What is SG&A Accounting? Selling, General & Admin Costs

Selling, General, and Administrative (SG&A) expenses represent the non-production costs a company incurs to operate its business. These expenses are sometimes referred to as overhead and are distinct from the direct costs of producing goods or services, known as Cost of Goods Sold (COGS). Understanding SG&A is important for assessing a company’s profitability and overall financial health, as it reflects the efficiency of its administrative functions and sales efforts.

Components of SG&A

SG&A expenses are typically broken down into two main categories: selling expenses and general and administrative expenses. Selling expenses are directly related to the efforts of generating revenue through sales. This includes costs such as marketing and advertising. Sales salaries and commissions paid to sales personnel are also included, along with sales travel expenses. Rent for sales offices and shipping costs for delivering products to customers also fall under selling expenses.

General and administrative (G&A) expenses cover the overhead costs necessary for the operation and management of the company. This includes salaries for executive and administrative staff, such as human resources, finance, and legal personnel. Office rent and utilities for non-production areas, like the corporate headquarters or administrative offices, are also G&A expenses. Additionally, costs for office supplies, legal and accounting fees, general business insurance, and depreciation of administrative assets are categorized as G&A.

SG&A in Financial Statements

SG&A expenses are prominently displayed on a company’s income statement, serving as a key line item that follows the calculation of Gross Profit. After a company reports its net sales and subtracts the Cost of Goods Sold to arrive at Gross Profit, SG&A expenses are then deducted. This deduction is a step in calculating a company’s Operating Income, also known as Earnings Before Interest and Taxes (EBIT).

For instance, if a company has $1,000,000 in Gross Profit and $300,000 in SG&A expenses, its Operating Income would be $700,000. This calculation highlights how effectively a company manages its non-production costs to generate profit from its core operations. While the primary presentation of SG&A is on the income statement, some related assets, such as prepaid advertising or office supplies inventory, might appear on the balance sheet. However, the direct impact on profitability is observed through its expense recognition on the income statement.

Analyzing SG&A

Companies and external stakeholders, such as investors, analyze SG&A to gain insights into operational efficiency and cost control. One common method is calculating SG&A as a percentage of revenue, which indicates how much of each revenue dollar is spent on these non-production costs. This metric is calculated by dividing total SG&A expenses by total revenue; for example, $300,000 in SG&A divided by $1,500,000 in revenue yields a 20% SG&A ratio. A lower percentage often suggests more efficient cost management relative to sales.

Trend analysis involves tracking SG&A expenses over time, whether quarter-over-quarter or year-over-year, to identify patterns and changes in spending. An increasing SG&A percentage might signal rising inefficiencies or aggressive growth strategies, while a decreasing trend could indicate effective cost-cutting measures. Comparing a company’s SG&A metrics to those of its industry peers provides context on its cost structure and competitive positioning. Efficient SG&A management directly contributes to higher operating margins, ultimately enhancing a company’s overall profitability.