Calculating your SG&A

What Is Selling, General & Administrative Expense (SG&A)?

Selling, general and administrative expense (SG&A) is reported on the income statement as the sum of all direct and indirect selling expenses and all general and administrative expenses (G&A) of a company. SG&A, also known as SGA, includes all the costs not directly tied to making a product or performing a service. That is, SG&A includes the costs to sell and deliver products and services and the costs to manage the company.  

KEY TAKEAWAYS

• Selling, general, and administrative expenses (SG&A) are included in the income statement in the expense section.

• SG&A is not assigned to a specific product, and therefore not included in the cost of goods sold (COGS).

• They are incurred as part of the day-to-day business operations.

• Managers target SG&A when a cost-reduction strategy is implemented because they do not affect the manufacturing or production of goods directly.

Selling, General & Administrative Expenses (SG&A)

Understanding Selling, General & Administrative Expenses (SG&A)

SG&A is not assigned to manufacturing costs as it deals with all the other factors that come with creating a product. This includes the salaries of various department staff such as accounting, IT, marketing, human resources, etc. It also includes commissions, advertising, and any promotional materials. In addition, rent, utilities, and supplies that are not part of manufacturing are included in SG&A. 

SG&A includes nearly everything that isn't included in the cost of goods sold (COGS). On the income statement, COGS is deducted from the net revenue figure to determine the gross margin. Below gross margin, SG&A and any other expenses are listed. When these expenses are deducted from the gross margin, the result is net income. Interest expense is one of the notable expenses not included in SG&A; it has its own line on the income statement. Also, research and development costs are not included in SG&A. 

SG&A expenses as a percent of revenue are usually highest for the health care and financial industries, while real estate and energy have some of the lowest. 

Types of Selling, General, and Administrative Expenses (SG&A)

Selling Expenses in SG&A

Selling expenses can be broken down into direct and indirect costs associated with selling a product. Direct selling expenses only occur when the product is sold and may include shipping supplies, delivery charges, and sales commissions. Indirect selling expenses are costs that occur throughout the manufacturing process and after the product is finished

Direct costs are directly related to the specific product being sold. Indirect costs are basically items that money is spent on in order to earn sales. Indirect expenses include product advertising and marketing, telephone bills, travel costs, and the salaries of sales personnel.

General and Administrative Expenses (G&A) in SG&A

G&A expenses are referred to as the overhead of the company. These are the costs a company must incur to open the doors each day. G&A expenses are incurred in the day-to-day operations of a business and may not be directly tied to any specific function or department within the company. They are more fixed than selling costs because they include rent or mortgage on buildings, utilities, and insurance. G&A costs also include salaries of personnel in certain departments, other than those related to sales or production.

Benefits of Selling, General & Administrative Expenses (SG&A)

SG&A plays a key role in a company's profitability and the calculation of its break-even point, which is the point at which revenue generated and expenses incurred are the same. It's also one of the easiest places to look when trying to boost profitability. Cutting operating expenses, such as non-sales personnel salaries, can usually be done quickly and without disrupting the manufacturing or sales processes.

SG&A is also one of the first places managers look to reduce redundancies during mergers or acquisitions. Following a merger, there are a number of redundant positions and employees. This area is an easy target for a management team that's looking to quickly boost profits. For example, the day that DuPont and Dow Chemical announced their merger in 2015, the companies announced 5,400 job cuts in an effort to save $750 million in expenses.1