Definition
SG&A Expenses, also known as Selling, General & Administrative Expenses, refer to the total costs related to selling a company’s product or services, as well as the overall administration and general business operations. These can include costs like sales salaries, advertising expenses, legal and rent fees, among others. Essentially, they are the costs to run the day-to-day business that are not directly tied to making a product or offering a service.
Key Takeaways
- SG&A (Selling, General & Administrative) Expenses are the costs associated with selling a company’s products and services, as well as the overall administrative costs of running the business. These expenses can include salaries, rent, utilities, office supplies, and marketing and advertising costs.
- SG&A Expenses are important for investors to consider as they make up a substantial portion of the costs for a business. Analyzing SG&A expenses can provide important insights into how efficiently a company is being run. Low SG&A costs relative to revenue indicates high operational efficiency.
- Furthermore, SG&A is a non-production cost and is recorded on an income statement below the cost of goods sold (COGS). Monitoring trends in the SG&A expenses overtime can help indicate whether a company’s cost management strategies are effective, and could hint at future profitability.
Importance
SG&A Expenses, short for Selling, General & Administrative Expenses, are crucial because they represent the overhead costs associated with running a business.
These expenses include everything from executive salaries and office supplies to utilities and legal costs.
A close examination of SG&A can help a business identify areas where costs can be controlled or reduced to improve overall profitability.
Furthermore, it’s important for potential investors since a company with lower SG&A costs relative to its revenue may be seen as operationally more efficient and potentially more profitable.
On the flip side, unusually high or rapidly increasing SG&A expenses may indicate potential issues or mismanagement in the company operations.
Explanation
SG&A (Selling, General, and Administrative) expenses are the costs associated with running a business that are not directly tied to the production of goods or services. While they do not contribute directly to the production process, they are essential for the overarching operation of the company. These expenses encompass areas such as salaries, office rent, administrative costs, sales commissions, advertising, promotional materials, utilities, and various other operating expenses.
SG&A expenses are important as they provide a comprehensive view of the costs involved in operating a business beyond production. The fruits of analyzing SG&A expenses are manifold. By considering these costs, businesses can discern their operational efficiency, benchmark against industry peers, and gauge overall financial health.
Reduced SG&A expenses can lead to an improved bottom line, assuming that these reductions do not impact the business’ ability to generate sales. This is why many companies look to streamline operations and cut costs in these areas. Investors and analysts also use SG&A expenses to evaluate a company’s management efficiency and to predict future earnings.
High SG&A expenses relative to revenue may indicate a company struggling with efficiency, whereas low expenses may suggest an effectively managed company.
Examples of SG&A Expenses (Selling, General & Administrative)
Coca Cola Company: In the beverage industry, a good example of SG&A expenses can be seen in The Coca Cola Company’s operation. Selling expenses would typically include the cost of advertising campaigns, promotional events, or commissions to sales staff. General expenses could be things like the salaries of the administrative team, office supplies, or utilities for their headquarters. Administrative expenses might include legal fees, IT support, or consulting services.
Amazon: In the e-commerce sector, Amazon would have SG&A expenses such as the costs spent on warehousing, shipping and handling (selling expenses), the salaries of employees in its corporate offices (general expenses), and expenses on legal, audit services or software support (administrative expenses). Also, the aggressive marketing strategies employed by Amazon, such as digital advertising and promotional discounts, are also included in their SG&A expenses.
Ford Motor Company: In the automotive industry, Ford’s SG&A costs might include the expenses related to advertising and promoting new vehicle models (selling expenses), the cost of managing their wide network of dealerships including salaries of staff (general expenses), and costs related to corporate governance like legal costs, accounting and auditing costs, human resources, and executive compensation (administrative expenses).
FAQ: SG&A Expenses (Selling, General & Administrative)
What are SG&A Expenses (Selling, General & Administrative)?
SG&A Expenses (Selling, General & Administrative) are the costs incurred by a company to promote and sell its products or services, manage the daily operations of the business, and all other general administrative functions. These expenses encompass everything not directly tied to the production of a product or service.
What types of costs are included in SG&A Expenses?
SG&A Expenses include advertising costs, salaries, utility bills, rent for the office space, insurance, depreciation and amortization of office equipment and furniture, and legal and consulting fees among others.
How are SG&A Expenses shown on a financial statement?
On a company’s income statement, SG&A Expenses are usually combined and reported as a single line item. They are subtracted from gross profit to arrive at operating profit.
Do SG&A Expenses vary by industry?
Yes, SG&A Expenses can vary significantly from one industry to another. Companies in the service sector may have higher SG&A Expenses because they rely heavily on personnel to deliver their services, whereas manufacturing companies may have lower SG&A Expenses.
Why are SG&A Expenses important in financial analysis?
SG&A Expenses represent a significant cost for most businesses. For analysts and investors, understanding these costs is critical in assessing a company’s ability to manage its expenses effectively and generate profit. High SG&A Expenses relative to revenue may suggest inefficiencies and can impact a company’s profitability and attractiveness to investors.
Related Entrepreneurship Terms
- Operating Expenses
- Overhead Costs
- Fixed Costs
- Indirect Costs
- Expense Recognition
Sources for More Information
- Investopedia: It offers a vast selection of information on various finance topics including SG&A expenses. You can explore their comprehensive articles and educational videos.
- AccountingTools: This site provides comprehensive accounting past commission studies, articles, and book suggestions. Their topics include a detailed section on SG&A expenses.
- The Balance: A versatile website for anyone interested in personal finance, investing, and money management. They have resources on a broad range of financial subjects such as SG&A expenses.
- Corporate Finance Institute: CFI provides a wide variety of information related to corporate finance, accounting, investment banking, FP&A, treasury, and more, which includes SG&A expenses.
