Selling, general, and administrative (SG&A) expenses commonly appear on income statements, either as a category of expenses or a single line item. Let's explore SG&A expenses in more detail and the role they play in business operations.
Understanding SG&A expenses
SG&A expenses are ongoing business operating costs that are not directly linked to production or service delivery. They can be wages for employees in support departments like accounting or human resources, as well as third-party costs like rent, legal fees, insurance, and office supplies.
SG&A expenses do not include raw materials costs, wages of production workers, or utilities at a manufacturing facility. These items are included in cost of goods sold (COGS), which is deducted from revenue to calculate gross profit.
SG&A expenses appear on the income statement below gross profit and above operating profit. While SG&A expenses are often synonymous with operating expenses, some companies may report one, the other, or both. Generally, gross profit less SG&A expenses and any other operating expenses equals operating profit.
The income statement may deduct additional expenses from operating profit to calculate net income. These are non-operating expenses such as interest, taxes, and extraordinary gains or losses.
Common SG&A expenses
Selling expenses usually include:
- Sales commissions.
- Wages, salaries, and benefits for sales staff.
- Advertising and marketing costs.
- Costs related to trade shows, including travel.
- Support costs for salespeople, such as telephone bills.
General and administrative expenses can be any other operating cost that's not directly linked to sales, such as:
- Rent and utilities.
- Insurance.
- Wages, salaries, and benefits for support staff and the executive team.
- Office supplies.
- Subscriptions and licenses.
- Consultant fees.
- Office equipment.
Significance of SG&A expenses
When a business needs to reduce spending, leaders often first look for cost efficiencies in SG&A expenses. The rationale is that cutbacks in the selling, general, and administrative areas are less likely to affect product or service quality.
Cost-cutting within SG&A expenses can take several forms, including:
- Downsizing corporate offices.
- Cutting staff on support teams, such as accounting, marketing, or legal.
- Restructuring the business to a leaner organizational structure with fewer layers of management.
- Reducing marketing budgets.
- Implementing stricter controls and limits on corporate travel.
- Reducing benefits or switching employee health plans to lower costs.
It's also common to implement measures that limit SG&A growth from one year to the next. Examples include:
- Hiring freezes.
- Establishing policies on when to use contract labor vs. new hires.
- Enforcing annual budget reductions by department.
- Periodic cost/benefit analysis of insourcing vs. outsourcing noncore services, such as employee training.
SG&A expenses can also be a significant source of cost savings after mergers and acquisitions because they can create expense redundancies that can be eliminated with little downside. A newly merged business, for example, may not need two accounting or human resource departments.
Related investing topics
About the Author
