SG&A: Selling, General, Administrative Expenses – Definition and Explanation

What are Selling, General, and Administrative Expenses (SG&A)?

Selling, General, and Administrative expenses (SG&A) are the costs incurred by a company in its daily operations, excluding the costs of producing goods or services.

SG&A includes salaries and wages, rent, utilities, advertising, marketing, legal and professional fees, insurance, office supplies, and other overhead costs. A company incurs these expenses regardless of whether they generate or do not generate sales and are typically a significant component of a company’s operating expenses.

SG&A is an essential metric for investors, as it helps to measure a company’s efficiency and the effectiveness of its operating model.

High SG&A expenses indicate that a company needs to spend more on overhead and may need to generate more revenue to cover these costs. On the other hand, low SG & A expenses indicate that a company is operating more efficiently and has a lower cost structure, which is a positive indicator of future profitability.

Selling Expenses

Selling expenses are a subset of Selling, General, and Administrative (SG&A) expenses and refer to the costs incurred by a company in selling its products or services. A company incurs these expenses to generate sales and are directly related to the company’s sales activities.

Examples of selling expenses include:

• Sales salaries and commissions

• Advertising and promotional expenses

• Shipping and handling costs

• Trade show expenses

• Marketing and market research expenses

• Sales training and travel expenses

• Sales representatives’ expenses, such as meals and entertainment

Selling expenses are essential for companies and investors, as they can impact a company’s profitability. Companies with high selling expenses may need more revenue to cover these costs, which can negatively impact their bottom line. On the other hand, companies with low selling expenses and efficient sales processes may generate higher profits.

General Expenses

General expenses, or overhead expenses, are a subset of Selling, General, and Administrative (SG&A) expenses. They refer to the costs incurred by a company in its daily operations, not directly tied to producing goods or services. A company incurs these expenses to support its operations, regardless of whether it generates sales.

Examples of general expenses include:

• Rent or lease payments for office or retail space

• Utilities, such as electricity, gas, and water

• Office supplies and equipment

• Insurance premiums

• Legal and professional fees

• Taxes (other than income taxes)

• Depreciation and amortization

• Bank fees

General expenses are essential for companies and investors, as they can impact a company’s profitability and efficiency. Companies with high available fees may not operate as efficiently as those with low overhead costs, which can negatively impact their bottom line. Companies with low available prices and efficient operations can generate higher profits.

Administrative Expenses

Administrative expenses are a subset of Selling, General, and Administrative (SG&A) expenses. They refer to the costs incurred by a company in its daily operations, not directly tied to producing goods or services or the sales process.

A company incurs these expenses to support the company’s administrative functions and management activities.

Examples of administrative expenses include:

• Salaries and wages for administrative personnel, such as executives, managers, and support staff

• Depreciation on office equipment and computers

• Rent or lease payments for office space

• Legal and professional fees

• Office supplies and equipment

• Telecommunications expenses, such as telephone and internet costs

• Insurance premiums

• Marketing and advertising expenses are not directly tied to the sales process

Administrative expenses are essential for companies and investors, as they can impact a company’s profitability and efficiency. Companies with high administrative fees may not operate as efficiently as those with low overhead costs, which can negatively impact their bottom line. On the other hand, companies with low administrative expenses and efficient operations may generate higher profits.

Selling, General and Administrative Expenses (SG&A) Calculation

Calculate the Selling, General, and Administrative expenses (SG&A) by adding all the expenses incurred by a company in its daily operations, excluding the costs of producing goods or services. You do this by adding the costs of selling, general, and administrative expenses.

The formula for calculating SG&A is as follows:

SG&A = Selling Expenses + General Expenses + Administrative Expenses

It’s important to note that the specific expenses included in SG&A can vary depending on the company and the industry in which it operates. However, the goal is to capture all the costs incurred in the company’s daily operations, excluding the direct costs of producing goods or services.

How is SG&A calculated?

