What Are Selling, General, and Administrative Expenses (SG&A)?
The category of selling, general, and administrative expenses (SG&A) in a company's income statement includes all general and administrative expenses (G&A) as well as the direct and indirect selling expenses of the business.
In fact, this line item includes nearly all business costs not directly attributable to making a product or performing a service. SG&A includes the costs of managing the company and the expenses of delivering its products or services.
- Selling, general, and administrative expenses (SG&A) are included in the expenses section of a company's income statement.
- SG&A expenses are not assigned to a specific product, and therefore are not included in the cost of goods sold (COGS).
- SG&A expenses are incurred in day-to-day business operations.
- Managers typically target SG&A for cost reductions because they do not directly affect the product or service.
Selling, General & Administrative Expenses (SG&A)
Understanding Selling, General, and Administrative Expenses (SG&A)
SG&A covers nearly everything that isn't covered in the category of cost of goods sold (COGS). Some major SG&A expenses include:
- The salaries paid to the staff of the accounting, information technology, marketing, and human resources departments
- The costs of commissions, advertising, and promotional materials
- Rent, utilities, office equipment, and supplies that are not used for manufacturing
Expenses that are not included in SG&A include:
- Manufacturing costs such as materials and labor
- Interest payments
- Research and development costs
How to List SG&A and COGS
On the income statement, COGS is deducted from the net revenue figure to determine the gross margin.
SG&A and any other expenses are listed below the gross margin.
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. Research and development costs also are excluded from SG&A.
SG&A expenses as a percent of revenue are generally high for healthcare and telecommunications businesses but relatively low for real estate and energy.
Direct and Indirect Selling Costs
Selling expenses can be broken down into direct and indirect costs.
Direct selling expenses are incurred only when the product is sold. They include shipping supplies, delivery charges, and sales commissions.
Indirect selling expenses occur throughout the manufacturing process and after the product is finished. Examples are advertising and marketing, telephone bills, travel costs, and the salaries of sales personnel.
The G&A of SG&A
G&A expenses are the company's overhead. They 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 fixed costs that include rent or mortgage on buildings, utilities, and insurance. G&A costs also include salaries of personnel in certain departments not directly related to sales or production.
The Role of SG&A
SG&A plays a key role in a company's profitability and the calculation of its break-even point. That's the point at which the company's revenue generated and its expenses incurred are the same.
It's also one of the easiest places for management to look when trying to boost profitability. Cutting operating expenses, such as non-sales personnel salaries, can usually be done without disrupting the manufacturing or sales processes.
SG&A is also one of the first places managers look to when reducing redundancies after mergers or acquisitions. That makes it an easy target for a management team looking to quickly boost profits.
What Is and Isn't Included in Selling, General, and Administrative Expenses (SG&A)?
SG&A includes almost every business expense that isn't included in the cost of goods sold (COGS).
- The accountants, marketing professionals, and software engineers who keep the business running, and all of the office space, supplies, and utilities they use, are SG&A expenses.
- The raw materials that go into the product and the salaries of the people who build it are COGS expenses.
What Are Selling Expenses?
Selling expenses include both indirect and direct business costs.
- Indirect selling expenses include advertising and marketing costs, the company's telephone bills and travel costs, and the salaries of its sales personnel. Such expenses occur throughout the manufacturing process and even after the product is finished.
- Direct selling expenses are incurred only when the product is sold and are related to the fulfillment of orders. They include the costs of shipping and shipping supplies, delivery charges, and the payment of sales commissions.
What Are General and Administrative Expenses (G&A)?
The G&A of SG&A may be called overhead expenses. A business has many expenses that are not directly related to making or selling a product. Office rent, utilities, and insurance all are costs of doing business. Departments like human resources and information technology support the business but do not take a direct role in product creation.
How Can SG&A Be Useful to a Business Manager?
SG&A is both critical to the success of a business and vulnerable to cost-cutting.
Cutting the cost of goods sold (COGS) can be tough to do without damaging the quality of the product. Cutting operating expenses can be less damaging to the core business.
SG&A costs are typically reduced after a company merger or acquisition makes it possible to reduce redundancies.