What Is Selling, General & Administrative Expense SG&A? How to Calculate & Examples

Bookkeeping software like Lendio’s software can help you to track and categorize your expenses properly. Understanding where you’re spending money is the first step in making strategic decisions (e.g., should you spend more on social media advertising next month?). Depreciation can be used for many purchases, including fleet vehicles, office furniture, and computer equipment. One benefit of depreciating eligible assets is producing accurate financial statements. When you apply for business funding, lenders look at your income-to-expense ratio.

While this is typically synonymous with operating expenses, many times companies list SG&A as a separate line item on the income statement below cost of goods sold, under expenses. SG&A includes salaries and wages, rent, utilities, advertising, marketing, legal and professional fees, insurance, office supplies, and other overhead costs. A company incurs these expenses regardless of whether they generate or do not generate sales and are typically a significant component of a company’s operating expenses. Selling general and administrative (SG&A) expenses comprise all direct and indirect selling costs, operational overhead costs, and administrative expenses unrelated to production and sales.

Operating Expenses vs. SG&A

Depreciation refers to expenses related to a fixed asset’s usage, allocating costs based on wear and tear throughout the asset’s useful life. From this amount you subtract your SG&A figure, which might be another $30,000 as well as other costs of maybe $1,000, in other words, a total of $31,000. Your operating income is therefore $70,000 minus $31,000, that is $39,000. Since commissions are variable costs it’s particularly important to keep an eye on the maximum amounts that are flowing out of your bank accounts here. The same is true of travel costs, such as salespeople visiting clients or attending trade shows as well as staff visiting suppliers or going on buying trips. You’ve probably read or heard the words ‘Selling, General & Administrative Expense’ or SG&A somewhere by now.

Administrative expenses are a subset of Selling, General, and Administrative (SG&A) expenses. They refer to the costs incurred by a company in its daily operations, not directly tied to producing goods or services or the sales process. Direct expenses are those incurred at the exact point-of-sale for a product or service. https://marketresearchtelecast.com/financial-planning-for-startups-how-accounting-services-can-help-new-ventures/292538/ Examples of direct selling expenses include transaction costs and commissions paid on a sale. SG&A includes all non-production expenses incurred by a company in any given period. It includes expenses such as rent, advertising, marketing, accounting, litigation, travel, meals, management salaries, bonuses, and more.

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On the other hand, low SG & A expenses indicate that a company is operating more efficiently and has a lower cost structure, which is a positive indicator of future profitability. The most common examples are rent, insurance, utilities, supplies, and expenses related to company management, such as salaries of executives, admin staff, and non-salespeople. In an income statement, gross profit less SG&A (and depreciation expense) equals the operating profit, also known as earnings before interest and tax (EBIT). SG&A is both critical to the success of a business and vulnerable to cost-cutting. Cutting the cost of goods sold (COGS) can be tough to do without damaging the quality of the product. Cutting operating expenses can be less damaging to the core business.

Other SG&A costs, such as shipping costs or sales commissions, will vary. Still others, such as the costs of renting new retail locations or deploying a new website, are linked to business strategy, and accurate SG&A projections depend on researching the potential costs. For bookkeeping for startups instance, energy and materials firms often run SG&A ratios of 10% or less, while industrial manufacturers often average 10%–20%. Pharmaceutical, biotech and health care companies often report SG&A expenses of 40%–50% or more, sometimes due to high sales and marketing costs.

What are Selling, General & Administrative Expenses (SG&A)?

If you’re familiar with operating expenses, you might be wondering what the difference is between SG&A and operating costs. Reported separately from COGS and other operating expenses, companies can evaluate SG&A to assess the break-even or profitability points. Accounting for SG&A is relatively simple, though it’s important to separate other expenses such as R&D, COGS, non-operating expenses, and depreciation and amortization.

• To accurately project future SG&A costs, some companies attempt to forecast each individual component.
• Selling, general and administrative — or SG&A — expenses are the costs a business incurs to support production and manufacturing.
• This includes a wide range of expenses, such as rent, advertising and marketing, and salaries of management and administrative staff.
• Hence, SG&A expenses are said to be period costs as opposed to being part of a product’s cost.

SG&A does not include the direct costs of producing goods or acquiring goods for sale, which are calculated separately as cost of goods sold (COGS). The amount that a company spends on SG&A may play a key role in determining its profitability. Selling, general, and administrative expenses also consist of a company’s operating expenses that are not included in the direct costs of production or cost of goods sold.

Essentially these are the daily running costs of your business that aren’t directly related to the production of the goods or services that you sell. They typically include rent and utilities, plus salaries and employment costs for staff as well as advertising and marketing. You might also be paying management consultants or freelancers – again each of these represents this type of expense.

• It’s important to note that not all expenses have been recorded when calculating operating expenses.
• For example, research and development costs are often not to be included in SG&A.
• SG&A are the operating expenses incurred to 1) promote, sell, and deliver a company’s products and services, and 2) manage the overall company.
• Operating expenses are a broader category encompassing all business running costs, including SG&A expenses, R&D expenses, depreciation and amortization, and, in some cases, cost of goods sold.
• Bench’s easy-to-use software let’s you quickly see how your business is doing so you can make smarter decisions with your money and master your spending.
• COGS is the expense that most directly drives revenue and refers to the direct costs of manufacturing goods sold.