SG&A (Selling, General, and Administrative) expenses are the costs associated with a company’s daily operations that are not directly tied to producing goods or services. To calculate SG&A expenses, you need to identify and sum up all the relevant costs incurred by the company during a specific accounting period (such as a quarter or a year). Here are the steps to calculate SG&A expenses:

1. Identify the relevant expenses: Review the company’s financial records, such as the income statement and general ledger, to identify all costs that are not directly related to the production process. SG&A expenses can include:

   1. a. Salaries and wages for non-production employees (e.g., administrative staff, sales personnel, and customer support representatives)

   2. b. Rent and utilities for office spaces, warehouses, or retail locations

   3. c. Marketing and advertising expenses

   4. d. Office supplies and equipment,

   5. e. Insurance premiums

   6. f. Travel and entertainment expenses related to business operations,

   7. g. Professional services fees (e.g., legal, accounting, or consulting services)

2. Sum up the expenses: Add up all the identified costs for the specific accounting period to arrive at the total SG&A expenses.

For example, consider a company with the following expenses during a quarter:

• a. Salaries and wages for non-production employees: $150,000

• b. Rent and utilities: $25,000

• c. Marketing and advertising: $50,000

• d. Office supplies and equipment: $10,000

• e. Insurance premiums: $5,000

• f. Travel and entertainment: $15,000

• g. Professional services fees: $20,000

The total SG&A expenses for this company during the quarter would be $150,000 + $25,000 + $50,000 + $10,000 + $5,000 + $15,000 + $20,000 = $275,000.

Remember that the classification of certain costs might depend on the specific context and industry. For instance, research and development (R&D) costs are considered SG&A expenses in most industries. Still, in certain industries, such as pharmaceuticals, these costs might be treated as product costs due to their direct relationship with developing new products.

In summary, calculating SG&A expenses involves identifying all relevant costs not directly related to the production process and summing them up for a specific accounting period. This calculation helps companies understand the costs associated with their daily operations and make informed decisions about cost management and resource allocation.

Things to Consider Before Calculating the Selling, General and Administrative Expenses (SG&A)

After categorizing expenses, calculating SG&A is easy. SG&A cost calculation considerations include:

• Check if product production costs are included. SG&A includes non-production costs.

• Consider “below the line” costs. Operating income deducts interest and taxes from SG&A.

• Your reporting period. Any period can calculate SG&A. (i.e., any month, quarter, or year). The accounting year closes nominal accounts like expenses. Historical financial reports often contain this data.

• Consider your accounting method. Cash-based accounting only recognizes paid SG&A costs. Accrual-based accounting will include additional expenses that have been incurred but not paid.

Selling, General and Administrative Expenses (SG&A) Report

A Selling, General, and Administrative expenses (SG&A) report is a financial document that provides information about a company’s operating expenses, excluding the costs of producing goods or services.

The report typically includes information about a company’s selling, general, and administrative expenses and is used to track the company’s spending on overhead costs.

An SG&A report typically includes the following information:

• Total SG&A expenses for a given period, such as a quarter or a year

• Breakdown of SG&A expenses into selling expenses, general expenses, and administrative expenses

• Comparison of current SG&A expenses to previous periods, such as the same quarter or year in the last year, to track trends and identify changes

• Comparison of SG&A expenses to revenue to determine the company’s efficiency and profitability

• Comparison of SG&A expenses to industry averages to assess the company’s competitiveness

The SG&A report is essential for investors, analysts, and company management, providing insight into the company’s operating expenses and efficiency. By tracking SG&A expenses, a company can identify areas where it can reduce costs and improve its profitability.

The report is also used by investors and analysts to assess a company’s financial health and to make informed investment decisions.

Selling, General and Administrative Expenses (SG&A) in Accounting

In accounting, classify Selling, General, and Administrative expenses (SG&A) as operating expenses and report on a company’s income statement.

