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 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 and encompasses all direct and indirect selling costs incurred by the business. Some of the expenses included 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.
It is important to note that SG&A, unlike COGS, is not directly related to the sales number. However, over a period of a whole 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.
Key Learning Points
- Selling, General, and Administrative 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.
- The expenses are included in the calculation of operating profit, profit before tax, and net income.
- There are many types of expenses that are included in this line item including, advertising, marketing, rent, and other administrative-related expenses.
- SG&A is included in the calculation of operating margin, which measures how efficiently a company converts the revenue it generates into operating profit.
Why SG&A is Important
SG&A is critical when looking at a company’s profitability, conducting break-even analyses, 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 often targets the SG&A line when looking to boost profitability as reductions are less likely to affect product or manufacturing quality.
Presentation of SG&A on the Income Statement
Below is an outline for a simple income statement, broadly showing the progression from a sales number at the top to a net income figure at the bottom. In this instance, the expenses are shown as negative numbers. However, this is not always the case.
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
SG&A in the Financial Statements
Operating Profit and SG&A
Gross profit minus SG&A costs results in 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 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.
Below are extracts of the income statements for Coca-Cola and Pepsi from their three months end quarterly 10-Q reports for 2019.
The Coca-Cola Company – Extract from 10-Q September 2019
PepsiCo, Inc and Subsidiaries – Extract from 10-Q July 2019
Points To Note
- Numbers reported in the income statement are in millions.
- Coca Cola’s operating margin is 26.3% (2,499/9,507) x 100.
- Pepsi’s operating margin is 16.7% (2,855/17,188) x 100.
- The ratio shows that for every $1.00 sale Coke generated, it made $0.26 in operating earnings.
- The ratio shows that for every $1.00 sale Pepsi generated, it made $0.17 in operating earnings.