You’ve probably read or heard the words ‘Selling, General & Administrative Expense’ or SG&A somewhere by now. That’s because it is a cornerstone of any business plan. Knowing how these costs affect your business is important, but during challenging economic times this knowledge is essential.
With inflation once more on the agenda for the first time in decades, concerns about the price of raw materials and the cost of living driving consumers and businesses to cut their expenditure, having a good understanding of your general and administrative expenses is more essential than ever. Let’s dive in.
What are Selling, General & Administrative Expenses (SG&A)?
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.
Alongside your general and admin expenses are what are called costs of goods sold (COGS). These include materials and labor costs if you’re making something, or the charge for buying products wholesale if you’re solely a retailer.
It’s also important to distinguish your capital expenditure (CapEx) which is what you invest in acquiring, maintaining and upgrading your buildings, machinery and vehicles. Finally, you might also have research and development (R&D) costs. All of these outgoings will appear on your profit and loss account.
SG&A: meaning and importance
These particular line items include fixed costs such as rent, connection to utilities and base salaries. You’ll also have variable costs–these might include your monthly electricity bill, any commissions you pay staff and the price of raw materials. Knowing your costs, be they fixed, variable or semi-variable is important for maintaining the profitability of your business.
If you’re a start-up they need to be part of your business plan and regular financial statements because they will indicate when you’ll hit your break-even point, something that your investors or lender will want you to be clear on. Knowing these costs is part of the calculation that you need to carry out to identify your gross profit, your operating margin and your revenues.
This type of expense will typically appear on your income statement, which shows the amount of revenue that your business has generated and the expenses that it’s incurred. The figure will usually go below the cost of goods sold. Sometimes it’s broken out into a variety of expense line items but, more commonly, in what is known as a Consolidated Statement of Operations, it’s included in just one. This is the case when your company publishes what is known as a condensed income statement.
Types of Selling, General & Administrative Expenses
It’s useful to know which categories within this broad heading of business expenses your various outgoings fall. You’ll want to be clear on the costs of salaries and commissions as these might well be your largest expenses here.
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.
The costs for office supplies and equipment that isn’t directly connected with manufacturing such as desks, chairs, computers, company cars, company cellphones and other technology and furniture also count within this category and these amounts should appear on your financial statements.
Knowing the figure for your utilities every month is essential as you might be able to get a better deal with another provider. The same is true of other costs such as insurance and accounting fees. Some businesses divide their selling, general and admin expenses into three categories: selling expenses, general expenses, and admin expenses.
Whatever the sector that you’re working in and the products or services that you’re responsible for, your selling expenses will probably account for a significant proportion of your SG&A outgoings. You’ll almost certainly have direct and indirect selling expenses.
Direct selling expenses are those that you incur whenever you make a sale and they might include packaging and shipping, as well as commission for salespeople. If you’re selling services, they could include paying for staff to visit a client or fees to freelancers and agents who deliver the service.
As well as your direct selling expenses you’ll also have indirect selling expenses. These are the costs that are incurred before or after a sale. They might include your markets and advertising budgets or your promotional activities.
Whether you’re advertising online, through social media, in local media or in trade publications or whether you have salespeople and account managers at conferences you’ll need to account for these costs as your indirect selling expenses.
Keeping a close eye on both your direct and indirect selling expenses is essential for maintaining profitability and ensuring that you break even on your key product lines. After all, your products might be flying out of your warehouse to customers – but are you making any money out of these sales? If so how much, and could these margins be increased?
General and Administrative Expenses
Here’s a simple formula:
Operating profit equals gross profit minus SG&A.
So, for example, your net operating revenues might be $100,000. From this you subtract the cost of goods sold (CGS) which might be, say $30,000. This leaves you with a gross profit of $70,000.
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.
Having timely, accurate information about your income and costs is essential. The more detail the figures you have at your fingertips and the more insight you gain into them, the better you can manage your company’s finances.
Being aware of your SG&A as they evolve and respond to external events is an essential tool for maintaining and improving your profitability and setting your business firmly on the road to success.