What Is Selling, General, and Administrative Expenses?

Selling, General, and Administrative Expenses are a category of operating expenses that companies incur to run their daily operations. This line item on a company’s income statement provides insight into its operational efficiency. Understanding what these expenses entail is important for anyone looking to comprehend a company’s financial health.

Understanding Selling, General, and Administrative Expenses

Selling, General, and Administrative (SG&A) expenses represent the costs a business incurs that are not directly tied to the production of goods or services. Also known as overhead, these expenses reflect the day-to-day costs required to maintain business operations. Unlike the Cost of Goods Sold (COGS), which includes direct costs like raw materials and direct labor, SG&A covers indirect costs that support the entire business. The grouping of these costs helps companies assess their operating leverage, showing how changes in sales volume affect profitability. SG&A expenses are typically recorded below the gross profit line on the income statement, distinguishing them from product creation costs and providing transparency.

Common Selling Expenses

Selling expenses are costs incurred to promote, sell, and deliver a company’s products or services. These expenses are essential for generating revenue and represent the financial outlay associated with sales and distribution. Examples of selling expenses include:
Advertising and marketing costs, such as campaigns, digital ads, and promotional materials
Sales force salaries and commissions
Sales travel expenses
Delivery costs
Packaging if it is related to selling and distribution rather than production
Trade show expenses, which involve participating in events to showcase products

Common General and Administrative Expenses

General and administrative (G&A) expenses are the overhead costs associated with the overall management and operation of a company. They are not directly related to selling activities or the production of goods and services, instead supporting the broad functioning of the business. Examples include:
Salaries of executive and administrative staff, excluding sales personnel
Office rent and utilities, such as electricity and internet
General office supplies
Legal and accounting fees, which are necessary for compliance and financial management
Depreciation on administrative assets like office equipment
General liability insurance premiums
Expenses for IT support for general operations
Human resources department costs, covering activities like recruitment and employee benefits

SG&A on Financial Statements and Its Role

Selling, General, and Administrative expenses appear on a company’s income statement as a distinct line item. This placement is typically below the Cost of Goods Sold (COGS) and gross profit. SG&A is then subtracted from gross profit to arrive at operating income, also known as Earnings Before Interest and Taxes (EBIT). The presentation of SG&A provides a clear view of the non-production costs required to run the business, helping stakeholders understand how efficiently a company manages its overhead. While it does not directly relate to the production of goods, SG&A significantly impacts a company’s overall profitability and operational efficiency.