What Is SG&A in Accounting? A Simple Explanation

Selling, General, and Administrative (SG&A) expenses are costs a business incurs that are not directly tied to producing goods or services. Often considered overhead, SG&A costs are a significant portion of a company’s total expenses and directly influence its profitability. Understanding and managing SG&A is fundamental for assessing a business’s financial health and operational efficiency.

Understanding the Components of SG&A

SG&A encompasses all non-production operational costs a company must pay to conduct business, segmented into three main categories: selling, general, and administrative expenses. These costs are distinct from the Cost of Goods Sold (COGS), which includes direct expenses related to manufacturing or acquiring products. While COGS fluctuates directly with production volume, many SG&A expenses are fixed or semi-variable.

Selling Expenses

Selling expenses are the costs incurred to promote, sell, and distribute products or services. These expenses are directly related to generating revenue but are indirect to the product’s creation. Examples include marketing and advertising costs, such as online ads, print media campaigns, and social media management. Salaries and commissions for sales personnel, along with their travel and entertainment expenses for client meetings or trade shows, also fall under selling expenses. Additionally, distribution costs like logistics, shipping, packaging, handling, and insurance for getting products to customers are considered selling expenses.

General Expenses

General expenses cover overhead costs necessary to support the overall business environment, distinct from sales or administration. These day-to-day operational costs keep the business functioning regardless of sales volume. Common examples include rent for office space or facilities not used for production, and utility bills such as electricity, water, and internet services. Other general expenses include office supplies, as well as insurance premiums for general liability or property coverage.

Administrative Expenses

Administrative expenses are associated with the central functions that support a company’s governance and overall management. These expenses are essential for the functioning of the business but do not directly contribute to the production of goods or services. Examples include executive salaries and benefits for management, human resources costs, and IT support expenses like software subscriptions and computer equipment. Professional fees for legal services, accounting, and auditing are also classified as administrative expenses. Training and development costs for administrative staff, along with office maintenance and cleaning, further fall into this category.

SG&A on Financial Statements

SG&A expenses are typically presented on a company’s income statement. This line item usually appears after the Cost of Goods Sold (COGS) and before operating income, often referred to as Earnings Before Interest and Taxes (EBIT). This placement highlights that SG&A represents costs incurred after the direct expenses of producing goods or services have been accounted for.

The income statement may report SG&A as a single combined line item or break it down into separate selling and general and administrative components, depending on the company’s reporting practices. This presentation helps users understand the indirect costs of operations. By subtracting SG&A from the gross profit (revenue minus COGS), a company arrives at its operating income. This calculation helps assess how efficiently a business manages its operational costs to generate profit from its core activities.

Analyzing SG&A

Analyzing SG&A provides insights into a company’s operational efficiency and cost management. For management, investors, and analysts, monitoring SG&A trends over time can reveal whether a company is effectively controlling its overhead. A rising SG&A-to-sales ratio, for example, might indicate decreasing efficiency, where expenses are growing faster than revenue.

Comparing a company’s SG&A against industry benchmarks and competitors is useful. While a lower SG&A percentage often suggests better cost control, the optimal level varies significantly across industries. For instance, technology companies may have higher SG&A ratios due to substantial investments in sales and marketing compared to other sectors. Benchmarking helps stakeholders understand if a company’s spending aligns with its strategic goals and industry norms, allowing for informed decisions on cost optimization or strategic investments.