a company sells. These include raw materials, direct labor, and manufacturing overhead. For example, the cost of wood for a furniture manufacturer or fabric for a clothing company would be part of COGS.

In contrast, SG&A expenses are indirect costs like advertising campaigns or administrative salaries, not directly traceable to a specific product unit. Factory worker wages are a direct cost included in COGS, while an administrative assistant’s salary is an SG&A expense. While COGS fluctuates with production and sales volume, SG&A costs are often more stable, incurred regardless of units produced or sold.

Other cost categories are typically separated from SG&A on the income statement for clarity. Research and Development (R&D) expenses, for instance, are usually listed as a separate operating expense. R&D costs are investments in future production and innovation, not day-to-day operational costs, and thus not part of SG&A. Interest expense, the cost of borrowing money, is also reported separately below operating income, distinguishing it from operational expenses.

The Importance of Understanding SG&A

Understanding SG&A is a significant aspect of financial analysis for various stakeholders. It provides insights into a company’s operational efficiency and cost management.

For Business Owners/Management

Monitoring SG&A helps business owners and management control operational costs and improve efficiency. By analyzing these expenses, companies can identify areas for potential cost reduction without compromising product quality or core operations. Effective SG&A management influences profitability and cash flow, as reducing these costs can lower the revenue needed to earn a profit. This understanding is also important for budgeting and strategic decision-making, allowing businesses to allocate resources effectively and set realistic financial targets.

For Investors/Analysts

Investors and financial analysts examine SG&A to assess a company’s operational effectiveness and its ability to scale. A lower SG&A-to-sales ratio can indicate better cost control and financial efficiency, often favored by investors. SG&A directly impacts net income and profit margins, as it is subtracted from gross profit to arrive at operating profit. SG&A analysis can reveal whether a company is overspending on non-essential costs, affecting its overall financial health and stock performance.

For the General Public/Consumers

Efficient SG&A management can indirectly influence product pricing and company competitiveness. Businesses that effectively control non-production costs may have more flexibility in pricing products or services. This can lead to more competitive offerings, potentially benefiting consumers through better value. Ultimately, a company’s ability to manage its SG&A impacts its financial stability and long-term sustainability, affecting its ability to provide products and services consistently to the market.