A company incurs SG&A expenses in the daily operations of a company, excluding the costs of producing goods or services. These expenses are necessary for the company’s sales and administrative functions and support its operations, regardless of whether it generates sales.

SG&A expenses are an important financial metric impacting a company’s profitability and efficiency. Companies with high SG&A expenses may not operate as efficiently as those with low overhead costs, which can negatively impact their bottom line. Companies with low SG & A expenses and efficient operations may generate higher profits.

In accounting, record SG&A expenses as debits to the appropriate expense accounts, such as selling, general, and administrative expenses. These expenses are then subtracted from revenue to calculate the company’s operating income, which you use to determine the company’s profitability.

The SG&A expenses are also disclosed in the notes to the financial statements, providing additional information and transparency to investors and analysts.

Selling, General and Administrative Expenses (SG&A) in Business

In business, Selling, General, and Administrative expenses (SG&A) are critical aspects of operations and financial health. SG&A expenses are incurred in the daily operations of a company, excluding the costs of producing goods or services, and are necessary for the company’s sales and administrative functions. These expenses support the company’s operations, regardless of whether it does or doesn’t generate sales.

SG&A expenses are essential for companies and investors, as they can impact a company’s profitability and efficiency. Companies with high SG&A expenses may not operate as efficiently as those with low overhead costs, which can negatively impact their bottom line. Companies with low SG & A expenses and efficient operations may generate higher profits.

In business, it’s essential to manage SG&A expenses effectively to ensure the company’s financial health. It can be done by regularly monitoring SG&A expenses, identifying areas where costs can be reduced, and implementing cost-saving measures where appropriate. Companies can also compare their SG&A costs to industry averages to assess their competitiveness and identify areas for improvement.

Overall, SG&A expenses play a crucial role in a company’s success, and effective management of these expenses is integral to achieving financial stability and growth.

Benefits of Selling, General and Administrative Expenses (SG&A)

There are several benefits to tracking and managing Selling, General, and Administrative expenses (SG&A):

• Improved Financial Performance

By monitoring SG&A expenses, a company can identify areas where costs can be reduced and implement cost-saving measures, improving the company’s profitability and financial performance.

• Better Decision Making

SG&A expenses provide valuable information for decision-making, as they reflect a company’s operating expenses and efficiency. By tracking SG&A expenses, a company can make informed decisions about investments, cost-saving measures, and other financial initiatives.

• Increased Transparency

SG&A expenses are disclosed in the notes to a company’s financial statements, providing additional information and transparency to investors and analysts. It helps build trust and credibility with stakeholders.

• Comparison to Industry Averages

By comparing their SG&A expenses to industry averages, companies can assess their competitiveness and identify areas for improvement.

• Better Understanding of Operations

Tracking SG&A expenses provides valuable insight into a company’s operations, including its sales and administrative functions. It can help companies to make informed decisions about their operations and to improve their efficiency and effectiveness.

Overall, tracking and managing SG&A expenses is a critical aspect of financial management and can provide valuable benefits for companies and their stakeholders.

Detailed examples of SG&A costs

Selling, General, and Administrative (SG&A) expenses are the costs associated with a company’s daily operations that are not directly tied to producing goods or services. SG&A costs can be both fixed and variable and include a wide range of expenses. Here are some detailed examples:

1. Salaries and Wages

   SG&A costs include the salaries and wages of employees who are not directly involved in the production process. This includes management, administrative staff, sales personnel, and customer support representatives.

   Example: A software company has a marketing team, an HR department, and a finance team. The salaries and wages of these employees are considered SG&A costs, as they are not directly related to the development of the software products.

2. Rent and Utilities

   Companies often incur expenses related to renting office spaces, warehouses, or retail locations. This includes the cost of rent, electricity, heating, water, and other utilities needed to maintain the facility.

   Example: A retail store pays monthly rent for its storefront location and covers the cost of electricity, heating, and water for the store. These expenses are categorized as SG&A costs.

