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.
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.
Why does it matter, an expense is an expense, right? Well, sort of...the biggest difference is that SG&A and COGS are 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:
Things we advice against including in COGS:
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: