Selling, general & administrative costs (SG&A)—also sometimes referred to as operating expenses—are any costs your business pays that aren't directly tied to making or delivering your product or service.
So what is SG&A? It's a broad "catch-all" category that basically includes anything you spend money on that isn't a production cost, also known as cost of goods sold (COGS).
For example, let's say your fictional company, XYZ Soaps Inc., hand-makes and sells artisanal soaps online.
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.
Your SG&A costs are basically the operating costs of running the business—on all the social media and Google ads you run for your store, your monthly Shopify subscription, the fee you paid the illustrator who designed your new logo, etc.
(There are also interest and income tax expenses, but these are usually much smaller than COGS and SG&A, so we'll ignore those for now.)
SG&A costs are reported on the income statement, the financial statement that your business prepares to figure out how profitable it is.
SG&A costs are typically the second expense category recorded on an income statement after COGS, like on this simple income statement for XYZ Soaps Inc.
XYZ Soaps Inc. Income Statement
For the year ending Dec. 31, 2021
"
Helpful resource: How to Read (and Understand) an Income Statement
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.
Further reading: 8 Great Reasons to Outsource Your Bookkeeping
Three types of expenses are typically listed as line items under the SG&A category: selling expenses, general expenses, and administrative expenses. In some cases, certain non-operating expenses might appear under SG&A as well.
These are any sales or marketing expenses your business incurs. They can be broken down into direct and indirect selling expenses:
Direct selling expenses are incurred when a product or service is sold. These include things like:
Indirect selling expenses are incurred when the product is manufactured or the service is conducted, and after. These include things like:
These are anything your business spends money on that has nothing to do with COGS, selling, or administration. These include things like:
Small businesses typically don't spend very much money administering their business, but if they do, their administrative expenses might include things like:
These are usually listed separately from SG&A, but income statements will sometimes bundle them together with SG&A. Non-operating expenses are anything you spend money on that isn't related to the day-to-day operations of your business, including:
With a handle on the SG&A meaning, let's dig into how you can use this information for your business.
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.
It looks like this:
SG&A ratio = Total SG&A / Total sales revenue
For example, the sales ratio for the fictional company XYZ Inc. we mentioned above would be:
SG&A ratio = Total SG&A / Total sales revenue
= $6,450 / $24,200
= 0.266528926
= 26.65%
This means that 26.65% of every dollar XYZ Inc. earns gets spent on SG&A expenses.
What's a good SG&A sales ratio? Generally speaking, the lower the better. But average SG&A sales ratios vary wildly based on industry. For example, manufacturers range anywhere from 10% to 25% of sales, while in health care it isn't unusual for SG&A costs to approach 50% of sales.
When an external business advisor looks at a small business' books, one of the first places they'll look for cost-cutting opportunities is SG&A. Why? Because it's usually one of the first places where businesses get sloppy with their spending. When left unchecked, it can have a negative impact on your company's profitability. Here's how to make sure your SG&A expenses don't get out of control:
Sometimes just the simple act of sitting down and identifying every single one of your SG&A expenses for the last year is enough to start thinking of ways to control them. When you finally do get down to cutting costs, look for expenses that aren't directly tied to revenue like:
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? Think you could renegotiate your company's internet and phone bill? Look through each of your business' monthly expenses and make sure you aren't overpaying for them.
Make sure to keep a petty cash log. Get your employees to use a dedicated receipt app to scan and keep track of all receipts. Keep a close eye on day-to-day spending with tools like Bench. The better you track daily spending in your business today, the less likely it'll get out of control in the future.
Helpful resource: The 6 Best Expense Trackers for Small Businesses
Yes! According to the IRS, as long as these expenses are "ordinary" (i.e. typical for businesses in your industry) and "necessary" (i.e. you couldn't do business without them), you're allowed to write off SG&A expenses for the year in which you incurred them.
One thing to look out for when deducting SG&A is to make sure that they don't include any capital expenses, which are any investments you make in your business (i.e. startup costs, assets, renovations, and improvements, etc.) Capital expenses must be capitalized and depreciated rather than deducted.
How Accracy can help
If you're trying to get a better handle on your business finances, Accracy can help.
Our bookkeeping team completes your books and generates a monthly income statement and balance sheet for you. Bench's easy-to-use software let's you quickly see how your business is doing so you can make smarter decisions with your money and master your spending. Have questions? Message your bookkeeper in your message feed. They work with our client research team to get the answers you need to make informed decisions for your business strategy.
Don't waste time and money on expensive financial mistakes. Enlist the Bench bookkeeping team today.
More helpful resources:
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