SG&A Expenses and Why They’re Important

Selling, general, and administrative costs (SG&A) are costs incurred by your business that are not directly related to the cost of producing a product or delivering a service. SG&A expenses are always separately tracked from your cost of goods sold and are considered a part of doing business.

Overview: What is selling, general & administrative expenses (SG&A)?

SG&A costs are frequently referred to as operating costs, meaning the day-to-day expenses of running your business. Because these costs cannot be directly associated with production, they are usually reported as individual line items on an income statement.

On a summary income statement, SG&A expenses are reported as a single line item total under operating expenses, although it’s up to the business owner to decide how they wish to display these expenses on their income statement.

Most accounting software applications take care of tracking of SG&A expenses, providing business owners with an easy way to analyze the results.

Various types of selling, general, and administrative expenses (SG&A)

Anything that is not directly related to product production and the cost of goods sold is usually considered a SG&A expense. Commonly referred to as indirect costs, operating or SG&A expenses can include the following.

1. Selling expenses

Selling expenses are those that are directly related to the sales process and include these types of expenses.

• Advertising and marketing costs
• Sales staff wages
• Sales commissions
• Travel
• Promotional items such as flyers and brochures

Travel expenses can quickly get out of hand for small businesses. Image source: Author

2. General expenses

General expenses are those that are not directly associated with either a department or a product but are necessary for the business to continue operations. General expenses can include the following items.

• Rent
• Utilities
• Office expenses such as petty cash
• Insurance
• Software and technology costs

3. Administrative expenses

Administrative expenses are usually centered on staff and consulting costs. In most cases, smaller businesses will have limited administrative costs.

• Management and executive salaries
• Staff accountants
• IT personnel
• Legal staff
• Consultants

What’s the difference between SG&A and operating expenses?

In many cases, there is no difference between SG&A and operating expenses, with the only distinction being the level of detail with which these expenses appear on your income statement.

Larger corporations often find it helpful to separate expenses into each SG&A category for tracking purposes. However, in most cases, small businesses can use either term when calculating non-production costs.

How to calculate selling, general, and administrative expenses (SG&A)

If you’re using accounting software, the structure of the software will automatically categorize SG&A expenses based on information provided during the software setup process.

If you’re using an income statement template, spreadsheet software, or a manual ledger to record transactions, you’ll need to calculate all non-product-related expenses and enter them on your income statement as an SG&A expense.

Before you can enter the total SG&A expenses on your income statement, you’ll need to create a detailed list of the selling, general, and administrative expenses, which can be added up from various expense journals.

Whether you provide line-by-line detail on your income statement or do a single line item entry, you’ll need to properly categorize SG&A expenses.

Once you’ve entered the totals, you’ll need to put them into specific categories like the ones that appear in the list above. Once that’s completed, you’ll be able to record the cumulative amount on your income statement.

You can display SG&A expenses as a single line item on your income statement. Image source: Author

Whether they are entered by category or by a single line item, SG&A expenses are always recorded in the Operating Expenses section of your income statement. You can choose to directly include depreciation expenses in your SG&A expenses or record them separately on your income statement.

SG&A expenses need to be regularly reviewed

Although many smaller businesses won’t need to separate selling, general expenses, and administrative expenses, calculating SG&A expenses is still a useful process. Taking a deeper dive into your SG&A expenses can give you better insight into company performance, as well as point out areas of concern.

The best way to do this is to go through all of your SG&A expenses line by line to see if there are expenses that need to be trimmed or eliminated. There may be a few areas in particular that would benefit from a more in-depth review.

1. Advertising: If you’re not getting results from your advertising campaigns, it’s just wasted money. When you do launch a campaign of any kind, whether it’s on a social media platform or more traditional advertising, be sure to track results to find out your return on investment.
2. Travel: Travel expenses can quickly get out of hand. If your travel expenses result in increased business, they may be worth it, but think twice about travel that yields no immediate impact.
3. Utilities: While utilities are sometimes considered a fixed cost, you do have some control over monthly utility bills. For instance, changing thermostats can have a direct impact on both heating and cooling bills, so be sure your employees aren’t arbitrarily changing the thermostat when they’re hot or cold. If your utility bills run super high, you may want to invest in a more energy-efficient system.
4. Unnecessary subscriptions: Are you still paying for a subscription to a service you no longer use? Reexamine all of your monthly costs and determine which ones you need and which ones can be canceled.
5. Office space: Do you need all the space you’re currently leasing? Do you need office space at all? While negotiations on a factory or warehouse may not be possible, if you rent additional space for operations, you may be able to reduce those costs.

Separately tracking SG&A expenses helps even small businesses get a better handle on operating costs. Be sure you’re tracking them properly.