3. Marketing and Advertising

   SG&A costs include expenses related to promoting a company’s products or services, such as advertising campaigns, promotional materials, trade shows, and public relations efforts.

   Example: An e-commerce company runs a digital marketing campaign using Google Ads and social media platforms to promote its products. The fees paid to these platforms and the cost of designing and creating the ads are considered SG&A costs.

4. Office Supplies and Equipment

   Companies incur expenses for office supplies (such as paper, pens, and printer ink) and equipment (such as computers, printers, and furniture). These costs are considered part of SG&A expenses.

   Example: A law firm purchases new office chairs, desks, computers, and office supplies for its staff. These costs are classified as SG&A expenses.

5. Insurance

   Businesses need various types of insurance coverage, such as property, liability, and workers’ compensation insurance. The premiums paid for these insurance policies are considered SG&A costs.

   Example: A manufacturing company pays annual premiums for property insurance to cover potential damages to its facilities and liability insurance to protect against legal claims. These insurance costs are categorized as SG&A expenses.

6. Travel and Entertainment

   Companies often incur travel and entertainment expenses for business trips, client meetings, or employee training. These costs include airfare, lodging, meals, and transportation.

   Example: A consulting firm sends its consultants to attend a conference in another city. The costs of flights, hotel accommodations, and meals during the trip are considered SG&A costs.

7. Professional Services

   Companies may hire external professionals, such as lawyers, accountants, or consultants, to provide specialized services. The fees paid to these professionals are categorized as SG&A expenses.

   Example: A startup company hires an accounting firm to prepare its financial statements and tax filings. The fees paid to the accounting firm are considered SG&A costs.

In summary, SG&A costs encompass various expenses related to a company’s daily operations that are not directly tied to producing goods or services. These costs are crucial for businesses to manage effectively, as they can significantly impact a company’s profitability and financial performance.

Limitations of Selling, General and Administrative Expenses (SG&A)

While tracking and managing Selling, General, and Administrative expenses (SG&A) is an essential aspect of financial management, there are some limitations to this metric:

• Incomplete Picture

SG&A expenses only reflect a portion of a company’s operating expenses and do not include the costs of producing goods or services. It means more than the SG&A expenses are needed to provide a complete picture of a company’s financial health.

• Difficult to Compare

SG&A expenses can vary significantly from company to company, depending on the business’s size, industry, and nature. It can make it challenging to compare SG&A expenses between companies, and it’s important to consider other factors, such as revenue and operating income when comparing.

• Subjectivity

The classification of expenses as SG&A can be subjective, as some costs may be classified as selling or general and administrative fees. This subjectivity can make comparing SG&A expenses between companies and identifying improvement areas challenging.

• Limited Cost Control

A company incurs SG&A expenses in its daily operations, and many of these expenses may be necessary for the company’s sales and administrative functions. It can limit a company’s ability to control its SG&A costs and may limit the impact of cost-saving measures.

While tracking and managing SG&A expenses is an essential aspect of financial management, it’s important to consider these limitations and other financial metrics, such as operating income and profitability, to get a complete picture of a company’s financial health.

Understanding SG&A: Selling, General, Administrative Expenses – Definition and Explanation – Conclusion

In conclusion, Selling, General, and Administrative expenses (SG&A) are a critical aspect of a company’s financial performance and operations. SG&A expenses include all costs associated with the company’s sales and administrative functions, excluding the costs of producing goods or services. These expenses are incurred in the daily operations of a company and play a crucial role in its financial health and competitiveness.

Tracking and managing SG&A expenses is an integral part of financial management, as it can provide valuable insight into a company’s operations and help to improve its profitability and efficiency.

However, it’s also essential to understand the limitations of SG&A expenses, such as subjectivity in the classification of expenditures, and to consider other financial metrics, such as operating income and profitability, to get a complete picture of a company’s financial health.

