SG&A: Selling, general, and administrative expenses

As a business owner, you already know how important it is to keep your business’s spend under control. 

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But if you’re treating all of your expenditures the same, you may inadvertently find yourself cutting expenses that are critical to your operations or, on the other hand, missing out on opportunities to make meaningful reductions. Breaking your expenses out into different categories—and accurately classifying them as they’re incurred—makes it possible to perform a more granular analysis of how your company actually spends its money. 

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One important category of expenses? SG&A: Selling, general, and administrative costs. 

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Below, we take a look at which expenses that fall under the SG&A umbrella and which don’t. We also compare selling, general, and administrative expenses against other expense categories like COGs, show you how to calculate your SG&A expenses, and answer other common questions you may have. 

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

Selling, general, and administrative expenses (SG&A) is a category of business expense that includes any cost that is not directly tied to your business’s production of a product or service. In other words, SG&A accounts for your company’s overhead costs—expenses that are necessary for the day-to-day operation of your business, but which don’t directly relate to production. 

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A few common examples of SG&A expenses include employee salaries for administrative roles, like payroll and human resources (HR); rent and utility payments for your administrative offices; legal fees; and marketing and advertising costs, amongst others.

SG&A vs COGs

COGs stands for cost of goods sold, a category of business expenses that includes all costs that are directly tied to the production of goods. It includes things like inventory costs, material costs, labor expenses tied to production, and overhead (rent, utilities, maintenance, etc.) for your production facilities. 

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SG&A, on the other hand, are non-production costs, focusing instead on the indirect costs of running your business. In this way, COGs and SG&A can be thought of as something like opposites. 

SG&A vs operating expenses

Operating expenses (OpEx) is a term that, like SG&A, refers to the indirect costs of operating a business. For this reason, many businesses—especially smaller businesses—will use the terms interchangeably when talking about expenses that are not COGs.

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That being said, some businesses do make a distinction between SG&A and operating costs on financial statements, including their income statement. When this is the case, OpEx will typically refer to all of the costs a business incurs that are not tied to production, while SG&A will refer to a subset of these expenses, with research and development (R&D) being another common subcategory.

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Types of SG&A expenses

As noted above, many of the most common expenses incurred by a business will fall under the SG&A umbrella. These expenses can be broken out into the following subcategories, which can be easier to understand:

Selling expenses

Selling expenses are any expense that you incur while actually selling your product or service. These costs can be further broken down into direct selling expenses, which you only incur after selling a product or service, and indirect selling expenses, which you incur before or after making a sale. 

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Common direct selling costs include:

• Sales commissions or bonuses
• Affiliate fees (for sales made by affiliates)
• Packaging expenses
• Delivery and distribution expenses
• Insurance costs during shipping

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Common indirect selling costs include:

• Base salaries for your salespeople 
• Promotion expenses, advertising expenses, and marketing costs
• Salaries and wages for other departments (marketing, public relations)
• Website design, hosting, and maintenance
• Travel expenses related to sales (airfare, lodging, meals, mileage)
• Out-of-pocket expenses reimbursed to employees

General expenses

General expenses are any costs related to your business’s overhead costs that aren’t tied to a specific function, such as sales or administration. This includes things like:

• Rent or mortgage payments for office space 
• Utility bills like water, electricity, garbage disposal, and internet/telephone packages 
• Depreciation on office equipment like computers, printers, fax machines, and other electronics, as well as furniture like desks and chairs
• Office supplies like stationery, pens, pencils, toiletries, and cleaning supplies 
• Various forms of business insurance, including general liability insurance, property insurance, and renter’s insurance

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It’s important to note that similar expenses may be recorded under COGs when they are associated with the production of your products and services. 

Administrative expenses

Administrative expenses are costs related to the actual management of your business. These costs are usually heavily centered around the compensation paid to your administrative staff. It includes things like:

• Payroll for your HR, accounting, and information technology (IT) departments
• Employee benefits for your administrative workers, including employer-sponsored insurance (health insurance, life insurance), healthcare stipends, and retirement contributions
• Executive compensation, including salary, incentives, and other benefits for the CEO, CFO, COO, and other members of your C-Suite
• Legal counsel, whether you have an in-house legal team or work with an external law firm
• Consultant fees related to HR, IT, accounting, management, etc. 

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As a note, some businesses group their general and administrative expenses together as a single line item in their income statement. 

How to calculate SG&A

As long as you are properly categorizing your business expenses, calculating your company’s SG&A costs should be relatively easy. In fact, most accounting softwares should be able to perform the calculation automatically for you. That being said, if you are calculating SG&A manually, all you need to do is add together your selling expenses, general expenses, and administrative expenses.

SG&A formula

If you are looking to calculate your SG&A expenses so that you can spike it out as a line item in your company’s financial reports, you can use the following formula:

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

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If, on the other hand, you need to calculate your company’s SG&A margin, you would use the following formula: 

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SG&A Margin = SG&A Expenses / Net Revenue

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Why should you calculate your SG&A margin? Simply, this ratio helps you understand what percentage of your net revenue is “used up” by your SG&A expenses, which in turn can be used to inform various business decisions. 

Why it’s important to track SG&A

Keeping track of SG&A expenses offers a number of potential benefits to your business, including the fact that:

SG&A are tax deductible

As long as your SG&A expenses are an ordinary and necessary business expense, they’re tax deductible. That means that you can write them off to reduce your business’s income tax liability come tax season. 

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But in order to take full advantage of these deductions, you need to be accurately tracking all of your expenses—including SG&A. If you miscategorize expenses, don’t collect supporting documentation in the form of receipts, or fail to log expenses, you could risk missing out on a bigger writeoff. 

SG&A are often fixed, recurring expenses

While this isn’t true of all SG&A expenses, many of the biggest costs included in SG&A are recurring expenses—think rent, utilities, business insurance, and salaries. If you’re looking to cut down on spending, recurring expenses can be an opportunity. When you reduce a recurring expense, you aren’t just realizing that saving once, you’re realizing it every single time you pay that expense. 

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This is why SG&A are often the first expenses to be targeted by management when a company embarks on a cost-cutting endeavor. Headcount reductions, salary and benefits renegotiations, and downsizing to a smaller facility (or moving to a cheaper location) can all offer a major boost to your bottom line.  

SG&A aren’t tied to production

Many businesses are reluctant to cut costs related to production—for example, switching to a cheaper material or components—out of a fear that they may lower the quality of their final product and damage customer loyalty. But because SG&A aren’t tied to production, it’s often possible to reduce these non-production costs without affecting the end product. This can lead to greater liquidity, cash flow, and ultimately profits without risking your customer base. 

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If your sales team regularly travels to meet with prospects, for example, your business may naturally incur a lot of travel expenses. Reducing these—for example, by saving face-to-face meetings for prospects who are close to buying and by leveraging video conferencing for prospects earlier in the pipeline—can lead to big savings without compromising the quality of whatever it is you’re selling. 

Track and manage your company’s SG&A with Ramp

Not sure that you can track, manage, and calculate your SG&A expenses on your own? Consider leveraging an expense management platform like Ramp, which can automatically do much of the heavy lifting for you.

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With Ramp, you can easily track everything from vendor spend to out-of-pocket employee purchases to travel expenses, mileage reimbursements, recurring bills, and more—all while collecting and digitizing receipts, automatically categorizing expenses, and streamlining your approvals. 

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Want to learn more about how Ramp’s expense management platform can help your business better track its spending? Try Ramp for free, or request a demo to get started.