What Is SG&A on an Income Statement?

An income statement details a company’s financial performance over a defined period, typically a quarter or a year. It provides insights into revenues, expenses, and net income or loss, helping stakeholders understand how effectively a business generates profit from its operations.

Understanding SG&A

SG&A stands for Selling, General, and Administrative expenses, representing operating costs not directly tied to the production of goods or services. These expenses are crucial for supporting overall business activities and keeping a business operational.

These costs are often referred to as overhead. Grouping them on the income statement allows for a clearer view of a company’s indirect operational spending. Companies separate SG&A from the Cost of Goods Sold (COGS) to assess operating leverage and understand how changes in sales volume might affect profitability.

Key Components of SG&A

SG&A is broken down into three main types of expenses: selling, general, and administrative. Each component captures different facets of non-production operating costs, providing a more granular view of a company’s operational outlay.

Selling expenses

Selling expenses encompass all costs incurred to promote, sell, and distribute a company’s products or services. This includes marketing and advertising costs, such as campaigns, content creation, and social media management. Salaries and commissions paid to sales staff, along with their travel and entertainment expenses for client meetings or trade shows, also fall under selling expenses. Additionally, distribution costs, including logistics, shipping, packaging, and insurance for delivering goods to customers, are categorized here.

General expenses

General expenses cover the costs necessary to support the overall business environment, distinct from direct sales or administrative functions. These costs are often fixed and essential for maintaining the company’s infrastructure. Common examples include rent for office facilities, utility bills like electricity and water, and general business insurance premiums. Office supplies, postage, and computer equipment also represent typical general expenses that facilitate daily operations.

Administrative expenses

Administrative expenses relate to the management and support functions of the company, ensuring its governance and smooth operation. This category includes salaries and benefits for executive leadership and administrative staff who are not directly involved in sales or production. Legal and accounting fees, along with information technology (IT) support costs, are also administrative expenses. These expenses often involve professional services and other costs associated with the central oversight of the business.

SG&A on the Income Statement

On a typical income statement, SG&A expenses are presented as a collective line item, playing a specific role in calculating a company’s profitability. This figure usually appears after the Cost of Goods Sold (COGS) and before the calculation of operating income. The income statement follows a structured format to arrive at net income, beginning with revenue.

The calculation progresses by first subtracting COGS from revenue to determine gross profit. Subsequently, SG&A expenses are deducted from this gross profit figure. The result of subtracting SG&A and any other operating expenses from gross profit yields the company’s operating income, often referred to as Earnings Before Interest and Taxes (EBIT). This placement highlights that SG&A represents costs incurred to run the business beyond the direct expense of producing goods.

What SG&A Reveals About a Business

The SG&A figure on an income statement offers insights into a company’s operational efficiency and strategic investments. A company’s SG&A level can indicate the effectiveness of its cost management and its overall overhead structure. For instance, a relatively high SG&A in relation to revenue might suggest inefficiencies or substantial investment in non-production areas.

Changes in SG&A over time can signal shifts in a company’s business strategy. An increase in selling expenses could reflect a greater investment in marketing and sales efforts aimed at growth, while a rise in administrative costs might point to an expansion of corporate infrastructure. Analysts often examine SG&A closely to understand how a company allocates resources beyond direct production, providing clues about its competitive approach and long-term viability.