Overall, understanding SG&A expenses is an essential aspect of financial management and can help companies to make informed decisions and to achieve financial stability and growth.

Understanding SG&A: Selling, General, Administrative Expenses – Definition and Explanation- FAQs

Why don’t organizations include SG&A costs in their product costs?

Organizations typically do not include SG&A costs in their production costs for several reasons:

1. Cost Allocation: SG&A costs are indirect and are not directly traceable to specific products or services. Including these costs in product costs would require allocating them across various products, which can be challenging and may result in inaccurate cost allocations.

   Direct costs, such as raw materials, labor directly involved in the production, and manufacturing overhead, are easier to trace to specific products, making them more suitable for inclusion in product costs.

2. Matching Principle: According to the matching principle in accounting, expenses should be recognized in the same period as the revenues they help generate. SG&A costs are often period costs, which are expensed in the period they are incurred.

   They support a company’s overall operations, not just the production of specific goods or services. Including SG&A costs in product costs would mean recognizing these expenses only when the products are sold, which may not accurately reflect when the costs were incurred.

3. Decision-Making: Separating product costs from SG&A costs allows managers to make better-informed decisions about pricing, production levels, and cost control.

   Including SG&A costs in product costs could make it more difficult to analyze and control the direct costs of production, potentially leading to less efficient decision-making.

4. Profit Margin Analysis: By excluding SG&A costs from product costs, organizations can more accurately calculate their gross profit margin, which is the difference between the revenue generated from product sales and the direct cost of producing those products.

   This metric is essential for evaluating the efficiency of the production process and comparing it across different products or time periods. Including SG&A costs in product costs could distort the gross profit margin calculation and make it less useful for analysis and decision-making.

5. External Reporting: Financial reporting standards, such as GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards), require companies to separate their costs into product costs and period costs, which include SG&A expenses.

   Following these reporting standards allows for more accurate and comparable financial statements, which are essential for external stakeholders, such as investors, creditors, and regulators.

In summary, organizations do not include SG&A costs in their production costs because it helps maintain a clear distinction between direct and indirect costs, aligns with accounting principles, supports better decision-making, allows for more accurate profit margin analysis, and adheres to financial reporting standards.

What’s the best way to determine if expenses are SG&A vs. product costs?

To determine whether an expense is an SG&A cost or a product cost, you should consider the nature of the expense and its relationship to the production process. Here are some guidelines to help classify expenses:

1. Direct Relationship to Production: Product costs, also known as the cost of goods sold (COGS), are directly related to the production of goods or services. These costs include:

   1. a. Direct Materials: Raw materials or components used to create the final product.

   2. b. Direct Labor: Wages and salaries of employees directly involved in the production process, such as assembly line workers or machine operators.

   3. c. Manufacturing Overhead: Indirect production costs, including factory rent, utilities, equipment depreciation, and indirect labor (e.g., factory supervisors or quality control staff).

2. Indirect Relationship to Production: SG&A costs are expenses that support the business’s overall operations but are not directly tied to the production process. Examples of SG&A expenses include:

   1. a. Salaries and wages of employees not involved in production, such as administrative staff, sales personnel, and customer support representatives.

   2. b. Office rent, utilities, and supplies.

   3. c. Marketing and advertising expenses.

   4. d. Insurance premiums, legal fees, and professional services fees.

   5. e. Travel and entertainment expenses related to business operations.

To determine whether an expense is an SG&A cost or a product cost, evaluate the expense’s relationship to the production process. If the expense is directly related to producing a good or service, it is a product cost. If the expense supports the company’s overall operations but is not directly tied to the production process, it is an SG&A cost.

However, it is important to note that the classification of certain costs might depend on the specific context and industry. For example, research and development (R&D) costs are typically considered SG&A costs in most industries.

Still, in certain industries, such as pharmaceuticals, these costs might be treated as product costs due to their direct relationship with developing new products.

