What Is SG&A Expense? Definition and Components
Learn about SG&A expenses, essential operational costs that shape a company's financial performance and efficiency.
Selling, General, and Administrative (SG&A) expenses are operational costs businesses incur. They appear as a line item on a company’s income statement. Understanding SG&A is important for assessing a company’s financial health and operational efficiency, as these costs differ from direct production expenses. They reflect investments in ongoing operations and sales.
Understanding SG&A
SG&A stands for Selling, General, and Administrative expenses, encompassing a broad range of operating costs not directly tied to production. Essential for running a business and selling its offerings, they are often considered “overhead.” These costs cover day-to-day operations regardless of production levels.
SG&A accounts for indirect costs supporting business activities. While some SG&A costs, like sales commissions, can vary with sales volume, many, such as rent, tend to be fixed or semi-variable. Effective management of these expenses impacts financial performance and profitability.
Components of SG&A
SG&A expenses break down into three categories: selling, general, and administrative. Each category includes costs supporting the business without direct manufacturing involvement. Companies often provide footnotes in their financial statements to detail what makes up these expense categories.
Selling expenses relate directly to selling products or services. These include advertising, digital marketing, and promotional materials. Sales salaries, commissions, bonuses, and travel expenses are also included. Distribution costs like shipping and warehousing are selling expenses.
General expenses are necessary for overall business operation, independent of direct production or sales. Examples include office rent and utilities (electricity, water, internet). Office supplies, equipment maintenance, and various insurance types (property, liability) are also general expenses.
Administrative expenses cover company management and administration costs. This includes salaries and benefits for executive leadership and human resources. Accounting, legal, IT support, and other professional services are also administrative costs. These ensure regulatory adherence and financial integrity.
SG&A in Financial Statements
SG&A appears on a company’s income statement, below Cost of Goods Sold (COGS). This placement helps calculate gross profit before operating income. After COGS is deducted from revenue for gross profit, SG&A and other operating expenses are subtracted.
Deducting SG&A and other operating expenses from gross profit yields operating income, also known as Earnings Before Interest and Taxes (EBIT). Analysts and investors examine SG&A as a percentage of sales to evaluate operational efficiency. A lower SG&A percentage relative to revenue indicates better cost control and potentially higher profitability.
SG&A Versus Other Business Costs
SG&A expenses differ from other business costs, particularly Cost of Goods Sold (COGS) and Research and Development (R&D). Understanding these distinctions clarifies SG&A’s role within a company’s financial structure.
Cost of Goods Sold (COGS) represents direct costs of producing goods or services. These include raw materials, direct manufacturing labor, and manufacturing overhead. Unlike SG&A’s indirect operational costs, COGS scales directly with production volume. For example, factory worker wages are COGS, while a marketing manager’s salary is SG&A.
Research and Development (R&D) expenses are reported separately from SG&A on the income statement, though they are also operating expenses. R&D costs relate to innovation and new product or process development. Both SG&A and R&D are necessary for business operations, but R&D is viewed as an investment in future growth rather than a current operational cost.