What is Selling, General, and Administrative Expense?

Using these comparisons allows us to see trends in the company and possible comparisons among the industry. In fact, the company stated they intend to retained earnings manage operating expenses even with revenues continuing to grow. At some point, the company will evolve from the growth stage to a more mature point, a la Microsoft. In determining a company’s profitability and break-even point, SG&A is crucial.

What is a Good SG&A Expense?

• The way you list your SG&A and operating expenses on your income statement is completely up to you.
• If SG&A costs are too high, they can eat away at profits, which is why companies need to keep these expenses in check.
• That’s because all businesses need to promote their products and services and all businesses need to have some administrative functions.
• Business owners can track expenses, monitor performance, and make more confident decisions using intuitive tools and automated reports.
• By integrating accounting, payroll, payments, and cash flow forecasting into one connected system, FINSYNC provides real-time visibility into SG&A and other key financial metrics.

SG&A includes all other non-production costs, such as marketing and administrative costs. SG&A are the operating expenses incurred to 1) promote, sell, and deliver a company’s products and services, and 2) QuickBooks Accountant manage the overall company. SG&A expenses do not include raw materials costs, wages of production workers, or utilities at a manufacturing facility.

Definition of SG&A

‘Selling expenses’ relate directly to the sales process—it’s all about marketing, sales commissions, and the resources needed to close a deal, like sales-related travel costs. ‘General expenses’ might encompass rent, utilities, office supplies—essentially, they cover the day-to-day running of the business, including necessary website maintenance. Think of the behind-the-scenes action—management salaries, but most importantly, the crucial accounting expenses, and legal fees.

How Selling, General, and Administrative Expenses Fit into Profit and Loss

Therefore, if you made many sales hired in 2021, those expenses will continue to be amortized over the next two to four years, giving your income statement a fixed cost base. It may take some time for the cost optimization to completely reflect in your margins, even if you scale down hiring immediately. In addition to the general and administrative categories, Cloudflare additionally explains in the notes to its financial statements what they include in the sales and marketing area. Cloudflare lost money from operations, which equals an operating income percentage of (19.4). The company is in a different stage of its life cycle than either Roper or Microsoft, which means it will reinvest aggressively to continue to grow. For example, tech companies may have lower COGS but higher SG&A expenses due to higher marketing, research, and administrative costs.

General and Administrative Expenses

By keeping rigorous financial records and categorizing your expenses correctly, you can make the most of these deductions, ultimately reducing your taxable income. It’s always a smart move to consult with a tax professional who can help ensure you’re in compliance with current tax laws and maximizing your potential deductions. For smaller businesses, this level of detail might not be as critical, so lumping everything under one ‘SG&A’ or ‘Operating Expenses’ label suffices. Still, understanding the nuances can sharpen your financial analysis skills and give you better insight into how different firms structure their costs.

Freedom to Focus on Your Business

Operating expenses include all of the expenses that aren’t covered under cost of goods sold, such as rent, equipment, and marketing. Typically, the lower the SG&A as a percentage of revenue is, the better. However, an executive’s goal is to maximize the overall financial performance of the company, not just one individual financial metric like SG&A as a percentage of revenue. SG&A includes sales, marketing, and IT, all of which drive near-term and long-term revenue. Therefore, if a company wanted to reduce SG&A, they could simply reduce IT expense, but they may find that even though near-term profit improves, long-term revenue and profit may suffer.

• When such expenses increase too much without a rise in sales or a drop in sales, it is very important to reduce the SG&A costs.
• These expenses are typically recorded below the gross profit line on the income statement.
• A fundamental concept in accounting and finance is that managers should first minimise costs to maximize a company’s profitability.
• Examples of selling expenses include salary and commission to the company’s sales people.
• Some businesses include it as a subcategory of operating expenses on their income statement.

How companies report SG&A vs. operating expenses

That’s still a high number by small business standards, but it’s not good enough if fixed costs are $900,000. A firm with high fixed costs is said to have high operating leverage. In order to facilitate comparison over time or between companies, SG&A is typically measured as a percentage of revenue. Imagine a company with SG&A expenses of $500,000 and sales revenue of $5 million. This content is for information purposes only and should not be considered legal, accounting or tax advice, or a substitute for obtaining such advice specific to your business.

Whether through reducing unnecessary expenses or balancing spending to support growth, businesses that effectively manage SG&A can improve profitability and maintain competitiveness. Smart cost control can lead to sustainable growth and better financial health. For example, the electricity bill for running the production line in a factory is an operating expense, but the sg&a meaning office rent for the sales team is part of SG&A.