Selling, General, and Administrative Expenses (SG&A)
SG&A (selling, general, and administrative expenses) is the category of an income statement of the company representing all general and administrative expenses, and selling expenses (office supplies, telephone bills, and postage, compensation for employees) of the business.
All expenses unrelated to manufacturing or services are reported in this line item. SG&A covers the costs of business management and service costs or product delivery expenses.
Understanding Selling, General, and Administrative Expenses (SG&A)
Nearly everything out of COGS (cost of goods sold) category is recorded in SG&A. Some of major SG&A expenses are:
- accounting, IT, marketing and human resources personnel wages and salaries;
- advertising, promotion materials and commission expenses;
- rental payments, public services, office equipment, and consumables that are not used in manufacturing.
Expenses out of SG&A:
- manufacturing expenses (materials, labor, etc.);
- interest rate payments;
- research and development expenses.
How to list SG&A and COGS
Any company has to make a profit and loss statement. Expenses and SG&A are given after the gross margin. To find a gross margin, it is necessary to subtract COGS from net income. To determine net income, it is necessary to subtract expenses and SG&A from gross margin.
SG&A doesn't cover rather visible interest expenses and research and development expenses. They are put on separate lines of the income statement.
Important note: Healthcare and telecommunication companies have high SG&A expenses, but they are lower for real estate and energy.
There are indirect and direct Selling expenses.
Indirect selling expenses are salaries and wages of sales department workers, marketing, advertising, phone call bills, traveling expenses, when the product is finished.
Direct selling expenses are manufacturing, shipping and delivery payments, sales commissions, when the product is sold.
The G&A of SG&A
G&A expenses are building rent or mortgage, public services, and insurance, wages and salaries of personnel of departments, except sales and production.
The SG&A function
Company break-even point calculations and profitability rely on SG&A. The break-even point is the indicator of company profits and its losses matching. It’s a shortcut for managers to find an easy way for profit increase. Management can observe and track expenses in this point to increase profitability due to cutting operating expenses (for example, non-sales staff wages) or excess staff reducing after mergers or acquisitions. It can be done without disturbing the manufacturing or sales processes.