SG&A expenses cover a lot of ground, from the non-production costs of your product or service to the overhead costs to running your company on a day-to-day basis.
They’re commonly used to measure the financial health of a company, and understanding them is key to staying on top of your company’s viability as a profitable venture.
In this brief guide, we’ll explain everything you need to know about SG&A expenses.
SG&A expenses is short for selling, general and administrative expenses. These expenses, sometimes referred to as operating expenses, capture virtually all business expenses that can’t be directly attributed to the manufacturing of a product or service.
This sets it apart from the cost of goods sold, or COGS.
For example, let’s consider a fast-casual burger joint.
The business owner will incur costs on the ingredients used to make the burger; the meat, buns, toppings, and so on. This is the cost of goods sold, because the costs are directly attributed to the product.
But a lot more goes into the sale of each burger than just the ingredients. There are salaries for the cook and the server, plus costs for the new grill the business owner just purchased. There’s also rent and property insurance. Perhaps the burger joint just rolled out a new marketing campaign. All of these costs fall under SG&A expenses.
These are the costs associated with the sale, distribution and marketing of a product or service.
These are the expenses that would be incurred by the company no matter the industry it’s in or the product/service it offers. Think of these as your day-to-day business expenses, minus payroll for administrative staff.
These are similar to general expenses, but deal more directly with the management of the business.
SG&A expenses are reported on the company’s income statement, below gross profit.
Gross profit is calculated by listing your company’s total revenue and subtracting the cost of goods sold.
Thus, subtracting SG&A and all other miscellaneous expenses helps you arrive at your company’s net income, or “bottom line.”
There are several reasons why SG&A expenses are important to monitor.
While you may think expenses are expenses regardless of how they’re incurred, investors don’t think the same way.
As we touched on, SG&A expenses are listed separately from the cost of goods sold (COGS) on a company’s income statement. Because it’s difficult to cut COGS without harming the product, outside investors will often look at the ratio of SG&A expenses to sales revenue to determine whether or not your business provides a promising investment opportunity.
SG&A ratios vary widely, depending on the industry. The median company in the energy and real estate sectors has a ratio below 10%, whereas the median health care company has a ratio above 40%. A ratio between 15% and 20% is usually considered healthy — but the lower, the better.
SG&A expenses are also important during mergers and acquisitions, as executives will often look to slash these costs first in order to reduce redundancies and boost profit.
Moreover, SG&A expenses, like other expenses, are tax-deductible in the year the costs are incurred.
Some SG&A expenses simply can’t be avoided, but that doesn’t mean you should let them balloon out of control. They’re a major factor in determining operating income, and key to determining profitability for shareholders.