SG&A: Selling, general, and administrative expenses

Understanding your company’s expenses is key to running a successful business. However, if you treat all expenses the same, you might inadvertently cut critical costs or miss opportunities to reduce business expenses. Breaking down your expenses into categories helps you analyze how your company spends its money. An important category is SG&A:

What is SG&A?

SG&A stands for selling, general, and administrative expenses. It includes all the costs that aren’t directly related to producing goods or services. SG&A accounts for the overhead costs necessary for day-to-day operations, but these costs don't contribute to production directly.

Examples of SG&A

• Administrative costs: Salaries for HR, IT, and accounting departments
• Selling costs: Sales commissions, advertising, and promotion
• General expenses: Rent, utilities, and office supplies

Key considerations

• SG&A includes all expenses not directly tied to production, such as marketing, administrative payroll, and office utilities
• SG&A is separate from cost of goods sold (COGS) and appears as anincome statement line item
• These expenses play a significant role in profitability and are often the first to be targeted for reduction in cost-cutting efforts

What’s the difference between SG&A and COGS?

Understanding the distinction between SG&A and COGS is essential for analyzing your business’s financials.

SG&A covers all indirect costs, like marketing and administrative expenses, while COGS includes direct costs related to production, such as labor, materials, and manufacturing overhead.

Knowing the difference, you can make better decisions to improve your gross profit and net income.

SG&A vs operating expenses

Operating expenses (OpEx) and SG&A are often used interchangeably, but understanding their differences is essential for accurate financial reporting and decision-making.

Operating expenses are the broader category of costs a company incurs to run its business. This includes all expenses that aren’t directly tied to producing goods, such as COGS but are still necessary to operate. SG&A is a subset of operating expenses, which primarily covers costs related to selling, general, and administrative activities.

How companies report SG&A vs. operating expenses

Companies can choose to report their SG&A expenses separately or include them as part of total operating expenses. The image below shows an example from Apple's financial statement, where they separate SG&A under operating expenses. This breakdown provides clarity about the specific costs tied to the day-to-day operations of the business.

The chart also illustrates how Apple reports SG&A alongside other operating costs such as research and development. By breaking down SG&A separately, you can provide more granular insights into your operational efficiency and profitability, which is essential for investors, managers, and other stakeholders.

Types of SG&A expenses

SG&A expenses can be broken down into three main categories:

1. Selling expenses

These are the costs directly associated with selling your product or service. They include both direct selling expenses and indirect selling expenses.

Direct selling expenses

• Sales commissions
• Affiliate fees
• Packaging and delivery costs

Indirect selling expenses

• Salaries for salespeople
• Marketing costs, including online and print ads
• Website design, hosting, and maintenance

2. General expenses

These expenses support your business’s operations but aren’t tied to a specific function such as sales or administration.

Examples

• Rent for office space
• Depreciation on office equipment and furniture
• Utility bills, such as water, electricity, internet
• Office supplies, such as stationery and cleaning materials

3. Administrative expenses

These costs are tied to managing your business and typically involve compensation for your administrative staff.

Examples

• Payroll for HR and accounting departments
• Executive compensation (CEO, CFO, etc.)
• Legal and consulting fees
• Healthcare benefits for employees

How to calculate SG&A

Calculating SG&A is an essential part of business financial management. It helps you determine how much your company spends on indirect costs and overhead relative to its revenue.

Step 1: Identify and categorize your SG&A expenses

First, categorize all indirect costs related to your business’s selling, general, and administrative activities. This includes:

• Selling expenses: Costs related to selling your products or services, such as sales commissions, advertising expenses, and marketing costs
• General expenses: Overhead costs not tied to a specific function, such as rent, utilities, and office supplies
• Administrative expenses: Costs related to business administration, including salaries for HR, IT, and executive staff

Step 2: Add together your SG&A categories

For example:

• Selling Expenses: $50,000
• General Expenses: $30,000
• Administrative Expenses: $20,000

Total SG&A Expenses = $50,000 + $30,000 + $20,000 = $100,000

Step 3: Calculate SG&A margin

Once you have your total SG&A expenses, calculate your SG&A margin, which shows the percentage of revenue that goes toward these costs.

SG&A Margin Formula:

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

If your net revenue is $500,000, the SG&A margin would be:

SG&A Margin = $100,000 / $500,000 = 0.2 or 20%

This means 20% of your revenue is spent on SG&A expenses. A higher margin indicates that a larger portion of your revenue’s used for overhead costs, which can affect profitability.

Why it’s important to track SG&A

Tracking SG&A expenses is crucial for several reasons:

• Tax deductions: SG&A expenses are typically tax deductible, reducing your business’s income tax liability
• Cost-cutting: By identifying areas where you can reduce SG&A, you can boost profitability without affecting production quality
• Financial forecasting: Monitoring SG&A helps you predict future expenses and adjust your budget accordingly

Special considerations

When calculating SG&A expenses, it's important to ensure that all relevant costs are properly classified and assigned. Several factors, such as the accounting method used and the categorization of certain expenses, can impact the accuracy of your SG&A calculations. Here are some key points to keep in mind.

• Correctly classify expenses as SG&A vs. COGS
• Separate operating expenses from SG&A for accurate reporting and analysis
• Use accrual accounting or cash basis accounting as needed based on your business structure

Effective strategies to reduce SG&A costs

Reducing SG&A costs doesn’t have to mean cutting essential services. Here are a few strategies that businesses can use to manage overhead costs effectively. By targeting these areas, you can reduce your SG&A costs while maintaining the quality of your services:

SG&A expense management example

Here’s an illustration of a small business that successfully reduced its SG&A costs. These changes boosted cash flow and improved company profitability.

Before:

• High office rent
• Excessive marketing spend with low ROI
• Overstaffed administrative department

After:

• Moved to a smaller office with reduced rent
• Focused marketing efforts on high-performing channels, reducing spend
• Outsourced accounting and HR tasks to cut labor costs

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

Not sure you can tackle your SG&A expenses on your own? Let Ramp do the heavy lifting for you.

With Ramp, you can easily track everything from vendor spend and 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.

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.