Selling, General & Administrative (SG&A) expenses are the overhead costs a company incurs to operate its business, excluding those directly tied to producing goods or services. These expenses are essential for keeping a business running and are typically found below the gross profit line on a company's income statement.
Components of SG&A Expenses:
SG&A expenses are broadly categorized into three main types:
- Selling Expenses: These are costs directly related to generating revenue. Examples include advertising and marketing campaigns, digital marketing, sales commissions, salaries and wages for sales personnel, and travel and accommodation expenses for sales activities.
- General Expenses: These cover the costs required to support the overall business environment and maintain the company's infrastructure. Examples include office rent, utilities, and office supplies.
- Administrative Expenses: These costs are associated with the central functions that support the company's strategy and day-to-day management. Examples include salaries for administrative staff, legal and professional fees, accounting, finance, tax, human resources, and technology infrastructure.
Other expenses that can fall under SG&A include litigation costs, travel, meals, and management salaries and bonuses. In some cases, depreciation expense may also be included, depending on its relation to these categories.
Importance of SG&A Expenses:
Understanding and managing SG&A expenses is crucial for several reasons:
- Operational Efficiency and Profitability: SG&A expenses significantly impact a company's operational efficiency and overall profitability.
- Cost Management: They are often a primary target for management during cost-reduction initiatives, as reducing these overheads can directly improve the bottom line.
- Financial Reporting Transparency: SG&A expenses are considered period costs, meaning they are expensed in the period they are incurred. This treatment aligns with generally accepted accounting principles (GAAP) and enhances transparency in financial reporting.
- Operating Leverage Assessment: By separating these indirect costs from the direct costs of production (Cost of Goods Sold or COGS), companies can better assess their operating leverage, which indicates how changes in sales volume affect profitability.
- Overhead Control: Analyzing SG&A helps companies manage their overhead, reduce unnecessary costs, and sustain profitability.