Selling, General and Administrative Expenses (SG&A)

What is Selling, General & Administrative Expenses?

Selling, General, and Administrative (SG&A) expenses reflect the overhead costs a company incurs in its daily business operations. These include the costs to promote, deliver and sell a company’s product or service, as well as expenses involved in managing the entire company. SG&A is given as an expense line on the income statement.

It is important to note that SG&A, unlike COGS, is not directly related to the costs of production or sales figures. However, over a period of a year, these expenses are fairly flexible, so when a company forecasts, it can link the SG&A expenses to sales. SG&A expenses are generally not product-related costs, therefore companies don’t assign them to the cost of goods sold or to inventory as these costs are not attributable to the manufacturing process.

Types of SG&A Expenses

Types of expenses within SG&A include advertising, sales commissions, marketing, rent, utilities, management salaries, travel, meals, stationery, and more. In some cases, depending on the context, depreciation expense can also be included in SG&A.

• Selling Expenses: this includes advertising, sales commissions, promotional materials, travel for sales staff
• General Expenses: typically, office rent, utilities, insurance, office supplies
• Administrative Expenses: salaries of executives, accounting fees, legal costs, IT support, HR services

All these expenses are essential for running a business but not directly tied to production.

How to Calculate SG&A Expense

To calculate SG&A (Selling, General, and Administrative) expenses, analysts need to sum all the non-production expenses incurred by a business. This includes selling expenses, like marketing and advertising, general expenses, like rent and utilities, and administrative expenses, like salaries and legal fees.

The formula for this is:

Why SG&A is Important

SG&A is critical when looking at a company’s profitability, conducting break-even analysis, and cost-cutting scenarios.

SG&A is one of the line items requiring detailed examination when comparing company cost structures and profitability. The break-even point for a company (which is where revenue earned equals the expenses incurred) can be adjusted most easily and efficiently by changing the SG&A cost component. Company management will often targets the SG&A line when looking to boost profitability as reductions are less likely to affect product or manufacturing quality.

SG&A can reveal whether a company has high administrative expenses, which may come from running a large head office or renting high-cost offices. It may also come from having a large or high-cost sales team. Analysts looking at companies will examine this line closely to ensure that a company is not over-spending on non-essential costs.

How to Report SG&A Expenses

SG&A expenses are reported in a company’s income statement and represent any overheads included in a company’s core operating business related to supporting the business. These expenses are included in the calculation of operating profit, profit before tax, and net income.

Depending on the accounting method, companies may report them:

• As a single SG&A line item
• Broken down into Selling and G&A
• Grouped under Operating Expenses, with additional subcategories for clarity

Some companies allocate certain SG&A components to specific cost centers or departments for internal reporting. If in doubt when looking at financial statements, it is best to check the notes section to confirm details.

What is a Good SG&A Expense?

For mature companies, a 10–20% SG&A as a percentage of revenue is considered a good SG&A ratio. For startups or high-growth firms, +30–50% is possible due to heavy investment in sales and marketing. A lower SG&A margin might indicate operational efficiency, but too low can mean an underinvestment in growth. Industry-specific benchmarks are important to recognize here too as retail, tech, and manufacturing all have very different SG&A profiles.

Presentation of SG&A on the Income Statement

Below is an outline for a simple income statement, showing the progression from a sales number at the top to a net income figure at the bottom. SG&A is reported below the gross profit line, or sometimes below the COGS line if gross profit is not shown.

In this instance, the expenses are shown as negative numbers, however, this is not always the case so analysts will need to check the format of each income statement.

Below is an extract from Expedia’s financial statements. In this case, Expedia has chosen to show the SG&A expenses in two separate line items:

• Selling and marketing
• General and administrative

Furthermore, both these line items have further details provided in the notes to the financial statements – analysts would need to find Footnote 1 for more information.

SG&A in the Financial Statements

SG&A Expenses vs. Operating Expenses

Operating expenses include the cost of goods sold (COGS) and selling, general and administrative (SG&A) expenses. Operating expenses are costs a company incurs in its regular business activities, while non-operating expenses are costs unrelated to the core operations.

Difference Between COGS and SG&A

This table highlights the differences between COGS and SG&A:

Cost of goods sold (COGS) relates to the direct costs of production for a good or service and is used to calculate gross profit. These costs are usually raw materials, production, factory and labor costs so will vary according to how many goods are being produced.

SG&A typically runs on a more fixed cost basis and covers the head office, marketing, legal and other internal costs, which are not directly related to production. Whilst these costs can be adjusted, it is often fairly fixed, so are chargeable even if production is halted for a period. Longer term more strategic changes can be made such as increasing or decreasing a sales team size. Analysts will look at SG&A closely to ensure that a business is operating efficiently.

Operating Profit and SG&A

Gross profit minus SG&A costs equals the operating profit of the business. The operating profit shows the amount of money generated from sales minus the costs associated with making the product and supporting the business.

When conducting comparisons of similar companies, analysts will routinely calculate the operating margin. It allows them to determine which company can better generate operating income. Pricing strategy and labor costs affect this operating margin, and stakeholders can use the ratio to measure managerial flexibility and competency.

The operating margin is a profitability ratio that measures how much profit a company makes per one dollar of sales. It is calculated by dividing the reported operating profit by the sales for that period. It can be compared to a company’s historical performance (and future) and also against a peer group.

Examples of SG&A Expenses

Below are extracts of the income statements for Coca-Cola and Pepsi from their three months end quarterly 10-Q reports for 2019.

Pepsi

PepsiCo, Inc, and Subsidiaries – Extract from 10-Q July 2019 form

Again, we can see that SG&A expenses are clearly laid out and more details will likely be available in the footnotes. This may include details such as sales commissions or the tenure of an office rental.

SG&A Points To Note

When looking at these company’s 10K financial statements, here are some things to consider:

• The numbers reported in the income statement are in millions (this will be detailed earlier in the document)
• Coca Cola’s operating margin is (2,499 SG&A / 9,507 Sales) x 100 =26%
• Pepsi’s operating margin is (2,855 SG&A / 17,188 Sales) x 100 = 17%
• The ratio shows that for every $1 sale Coke generated, it made $0.26 in operating earnings
• The ratio shows that for every $1 sale Pepsi generated, it made $0.17 in operating earnings
• Using the operating margin as a basis for comparison, Coke appears to be a more attractive company as it is able to generate substantially greater profits per dollar of sales
• To analyze this further it is best to look at the product mix and the costs incurred to run the business

Click here to access the free Financial Edge SG&A template and see how to calculate operating profit and ratios associated with SG&A.

Conclusion

Selling, General, and Administrative (SG&A) expenses are a critical component of a company’s financial health and operational efficiency. These expenses encompass a wide range of costs, including advertising, marketing, rent, utilities, and administrative salaries, which are essential for supporting the business but not directly tied to production.

Understanding and managing SG&A expenses is crucial for maintaining profitability, conducting break-even analyses, and implementing cost-cutting measures without compromising product or manufacturing quality. By carefully analyzing SG&A expenses, companies can identify areas for improvement, enhance their operational efficiency, and ultimately achieve better financial performance.

Additional Resource

Selling General and Administrative Expenses SGA

Operating Profit

Operating Expenses