Selling, General, and Administrative Expenses

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

Selling, general, and administrative expenses (SG&A) include all non-production expenses for a reporting period. Examples of these expenses are marketing, advertising, rent, and utilities.

This line item includes nearly all business costs that aren’t directly attributable to making a product or performing a service. SG&A consists of the costs of managing a company and the expenses of delivering its products or services.

Understanding Selling, General, and Administrative Expenses (SG&A)

Selling, general, and administrative expenses are often known as the company’s overhead. They’re incurred in the day-to-day operations of a business and may not be directly tied to any specific function or department within the company. These are usually unavoidable, fixed costs such as:

• Administrator salaries
• Executive travel expenses
• Rent and utilities
• Insurance

Since they are broad expenses and apply to the entire company, rather than a single product line or division, SG&A costs play a key role in a company’s profitability and in calculating its break-even point or margin targets.

As a result, these are also one of the first places managers look to slash costs when they’re reducing redundancies after mergers or acquisitions. This makes SG&A an easy target for a management team looking to boost profits quickly. It’s also the first place that private equity firms or strategic investors perform their due diligence when they’re considering an investment or acquisition target.

Types of SG&A Expenses

There are many types of SG&A expenses, and which ones a company incurs will depend on the type of industry it is part of and the overall business model. They all fall into one of the three categories that make up the name: selling, general, or administrative.

Selling Expenses

Selling expenses are necessary costs for a company to interface with customers. These include:

• Sales Expenses: Salaries and wages of salespeople, including commissions, payroll taxes, and benefits
• Marketing: Expenses directly related to a company’s product line, services, brand, or image
• Advertising: Direct or indirect advertising to consumers, sometimes broken down into different general ledger codes
• Travel Expenses: In-person events or recurring obligations such as trade shows or client meetings

Selling expenses can be broken down into direct and indirect costs. Direct selling expenses are incurred only when the product is sold. Indirect selling expenses occur throughout the manufacturing process and after the product is finished. These sometimes confused with the action of indirect selling, which happens when third parties or affiliates sell the products

General Expenses

General expenses are often necessary to run a business and are incurred regardless of the type of product or industry that a company operates within. These types of expenses include:

• Rent: Renting an office or headquarters space, as well as rent for necessary items unrelated to the manufacturing process
• Utilities: Electricity, water, internet, sewer, or garbage expenses that aren’t part of the manufacturing process
• Office Equipment: Costs of renting equipment or making one-time, non-material purchases that don’t meet capitalization requirements
• Supplies: General office supplies that are necessary for administrative personnel to carry out their jobs
• Insurance: Broad coverage necessary for operating the business

Administrative Expenses

Administrative expenses are primarily related to the cost of personnel. These employees may be internal staff or external parties who provide services for a fee. They often don’t directly interface with the manufacturing or sale of goods. These types of expenses include:

• Accounting Payroll: Manage accounting for the entire company or broad divisions
• Information Technology Payroll: IT staff or services that are available to the whole company or manage general technological operations, such as website maintenance
• Administrative/HR Payroll: Office and human resources staff that serve the entire company
• Legal Counsel: In-house salaries or paid to external firms
• Consulting Fees: Paid to external parties for administrative purposes

Special Considerations

Calculating SG&A expenses is straightforward when expenses have been classified into the correct accounting categories. Reporting and accounting software should be able to pull out these expenses and correctly assign them to the SG&A category. However, there are several factors to keep in mind when calculating SG&A costs.

Correctly Assign Expenses

Assess whether expenses are directly related to the manufacturing of the product. Costs that aren’t included in the production of goods must be included in the SG&A calculation.

Separate Operating Expenses

Be cognizant of “below the line” expenses. Costs such as interest and taxes aren’t included in SG&A because they’re deducted from operating income.

Establish Accounting Periods and Methods

Determine your reporting period. SG&A can be calculated for any period such as for a month, a quarter, or a year. Be mindful that nominal accounts, such as expenses, are closed at the end of the accounting year. This information is often readily available in historical financial reports.

Finally, consider your accounting method. Cash basis accounting will only recognize SG&A costs that have been paid for. Accrual basis accounting will recognize broader expenses that may have been incurred but not yet paid.

How to Report SG&A Expenses

SG&A is a specific line on a company’s income statement. Net revenue is always reported at the top, then the cost of goods sold (COGS) is deducted to arrive at the gross margin. A company may report SG&A in several ways. Companies can aggregate all these expenses in a single SG&A line or they can segregate selling costs from general and administrative costs. All SG&A and any other expenses, including operating expenses, are listed below the gross margin.

These expenses are then deducted from the gross margin to arrive at operating profit. However, not all expenses have been recorded when calculating operating profit. Some expenses such as interest or tax expenses are reported below operating income.

SG&A Expenses vs. Operating Expenses

SG&A expenses and operating expenses are often similar. Both encompass expenses that are necessary to operate a business independent of the costs of manufacturing goods. Smaller companies may aggregate these expenses in their reporting.

However, there are several subtle differences between SG&A expenses and operating expenses. Larger companies often separate these types of costs into smaller, specific SG&A categories because it’s often easier for companies to track and monitor costs in these groups. Management often has discretion in how many of these costs are reported on the income statement and concerning how to group these types of costs.

There are also a few specific accounts that may warrant specific accounting treatment that excludes them from SG&A. Research and development costs are often not to be included in SG&A. Depreciation costs are often reported in this section of the income statement but are excluded from SG&A as well.

Examples of SG&A Expenses

SG&A expenses are reported on a company’s income statement, which is part of a company’s annual report. For publicly traded companies, these reports must be filed with the Securities and Exchange Commission (SEC).

Apple reported $14.48 billion in operating expenses for the quarter as part of its Q1 2024 financial reporting. Of this, $7.70 billion was research and development and $6.79 billion was selling, general, and administrative.

A company may also provide notes with its financial statements to explain what makes up the different categories of expenses, as Amazon did with its 2022 annual report, in which it reported $22 billion in sales and marketing expenses in addition to $6.67 billion in general and administrative expenses.

The Bottom Line

A company must incur many types of costs to run a business and many of these expenses aren’t directly tied to making specific products. These broad costs are classified as selling, general, and administrative costs. These expenses are reported separately from COGS and are deducted from the gross margin to determine a company’s net income.