What are SG&A expenses?
As a founder, you've probably heard the term "SG&A expenses." But what is SG&A, and why does it matter for your business?
In this brief guide, we’ll explain what SG&A expenses are, how to track them, and what they can indicate for your trajectory. Monitoring and optimizing different types of spending are critical for your company's financial outlook.
What does “SG&A” mean?
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.
SG&A expenses are commonly used to measure the financial health of a company, and understanding them is key to staying on top of your company’s viability.
Different kinds of SG&A expenses
Selling expenses are the costs associated with the sale, distribution and marketing of a product or service.
They could include:
- Salaries for sales and marketing employees
- Sales commissions
- Marketing and advertising
- Shipping and distribution
This category covers other overhead expenses that are necessary to sustain the business, but not related to production, sales, or administration:
- Electricity, internet, and other utilities
- Office supplies
Administrative expenses include costs that contribute to the administration or management of the business:
- Wages for non-sales personnel, like those in human resources or accounting
- Executive compensation
- Legal fees
- Consulting fees
Where are SG&A expenses reported?
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.”
Why should I pay attention to SG&A expenses?
There are several reasons to monitor SG&A expenses. 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 expenses are particularly important during mergers and acquisitions, as executives will often look to slash these costs first in order to reduce redundancies and boost profit.
Typical SG&A ratios vary widely from one industry to another. 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. While you don't want to have unnecessary SG&A expenses, some of these costs are simply necessary to keep a business running.
Note that 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.
Of course, you'll need to incorporate your business before you can start issuing equity to investors. Click the button below to initialize the incorporation process and start moving your company forward.