In summary, the best way to determine whether an expense is an SG&A cost or a product cost is to examine its relationship to the production process and the company’s overall operations. This evaluation will help ensure that the expenses are classified accurately and in line with accounting principles and financial reporting standards.

What’s the difference between SG&A vs. operating expenses?

Selling, General, and Administrative (SG&A) expenses and operating expenses are related concepts in accounting, but they are not exactly the same. Here’s the difference between them:

1. SG&A Expenses: SG&A expenses are a subset of operating expenses that include the costs associated with a company’s daily operations that are not directly tied to producing goods or services.

   SG&A expenses encompass a wide range of costs, such as salaries and wages of non-production employees, office rent and utilities, marketing and advertising expenses, office supplies and equipment, insurance premiums, and professional services fees.

2. Operating Expenses: Operating expenses are the broader category that includes all costs associated with running a business, excluding direct costs of producing goods or services (Cost of Goods Sold) and non-operating expenses (such as interest expense and income taxes).

   Operating expenses include both SG&A expenses and other operating costs that are not part of SG&A. These may include:

   1. a. Research and Development (R&D): Expenses related to developing new products or services and improving existing ones.

   2. b. Depreciation and Amortization: The allocation of the cost of long-term assets, such as property, plant, equipment, and intangible assets, over their useful lives.

   3. c. Cost of Goods Sold (COGS): COGS may be considered an operating expense for some industries. COGS includes direct materials, direct labor, and manufacturing overhead.

In summary, SG&A expenses are a subset of operating expenses that focus on the costs of daily operations not directly related to producing goods or services.

Operating expenses are a broader category encompassing all business running costs, including SG&A expenses, R&D expenses, depreciation and amortization, and, in some cases, cost of goods sold.

To calculate a company’s operating income, you subtract operating expenses from its gross revenue.

What’s the average SG&A percentage by industry?

SG&A expenses as a percentage of revenue can vary significantly across industries due to differences in business models, cost structures, and competitive environments. Here are some approximate average SG&A percentages for various industries:

1. Technology and Software: 20-35%

   • Companies in this industry generally have higher R&D, sales, and marketing expenses, contributing to higher SG&A percentages.

2. Retail: 15-25%

   • Retailers typically have significant marketing and advertising expenses and store-related costs such as rent, utilities, and staff salaries.

3. Manufacturing: 10-20%

   • Manufacturing businesses usually focus more on production costs and have relatively lower SG&A expenses as a percentage of revenue.

4. Pharmaceuticals: 25-40%

   • High R&D expenses and sales and marketing costs, especially for branded drugs, contribute to relatively higher SG&A percentages in this industry.

5. Healthcare Services: 10-20%

   • This industry’s SG&A expenses can vary depending on the size and scale of the business, but administrative and staffing costs generally drive them.

6. Financial Services: 15-35%

   • SG&A percentages in this industry can vary widely due to differences in the types of financial services offered and the scale of operations.

7. Utilities: 10-15%

   • Utilities typically have lower SG&A expenses as a percentage of revenue, as they are highly regulated and have fewer marketing and advertising costs.

8. Food and Beverage: 15-25%

   • Companies in this industry generally have moderate SG&A expenses due to the need for marketing and advertising, but they also have significant production costs.

Please note that these percentages are rough estimates and can vary from company to company within each industry. Individual businesses might have higher or lower SG&A percentages based on their unique cost structures and strategies.

Understanding SG&A: Selling, General, Administrative Expenses – Definition and Explanation – Recommended Reading

Internal

1. Pledging- What is Pledging and How Does Pledging Work (benjaminwann.com)

2. Insufficient Funds – What It Means and Where it Comes From (benjaminwann.com)

3. Solicitation in Accounting: What It Is & Applies in Accounting (benjaminwann.com)

External

SG&A Expense (Selling, General & Administrative) – Guide, Examples (corporatefinanceinstitute.com)

Updated: 5/12/2023