What Is SG&A? Selling, General & Administrative Costs
Understand SG&A: learn about a key category of non-production business expenses, how they're reported, and what they reveal about a company's operations.
Selling, General, and Administrative (SG&A) expenses are costs not directly tied to the production of goods or services. These expenses are essential for a company’s daily operations and overall functioning. Understanding SG&A is important for assessing a company’s financial health, as it reflects the overhead required to maintain business activities. It provides insights into how efficiently a company manages its non-production costs.
Components of SG&A
SG&A is broadly categorized into three distinct types of expenses: selling, general, and administrative. Each category includes costs that support the business without being directly involved in the manufacturing process or direct service delivery.
Selling Expenses
Selling expenses are those incurred to market, promote, and sell a company’s products or services. Examples include advertising campaigns, sales commissions paid to staff, and the travel expenses for sales personnel visiting clients. Distribution and delivery costs, such as shipping fees for products, also fall under this selling category.
General Expenses
General expenses encompass the day-to-day operational costs necessary for a business to function, regardless of sales volume. These often include office rent, utility payments for administrative spaces, and the cost of office supplies like stationery and equipment. Insurance premiums for business operations, not tied to production, are also typically classified here.
Administrative Expenses
Administrative expenses cover the costs associated with the overall management and oversight of the company. This includes salaries and benefits for executive leadership, human resources personnel, and accounting staff. Legal fees, consulting fees, and information technology infrastructure costs that support the entire organization are also part of administrative expenses. These costs ensure the business operates smoothly from an organizational standpoint.
COGS represents the direct costs of producing goods or services, such as raw materials and direct labor. In contrast, SG&A expenses are indirect costs that support the broader business operations and are not directly tied to the creation of a product or service. This distinction is crucial for accurate financial reporting and analysis.
SG&A on Financial Statements
Selling, General, and Administrative expenses are displayed on a company’s income statement, a document that summarizes revenues, expenses, and profits over a period. This line item is typically presented below the Cost of Goods Sold (COGS). Its placement helps illustrate a company’s gross profit before accounting for these broader operational overheads.
On most public-facing income statements, SG&A is often aggregated into a single line item, even though it comprises numerous individual expenses. This consolidated presentation provides a concise overview of a company’s indirect operating costs. While the income statement may show a single figure, companies might provide a more detailed breakdown of these expenses in the footnotes to their financial statements or in internal reports.
The position of SG&A on the income statement is significant because it contributes to the calculation of operating income, also known as Earnings Before Interest and Taxes (EBIT). Operating income is derived by subtracting both COGS and SG&A from a company’s total revenue. This structure helps stakeholders understand the profitability of a company’s core operations before considering non-operating items like interest and taxes. The clear separation of SG&A from direct production costs allows for a more transparent view of a company’s operational efficiency and cost structure.
Interpreting SG&A
Analyzing a company’s SG&A provides valuable insights into its operational overhead and the efficiency of its non-production expenditures. A careful review of these expenses can reveal how effectively management controls costs that are not directly tied to manufacturing or service delivery. For instance, a high SG&A relative to revenue might indicate inefficiencies in administrative processes or excessive marketing spending.
SG&A can be effectively understood by comparing it to a company’s revenue, often expressed as a percentage of sales. This ratio helps assess how efficiently a business is growing or managing its core functions. A declining SG&A-to-sales ratio over time, especially with increasing revenue, often suggests improved operational leverage where sales growth outpaces the growth in overhead costs.
Comparing SG&A trends over several periods or against industry peers can highlight shifts in a company’s cost structure. For example, a sudden increase in SG&A might point to significant investments in new sales initiatives or administrative expansion. Conversely, consistently lower SG&A percentages compared to competitors could signal a more streamlined or cost-effective operational model. The nature and size of a business also influence typical SG&A levels; service-based companies, for instance, often have higher SG&A as a percentage of revenue than manufacturing companies due to their different cost structures.