What is a 'Selling, General & Administrative Expense - SG&A'
Selling, general and administrative expenses (SG&A) are reported on the income statement as the sum of all direct and indirect selling expenses and all general and administrative expenses of a company. There are many factors that go into manufacturing a product, such as a warranty, and therefore SG&A expenses are deducted to generate a net income. SG&A expenses are also monitored to ensure proper cash flow is being managed.
BREAKING DOWN 'Selling, General & Administrative Expense - SG&A'
SG&A are the costs that occur during the daily operations of a company and not directly related to the manufacturing of the product. These are the expenses related to the selling, promoting and delivering of a product as well as managing the company. SG&A is not assigned to the cost of goods sold as it deals with all the other factors that come with creating a product.
Selling expenses can be broken down into direct and indirect costs associated with the selling of a product. Direct expenses only occur when the product is sold and include shipping supplies, delivery charges and sales commissions. Indirect expenses are the costs that occur throughout the manufacturing process and after the product is finished. An item does not have to be sold for an indirect expense to be incurred. This can be considered money spent to earn sales. Indirect expenses include product advertising and marketing, telephone bills, travel costs and the salaries of sales personnel.
General and Administrative Expenses
General and administrative (G&A) expenses are referred to as the overhead of the company. They are the costs a company must incur to open the doors each day. G&A costs are more fixed than selling costs because they include rent/mortgage on buildings, utilities and insurance. G&A costs also include salaries of all no nsales personnel.
SG&A and Profitability
Low profits can indicate an issue with a company, such as a poor product, high expenses or management deficiencies. To increase profits without making large changes to the manufacturing process, management looks to reduce SG&A. Unfortunately, the quickest way to reduce operating expenses is to eliminate salaries of non sales personnel. This is a decision that must be made after careful contemplation by the management team as layoffs can have a negative impact on company morale.
Another time SG&A is cut to increase profitability is during mergers and acquisitions. When two companies merge, many employee positions become redundant and operations are no longer streamlined. This was the problem faced by H.J. Heinz Holding Corporation when it merged with Kraft Foods in July 2015, forming Kraft Heinz Company. After the merger, 2,500 jobs were cut to achieve a savings of $1.5 billion by 2017.