What is SG&A?
Selling, general, and administrative expenses (SG&A) are often referred to as operating expenses for a company. Depending on the organization, the SG&A can appear as a sub-category under operating expenses or be combined with the remaining operating expenses. SG&A expenses are costs that a business pays that aren’t directly correlated to making or delivering a product or service. The SG&A expenses can be broken down into three categories: selling expenses, general expenses, and administrative expenses.
Selling expenses are any expenses related to selling a firm’s products or services. Examples include:
- Advertising expenses (Google Ads, Facebook Ads, etc.)
- Promotional costs (Brochures, Business Cards, Promotional Videos, etc.)
- Commissions for sales
General expenses are expenses that are not associated with cost of goods sold, selling, or administration expenses. Examples include:
- Office Supplies
Administrative expenses are expenses associated with the costs to continue administering a business. Examples include:
- Salaries for company executives and administrative staff
- Fees paid to IT staff, lawyers, accountants, etc.
- Consulting fees
SG&A Sales Ratio
The SG&A sales ratio is a metric used to determine what percentage of every dollar in revenue a company generates goes towards SG&A expenses. The formula to calculate the SG&A sales ratio is as follows:
SG&A Ratio = Total SG&A / Total Sales Revenue
The number calculated shows the percentage of every dollar that is spent on SG&A expenses.
SG&A Expenses in Business
Calculating and monitoring SG&A expenses is crucial for a business to remain cash flow positive. Businesses tend to have unnecessary expenses that are not benefiting the business and costing the business money. Unused software subscriptions or excessive business travel expenses may add up to thousands of dollars in unnecessary expenses and can be cut from the SG&A expenses to increase profit for the business. Managers tend to look at SG&A expenses first when cutting down expenses to account for unused software, unproductive office space, and more.