Cutting operating expenses can be less damaging to the core business. SG&A costs are typically reduced after a company merger or acquisition makes it possible to reduce redundancies. Companies may aggregate all of these expenses in a single SG&A line, or it may segregate selling costs from general and administrative costs. When these expenses are deducted from the gross margin, the result is operating profit. It’s important to note that not all expenses have been recorded when calculating operating expenses.
However, U.S. accounting standards treat R&D as a separate operating expense that’s not part of SG&A. Depreciation is typically reported as a separate line item within operating expenses, too. Both operating expenses and SG&A are key components of tracking net income, or what’s left over after subtracting expenses and taxes from revenue. They are 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.
What is SG&A?
The SG&A expense is recorded on the income statement of companies in the section below the gross profit line item. A company’s management will try to grow revenue while simultaneously keeping operating expenses under control. Operating expenses, or OPEX for short, are the costs involved in running the day-to-day operations of a company; they typically make up the majority of a company’s expenses.
- While this is typically synonymous with operating expenses, many times companies list SG&A as a separate line item on the income statement below cost of goods sold, under expenses.
- The SG&A classification never includes the cost of goods sold, and generally does not include the expenses incurred by the research and development department.
- There are also a few specific accounts that may warrant specific accounting treatment that exclude them from SG&A.
- To calculate a total SG&A figure for an annual income statement, you’ll have to go through your company’s books for that year and add up all of the non-COGS, interest or income tax expenses you see there.
- However, the SG&A expense must be standardized to be compared side-by-side to industry comparables, and the average benchmark varies significantly based on the specific industry.
However, some companies may report selling expenses as a separate line item, in which case the SG&A is changed to G&A. Like operating expenses, administrative expenses are incurred regardless of the number of sales being generated by the company. General costs such as office supplies, telephone bills, and postage are considered to be administrative expenses. Compensation for employees who provide overall support for the company that is not tied to a specific department is also considered an administrative expense.
Real-World Examples of SG&A Expenses
Some expenses such as interest expense or tax expense are reported below operating income. SG&A costs are reported on the income statement, the financial statement that your business prepares to figure out how profitable it is. The SG&A classification never includes the cost of goods sold, and generally does not include the expenses incurred by the research and development department.
Your COGS are the direct costs related to making, packaging and shipping the soaps—raw materials, the wages you pay your soap maker Cheryl, the fancy packaging paper you use, shipping costs, etc. However, the SG&A expense must be standardized to be compared side-by-side to industry comparables, and the average benchmark https://personal-accounting.org/selling-general-and-administrative-expense-sg-a/ varies significantly based on the specific industry. Generally speaking, the lower a company’s SG&A expense, the better – since that implies the company is more profitable, all else being equal. The screenshot above is taken from CFI’s financial modeling courses, which cover forecasting SG&A expenses.
Cut overhead costs
Pharmaceutical, biotech and health care companies often report SG&A expenses of 40%–50% or more, sometimes due to high sales and marketing costs. For these reasons, SG&A expenses should be compared with similar companies, if possible. As part of its Q financial reporting, Apple reported $12.809 billion of operating expenses for the quarter. Of this, $6.797 billion was research and development, while $6.012 billion was selling, general, and administrative. Although the company does state that increases to SG&A from prior periods relates to headcount, advertising, and professional services, there is little more transparency beyond these notes. Zero-base budgeting can also be used to maintain control over the SG&A expense category.
What is included in SG&A?
Operating expenses—also known as selling, general and administrative expenses (SG&A)—are the costs of doing business. They include rent and utilities, marketing and advertising, sales and accounting, management and administrative salaries.
Some firms classify both depreciation expense and interest expense under SG&A. If this is the case, then gross profit less SG&A equals pre-tax profit, also known as earnings before taxes (EBT). In many instances, SG&A expenses and operating expenses are one and the same.
Types of SG&A Expenses
If the ratio of SG&A to sales revenue increases over time, it may become more difficult to earn a sustainable profit. Reducing SG&A lowers the level of revenue needed to earn a profit, which is why companies often focus on SG&A when attempting to cut costs. Do you need all of that office space you’re currently using, or could you sublease some of it to another business? Are you being as efficient with your electricity and heating costs as you could be? Look through each of your business’ monthly expenses and make sure you aren’t overpaying for them. To calculate a total SG&A figure for an annual income statement, you’ll have to go through your company’s books for that year and add up all of the non-COGS, interest or income tax expenses you see there.
- However, the two profit metrics can be switched around if needed, i.e. in order to arrive at a positive value.
- The SG&A ratio is simply the relationship between SG&A and revenue – i.e. the expense expressed as a percentage of total sales.
- SG&A costs are the residual expenses necessary to run the organization and incur costs less specifically tied to the cost of making the product.
- The most common examples are rent, insurance, utilities, supplies, and expenses related to company management, such as salaries of executives, admin staff, and non-salespeople.
Departments like human resources and information technology support the business but do not take a direct role in product creation. Net revenue is always reported at the top, then COGS is deducted to arrive at the gross margin. The SG&A to sales ratio (also sometimes called the percent-of-sales method) is what you get when you divide your total SG&A costs by your total sales revenue. It tells you what percent of every dollar your company earned gets sucked up by SG&A costs.