SG&A
SG&A vs COGS, definitions, calculation, types and examples
Table of Contents
What is Selling, General, & Administrative (SG&A)?
How to Calculate SG&A Expenses (SG&A Formula)
Benefits and Limitations of Selling, General & Administrative Expenses (SG&A)
What is Selling, General, & Administrative (SG&A)?
Selling, General & Administrative (SG&A) → This is a category of expenses that are incurred for all normal day-to-day operating expenses associated with running a business that aren’t related to producing a good or service; essentially all the costs you will incur from normal business operations that don’t fall under COGS. You might also hear SG&A expenses referred to as Operating Expenses or Period Costs. SG&A, Operating Expenses, Period Costs...toe-may-toe, toe-mah-toe…in most cases, they’re all one in the same and can be referred to interchangeably.
Where this get's a little bit tricky is that SG&A expenses exclude your COGS (Cost of Goods Sold) expenses.
What are COGS?
Cost of Goods Sold (COGS) → This is a category of expenses incurred in the direct production and delivery of a company’s products or services.
SG&A vs COGS
What's the difference between SG&A vs COGS? Why does it matter, an expense is an expense, right? Well, sort of...the biggest difference is that SG&A and COGS are Typically listed as separate categories on an Income Statement.
The other important thing to note is that when pitching to investors, the Gross Margin of your company (Total Revenue minus COGS) is an extremely important indicator of how profitable and scalable the business is and ultimately drives the type of valuation you might receive. Typically, a good Software-as-a-Service (SaaS) business should have a gross margin of about 80-90%. This means that the Cost of Goods Sold should be around 10-20% of the total Revenue.
Unfortunately for founders, accounting rules are very specific on some things, and surprisingly unhelpful in other areas. There are actually no Generally Accepted Accounting Principles (GAAP) rules on the type of costs that are included in the Cost of Goods Sold (COGS).
Costs we recommend including in COGS:
- Hosting costs & domain registry costs
- Employee costs related to keeping the production environment running
- Employee costs for customer support/success of the application, but excluding any sales costs for up-sells, or cross-sells
- Cost of any third-party software or data that is included in your delivered product
- Any other direct employee costs required to deliver the ongoing service
Things we advice against including in COGS:
- Sales commissions
- Allocated overhead charges
- Customer success costs associated with cross-selling/up-selling
- Product development costs
- Third-party software use in-house for operations, but not packaged in your product (think Slack, Microsoft Office, Zoom, etc.)
SG&A Examples
It may help to think about SG&A as four key categories of expenses – marketing, sales, development and overheads. Depending on your business, you could refine and subdivide the categories further to get more detailed insight in your costs…but if your company is still relatively immature, we suggest keeping things simple.
Costs we recommend including in SG&A:
- Salaries, wages and benefits for executives and staff not directly involved in manufacturing or other production tasks
- Rent
- Utilities
- Insurance payments
- Marketing, advertising and promotional expenses
- Accounting costs
- Legal costs
- Office supplies
- Equipment not associated with manufacturing/delivering the product or services (laptops, cellphones, etc.)
Types of SG&A Expenses
As the name suggests, the expenses associated with SG&A are frequently segmented into three primary groups: selling, general, and administrative. There is a connection, both directly and indirectly, between the costs of selling a product or service and the costs of producing revenue. Indirect selling expenses are those that are incurred prior to or after the sale has been made, such as salaries, benefits, and wages for salespeople, as well as travel and accommodation expenses. Direct selling expenses consist of transaction costs and commissions paid on a sale. Indirect selling expenses include those.
The term "general expenses" refers to the overhead costs incurred by a company that is not directly related to the sale of products or services but rather to the operation of the business on a day-to-day basis. These costs can include rent, utilities, and insurance. Expenses such as rent, insurance, utilities, and supplies are examples of general expenses. Expenses related to company management, such as salaries for executives, administrative staff, and non-salespeople, are also examples of general expenses.
Expenses that pertain to the management of the company are known as administrative costs. They include the salaries of employees such as executives, administrative staff, human resources, accountants, IT professionals, and lawyers, as well as fees for consulting services. These expenses are more associated with the management and administration of the company than they are with the actual process of generating revenue for the company.
In order for businesses to effectively and efficiently manage their expenses, it is essential for them to have a solid understanding of the various SG&A expense categories. The monitoring of these expenditures enables businesses to zero in on specific areas of cost reduction or elimination, which ultimately results in an increase in profitability.
How to Calculate SG&A Expenses (SG&A Formula)
The SG&A formula is calculated by adding up all the expenses incurred by a business that are not directly related to the production of goods or services. This includes selling expenses (such as marketing and advertising), general expenses (such as rent and utilities), and administrative expenses (such as salaries and legal fees).
The formula is as follows:
SG&A = Selling Expenses + General Expenses + Administrative Expenses
The SG&A formula is commonly used by businesses to calculate their overhead costs and evaluate their operational efficiency. It is important for businesses to keep their SG&A expenses in check, as these expenses can have a significant impact on the company's profitability.
How to Report SG&A Expenses
In the income statement of a company, selling, general, and administrative costs must be reported as expenses. SG&A expenses, along with other indirect costs of running a business, are typically included in the section of the financial statements devoted to operating expenses.
The reporting of SG&A expenses in an accurate manner is absolutely necessary for companies in order for them to determine their financial health and profitability. Incomplete or inaccurate reporting of selling, general, and administrative costs can lead to erroneous analysis and projections of financial performance. Companies have a responsibility to ensure that they are accurately reporting their SG&A expenses and are doing so in accordance with generally accepted accounting principles.
Benefits and Limitations of Selling, General & Administrative Expenses (SG&A)
When it comes to managing the day-to-day operations of a business, having a solid understanding of the costs associated with SG&A is absolutely necessary. The monitoring of these expenditures enables businesses to zero in on specific areas of cost reduction or elimination, which ultimately results in an increase in profitability. In addition to this, it assists businesses in understanding how the decisions they make regarding their operations will affect their bottom line.
However, there are some restrictions that come along with using SG&A as a measurement of the financial health of a company. Because SG&A costs are indirect costs, they can differ significantly between businesses and even within industries. As a result, it is challenging to compare SG&A costs from one company to another. In addition, SG&A expenses do not offer any insight into the direct costs of producing goods or services, which for some businesses can be a significant factor.
FAQ
Does SG&A Include Salary?
Yes, salaries for employees such as executives, administrative staff, and other employees who are not salespeople are included in SG&A expenses. These costs are categorized as administrative expenditures and fall under the SG&A umbrella of expenses. However, it is essential to keep in mind that SG&A expenses do not always include a person's total salary. Direct selling expenses include not only the salaries of salespeople but also those of other employees who are directly involved in the process of generating revenue.
Why Do You Need to Know SG&A for Your Business?
When it comes to managing the day-to-day operations of your business, having a solid understanding of your SG&A expenses is absolutely necessary. By keeping track of these expenditures, you will be able to identify areas in which costs can be reduced or eliminated, ultimately leading to an increase in profitability. SG&A expenses, in addition to providing valuable information about the effectiveness of your company's operations, can also assist you in making well-informed decisions regarding the distribution of resources. In addition to this, the SG&A expenses of your company are an important factor in determining the overall financial health of your business. Furthermore, these expenses can be used to compare your company to those of other companies operating in the same industry.
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