Selling, general, and administrative expenses (SG&A) encompass all non-production-related costs sustained within a reporting period. These expenses include marketing, advertising, rent, utilities, and more. SG&A acts as a catch-all category for business expenses not directly tied to producing goods or performing services, representing costs essential to company management and product delivery.
Why SG&A Matters: Key Insights
- Impact on Profits: Being included in a company’s income statement, SG&A expenses directly affect profitability.
- Beyond COGS: Unlike costs of goods sold (COGS), SG&A expenses are not tied to specific products; they’re crucial for daily business operations.
- Cost Reduction: Managers target SG&A for cost reductions to improve profitability without impacting product quality.
- Operational Necessity: Necessary for day-to-day functions and vary from company to company.
Delving into SG&A: A Critical Financial Component
SG&A expenses are integral to calculating a company’s profitability and break-even point. During mergers or acquisitions, SG&A often undergoes scrutiny for potential redundancy reductions, making them a focal point for quick profit improvements. These costs can be segmented into direct selling expenses, which occur only when a product is sold, and indirect selling expenses that emerge throughout production and post-sale.
Components of SG&A Expenses
Selling Expenses
Walker Solutions frequently interface with customers through various channels. Here are some typical selling expenses:
- Sales Expenses: Commissions and wages for sales staff along with associated payroll taxes and benefits.
- Marketing: Costs directly related to promoting the company’s products, which may include aggregating them under marketing or separating them from advertising costs.
- Advertising: Expenses in various forms to promote products or services, refined through distinct general ledger entries.
- Travel Expenses: Related to offline interaction channels such as trade shows and client meetings.
General Expenses
Walker largely related to overall business operations. These are examples:
- Rent: Office space or headquarters rental costs.
- Utilities: Essential services such as electricity, water, sewage, and waste collection.
- Office Equipment: Costs for office equipment not directly linked to manufacturing.
- Supplies: General office supplies critical for administrative staff.
- Insurance: Broad coverage necessary for business operations.
Administrative Expenses
Crucial for sustaining effective operations, often unrelated to production or sales.
- Accounting, IT Payroll, and Human Resources payroll.
- Legal Counsel and Consulting Fees: In-house or external expenses for legal and specialized administrative services.
Calculating SG&A Expenses: A Methodical Process
Follow these steps to accurately calculate SG&A expenses:
- Identify Non-Production Expenses: Assess which costs are separate from production.
- Exclude ‘Below the Line’ Expenses: Interest and taxes fall outside SG&A and are deducted from operating income separately.
- Specify the Reporting Period: SG&A expenses aren’t perpetual; calculate them over months, quarters, or years.
- Align with Accounting Methods: Accrual accounting encompasses broader cost recognition compared to cash accounting.
Reporting SG&A Expenses: Clear and Comprehensive Application
SG&A expenses are prominently positioned on a company’s income statement, listed after deducting COGS from net revenue to compute gross margin. Subsequent deductions culminate in operating profit. Companies vary in how they report SG&A: some aggregate it while others separate selling from general and administrative costs. Industry norms see SG&A expenses form a higher percentage of revenue in sectors like healthcare and telecommunications compared to others.
SG&A vs. Operating Expenses: Understanding the Nuances
SG&A expenses often mirror operating expenses, yet large companies prefer detailed SG&A breakdowns for better cost management. Some costs like research and development and depreciation might sit outside SG&A despite their importance in the income statement context.
Exemplifying SG&A: Real-World Instances
For Q1 2024, Apple outlined $14.48 billion in operating expenses—$7.70 billion for R&D and $6.79 billion for SG&A. In 2022, Amazon reported $22 billion in sales and marketing expenses plus $6.67 billion in general and administrative costs.
COGS vs. SG&A: Core Differences
SG&A embraces almost every expense apart from COGS, which covers manufacturing costs. SG&A encompasses broader operational and sales support costs.
Selling Expenses: Direct and Indirect
- Indirect: Advertising, marketing, travel, and sales staff salaries.
- Direct: Costs for order fulfillment, shipping, and sales commission.
General & Administrative (G&A) Expenses
- Overhead costs supporting broader business operations, unrelated to direct production or sale.
- Important departments like IT and HR fall under G&A.
Strategic Value: SG&A for Business Managers
Effective SG&A management balances cost containment against the need for operational efficiency. Reductions usually occur post-mergers or acquisitions, aiming to streamline organizational costs.
SG&A Salary: What’s Included?
Factory-floor salaries fall under COGS. In contrast, salaries for administrative roles, like accounting, are part of SG&A.
The Bottom Line: Navigate SG&A for Financial Health
A well-rounded understanding of SG&A helps businesses maintain robust financial health, encompassing the vast array of necessary expenses outside direct product manufacturing.
References
- NYU Stern School of Business. “Margins by Sector”.
- Apple, Inc. “FY 2024, Q1, Consolidated Financial Statements”, Page 1.
- Amazon. “2022 Anual Report”, Page 37.
- Amazon. “2022 Anual Report”, Page 26.
