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Selling, General and Administrative (SG&A)

Guide to Understanding SG&A

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Selling, General and Administrative (SG&A)

What Does SG&A Stand For?

SG&A expenses are the indirect costs of operating the business day-to-day.

SG&A, an abbreviation of “selling, general & administrative”, is a catch-all category of expenses that is inclusive of spending that isn’t a direct cost, otherwise known as cost of goods sold (COGS).

Recorded on the income statement of companies below the gross profit line item, SG&A captures indirect costs included in a company’s core operating business yet are not directly connected to the manufacturing of the products or delivery of the services.

Whereas SG&A primarily represents indirect costs unrelated to the core production of revenue, COGS are directly related to revenue generation.

For companies implementing cost-cutting initiatives, the first area they look at tends to be SG&A as opposed to COGS.

Once SG&A is deducted from gross profit – assuming there are no other operating expenses – operating income (EBIT) remains.

  • Operating Income (EBIT) = Gross Profit – SG&A

From here, you can divide EBIT by revenue to calculate the operating margin.

  • Operating Margin = EBIT / Revenue
SG&A and Non-Operating Expenses

Note that the calculation excludes interest expense since interest is reported as a “non-operating” expense (i.e. non-core).

Likewise, the taxes paid to the government are also not included under the same rationale.

Examples of SG&A Expenses

In this section, we’ll provide examples of the most common SG&A expenses.

Selling Expenses

Examples of “selling” expenses include the following:

  • Sales and Marketing (S&M)
  • Advertising
  • Travel Costs (i.e. In-Person Selling, Trade Shows)

General Expenses

Next, examples of “general” expenses include the following:

  • Rent
  • Utilities
  • Technology Costs
  • Equipment Costs
  • Office Supplies
  • Insurance

Administrative Expenses

As for the last category, examples of “administrative” expenses are the following:

  • Salaries of Employees (e.g. Executives, Administrative Staff, Human Resources)
  • Accountants
  • IT Professionals
  • Lawyers
  • Consulting Fees

SG&A Ratio Calculation Example

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 Ratio = SG&A / Total Revenue

The SG&A ratio measures what percentage of each dollar earned by a company is impacted by SG&A.

For example, let’s say that we have a company with $6 million in SG&A and $24 million in total revenue.

  • SG&A Ratio = $6,000 / $24,000 = 25%

The 25% ratio means that for each dollar of revenue created, $0.25 gets spent on SG&A expenses.

For purposes of creating a projection model, SG&A as a % of historical revenue is calculated, and then either:

  • The trend of the ratio is followed for future periods (i.e. increasing, decreasing) until the normalized % is reached, which is based on industry averages.
  • If unchanged in recent years, the ratio assumption for projected periods can be extended throughout the entirety of the forecast period.

SG&A by Industry

Generally speaking, the lower the SG&A ratio, the better – but the average benchmark varies significantly based on industry.

For example, the ratio for manufacturers can range anywhere around 20% of revenue, while in healthcare it can be up to 50% of revenue.

Certain companies will file their financial statements with one line for SG&A, while others – for example, software companies – will separately break out G&A and sales & marketing.

The distinction found in the financials will be based on the relative size of each, which depends on the specific industry in question.

SG&A vs. Operating Expenses

On the income statement, operating expenses and SG&A typically represent the same costs – those that do NOT qualify as COGS.

But as mentioned earlier, the line item can be broken out individually depending on the size of the cost and relevance to the core business model.

Therefore, operating expenses and SG&A are terms that are often used interchangeably, but differences can arise if, for instance, depreciation and amortization (D&A) are broken out in a separate line item.

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