It is the total of the costs essential for the manufacturing process, like advertising, commissions, travel, etc. Rent, salaries paid to non-production staff, legal expenses, marketing expenditures, and office supplies are common SG&A expenses. Together, these can represent a significant percentage of a company’s expenditures. Apple Inc. (AAPL) reported $14.29 billion in operating expenses as part of its financial reporting for the third quarter of 2024. Of this, $7.77 billion was for research and development and $6.52 billion was for selling, general, and administrative costs. Selling, general, and administrative expenses (SG&A) are overhead expenses that keep a business running but are not directly tied to producing goods or services.

Selling, general and administrative expense definition

This understanding is key for setting prices and assessing how efficiently you produce goods. Common expenses included in operating expenses are rent, utilities, labor, and property taxes. These are the expenses directly tied to the day-to-day operations of a business. Administrative expenses include wages and benefits for specific employees, such as accounting and IT personnel.

What is SG&A (Selling General and Administrative)?

A variable cost structure is one in which the SG&A costs keep pace with sales. Think of an importer that has only a warehouse and almost no other fixed expenses. It has just a 15% commission that it pays to independent road salesmen. In contrast, the cost of goods sold (COGS) is the actual cost incurred to produce and deliver a product. It ranges from the raw materials to make the product, to the shipping costs and taxes required to get it to the buyer.

SGA Expenses (Selling, General & Administrative)

• Future operating profits are improved as a result of increasing current selling, general, and administrative expenses for SG&A-cost-efficient firms.
• Marketing is often an investment in future growth, so it’s essential to evaluate where cuts can be made without stalling business momentum.
• SG&A expenses are mostly comprised of costs that are considered part of general company overhead, since they cannot be traced to the sale of specific products.
• General and administrative expenses hold distinct differences, but both qualify as operating expenses.

However, context matters; industry norms and business lifecycle stages should be considered when analyzing this ratio. For instance, a startup might have a higher SG&A to revenue ratio compared to an established company due to initial investments in marketing and staff. After mergers or in times of financial hardship, SG&A expense is the first area that management would examine to cut costs without impacting manufacturing or sales.

Profit & Loss

SG&A is reported in the section of expenses on a company’s income statement. Note that gross vs net certain expenses like interest and taxes are reported separately below operating income. The SG&A expense is recorded on the income statement of companies in the section below the gross profit line item. SG&A, or “selling, general and administrative” describes the expenses incurred by a company not directly tied to generating revenue. Sometimes, operating expenses are listed under an “operating expenses” heading, though this is not always the case, as seen in these examples.

SG&A costs are typically the second expense category recorded on an income statement after COGS, like on this simple income statement for XYZ Soaps Inc. Some firms classify both depreciation expense and interest expense under SG&A. If this is the case, then gross profit less SG&A equals pre-tax profit, also known as earnings before taxes (EBT). The SG&A-to-sales ratio is a measure investors use to evaluate a company’s financial efficiency.

• These costs are not related to specific products, so they are categorized separately from the cost of goods sold (COGS) on the income statement.
• SG&A includes most other costs related to running a business aside from COGS.
• Direct expenses are those incurred at the exact point-of-sale for a product or service.
• When we read the Income Statements of Alphabet and Meta, we noted that both companies recorded R&D, marketing & sales and general & administrative expenses separately.
• By keeping close tabs on SG&A expenses, a company can more efficiently manage its overhead, make cost-cutting decisions, and remain profitable.
• For each forecast period, we’ll multiply our SG&A margin assumption by the projected revenue in the same period, which results in our projected SG&A expense amounts.

“When the cost of sales is too high and How to Run Payroll for Restaurants CFOs are looking at improving profitability by decreasing the overall cost of business, they tend to cut SG&A,’’ Barros says. “If you want to keep your pre-tax profit at 20%, and your cost of sales is too high, the first place you’re going to have to cut is SG&A,” Barros says. If you want to keep your pre-tax profit at 20%, and your cost of sales is too high, the first place you’re going to have to cut is SG&A. Because operating costs are fixed, they tend not to fluctuate with the volume of sales. “It’s the cost that you have if you sell one unit or a thousand units,’’ Barros says.

General expenses

This is why SG&A expenses are often the first to go if a company is trying to reduce costs. What can be considered a “good” SG&A ratio for a company depends on a few factors, including industry, age, growth trajectory, and more. Importantly, reducing SG&A expenses means less revenue will yield more profit, which is why SG&A is often a target for cost-cutting measures.

General expenses are different from administrative costs in that they do not relate to the management of the business. The salaries and commissions of sales staff, as well as sg&a meaning advertising and promotion, travel and entertainment, are all considered selling expenses. Suppose that a bank invests heavily in its customer service experiences. It therefore has higher selling costs on its income sheet, but it also has higher sales.

ROI is critical to any investor, and knowing how a company is allocating its administrative expenses is a crucial facet of being a successful and savvy investor. Most administrative costs may appear insignificant in contrast to other costs. When you add them all up, they have the potential to have a big impact on your total business. General costs are necessary for businesses to operate, they also count as deductions on a company’s tax return.