A guide to Selling, General, and Administrative Expenses SG&A for your business

Knowing how these costs affect your business is important, but during challenging economic times this knowledge is essential. It’s important to recognize that overlap can exist, and depending on how the company classifies these costs, some expenses may fall under both categories. A balanced approach is necessary—cut costs where possible, but don’t undermine the support structures that keep the business running effectively. It’s about finding the right mix of cost-saving and investment to ensure the business can continue to grow and remain competitive.

Analyzing the Costs

• The examples below from Walmart (WMT -0.68%) and Visa (V 0.19%) demonstrate two different reporting strategies for SG&A expenses.
• In the firms with low sales revenue, SG&A expenses and material cost impact will be equal.
• SG&A, or “selling, general and administrative” describes the expenses incurred by a company not directly tied to generating revenue.
• It’s the accounting department of a company that decides what should go into COGS and what should go into SG&A.
• SG&A expenses are often the most significant operational cost center for service-based businesses with minimal COGS.
• In the next section, we’ll project our company’s SG&A expense (and operating margin) over the five-year forecast period.

If SG&A is too high, it could be a sign that the business is spending too much on non-essential things, which can hurt profitability. These include both production and non-production costs, such as raw materials or direct labor. Too much spending in these areas can also suggest the company isn’t running efficiently. On the flip side, smart businesses manage their SG&A expenses carefully, making sure they spend just enough to keep things running without overdoing it. It’s all about finding that sweet spot where spending supports growth without hurting the bottom line.

Where Does SG&A Appear in Financial Statements?

However, there are some restrictions that come along with using SG&A as Interior Design Bookkeeping a measurement of the financial health of a company. Because SG&A costs are indirect costs, they can differ significantly between businesses and even within industries. As a result, it is challenging to compare SG&A costs from one company to another. In addition, SG&A expenses do not offer any insight into the direct costs of producing goods or services, which for some businesses can be a significant factor. As these costs do not directly relate to production or sales volumes, they are generally fixed — or semi-fixed — and listed on the company’s income statement as indirect costs. Often, the objective of a company’s cost-reduction strategy is to lower costs in this category.

Definition of SG&A

This is why SG&A expenses are often the first to go if a company is trying to reduce costs. What can be considered a “good” SG&A ratio for a company depends on a few factors, including industry, age, growth trajectory, and more. Below are two real-life income statement examples from Microsoft Inc.’s (MSFT) 10-K form and Netflix, Inc.’s (NFLX) latest 10-Q filing. SG&A expenses can be reported differently, depending on the company. Depreciation refers to expenses related to a fixed asset’s usage, allocating costs based on wear and tear throughout the asset’s useful life.

Analyze the Sales, General, Administrative (SG&A)

Selling, General and Administrative (SG&A) costs, also called operating expenses, are a company’s overhead costs that are not directly linked to production. These costs are essential for day-to-day operations and can include rent, utilities, office supplies, insurance, employee salaries and marketing expenditure. 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 sg & a meaning 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 subtracted from gross profit to determine a company’s operating income.

General & Administrative (G&A) Expense

You might encounter a problem when you’re analyzing income statements from two firms in the same industry. Some costs can be either the cost of goods sold or the SG&A expenses. This can make the gross profit margin and the operating profit margin appear to differ, even if the firms are financially identical otherwise.

• The SG&A margin ratio can be informative in terms of understanding a company’s cost structure.
• Breaking these terms down adds further context to a company’s operations.
• Selling, general, and administrative (SG&A) expenses account for the essential costs of running the day-to-day business operations.
• The selling, general and administrative expense (SG&A) comprises all business operating expenses that are not included in the cost of goods sold.

Types of SG&A Expenses

SG&A expenses are unearned revenue mostly comprised of costs that are considered part of general company overhead, since they cannot be traced to the sale of specific products. For example, sales commissions directly relate to product sales, and yet may be considered part of SG&A. When an SG&A cost is considered a direct cost, it is acceptable to shift the cost into the cost of goods sold classification on the income statement. SG&A are the operating expenses incurred to 1) promote, sell, and deliver a company’s products and services, and 2) manage the overall company. G&A expenses are the overhead costs of a business, many of which are fixed or semi-fixed. These costs don’t relate directly to selling products or services but rather to the general ongoing operation of the business.