Many expenses facilitate the functioning of a business, and SG&A expenses form a significant portion of them. SG&A costs are the selling, general and administrative expenses of a business. These are all the costs involved in everyday operations and incurred while marketing and selling a product.
These costs are not directly related to the manufacturing, production, and products or services but are used to facilitate business processes and day-to-day operations.
Quick Read: Business Expense
What are SG&A expenses?
Selling, General, and Administrative (SGA) expenses are the three main expenses incurred during normal business operations. Selling expenses are the costs associated with promoting and selling a product or service. This includes expenses such as marketing campaigns, sales commissions, and advertising.
General expenses, also known as overhead expenses, are indirect costs that are not directly tied to the production of a product or service. These expenses include rent, utilities, insurance, and office supplies.
Understanding SGA expenses is important for companies to manage their costs and improve their financial performance effectively. Administrative expenses are the costs of running the day-to-day operations of a business, such as executive salaries, professional fees, and legal expenses. These expenses are necessary for a company to maintain its operations and support its growth, but they are not directly tied to generating revenue.
Read More: Expense Management
Types of SG&A expenses
SG&A costs can be divided into two broad types of expenses.
1. Selling expenses
Selling expenses are necessary for a company to generate revenue and grow its business. These are the costs incurred by a company for promoting and selling its products or services. These expenses include marketing and advertising costs, sales commissions, and promotional activities.
Example – Advertising and marketing costs, such as print, radio, or television ads.
2. General and administrative expenses
General and administrative expenses, also known as overhead expenses, are indirect costs incurred by a company during its normal business operations that are not directly tied to production costs.
Examples – rent, utilities, office supplies
Discussing selling expenses in detail
Selling expenses are all the costs incurred to facilitate the sales of goods or services. These include not just the direct costs of sales but also the sales-supporting expenses like marketing, PR, advertising, etc. Selling expenses can be divided into distribution, marketing, and final sales costs.
Selling expenses are different from the cost of goods sold. Cost of goods sold or COGS is the amount of money spent to acquire raw materials required to make a product and the development, production, manufacturing, and designing costs.
Direct and Indirect Selling Expenses
You can classify selling expenses into two categories: direct and indirect.
What are direct selling expenses?
Businesses incur direct selling expenses after the sale of a product or service. These expenses are primarily variable, and their total amount depends on the number of goods sold.
The following expenses can be classified as direct selling expenses.
- Commission on sales
- Packaging of goods
- Cost of transport and delivery services
What are indirect selling expenses?
Businesses incur indirect selling costs before the sale of the products. These costs can be all sales-enabling expenses like-
- Marketing expenses
- Advertising expenses
- Salespeople salaries
- Content development
- Social media management and marketing
- Website development and maintenance
- Certain travel expenses
- Public relations
- Events marketing and management
Discussing general and administrative expenses in detail
General & administrative expenses, or G&A expenses, are costs that facilitate the everyday operations of a company. They do not directly fund a specific department like sales or manufacturing but rather support activities essential to all functions and departments.
General and administrative costs support the overall functioning of a company. They are a part of the operating expenses of the company. Most salient general and administrative expenses include-
- Administrative staff salaries
- human resource professional salaries
- Legal fees
- Overhead costs
Difference between operating expenses and SG&A Expenses
SG&A expenses are a subset of the operating expenses. Although, in some cases, the two terms are used interchangeably as both include costs not involved in manufacturing, certain operating expenses cannot be categorized as sg&a expenses. Some of these expenses can be research and development fees or depreciation.
Read More: Operating expenses
Benefits of managing SG&A expenses
1. Insight into the financial standing of the business
Sg&a costs form a significant component of a company’s expenses and play a crucial part in the overall profitability of the company. Tracking, calculating, and analyzing them is instrumental in calculating the business’s net income. Knowing the net income is essential to understanding the company’s financial standing.
2. Gives insight into the performance of departments
Analyzing sg&a expenses closely also helps you gain insight into the performance and efficiency levels of the company’s departments. You can calculate the return on investment per department by analyzing selling expenses. It also shows you the short-term requirements of each department and function. This can help you make the right decisions during resource allocation and budgeting.
Closely tracking and analyzing sg&a expenses can help you identify the expense areas that yield the lowest returns or lead to wastage. You can weed out these expenses or replace them with better-optimized options to increase the savings for your business.
How to calculate and measure SG&A expenses?
Step 1: Identify the sg&a expenses
Different organizations have different ways of representing sg&a expenses on financial statements. Discuss the costs with the accounting team and decide which line items will be classified as sg&a expenses.
If a spend meets the following criteria, it can be included as a sg&a expense.
- It is a cost unrelated to the manufacturing, production, or development of goods.
- It is a salary expense for employees involved in non-production and manufacturing roles like IT department, marketing, sales, accounts, HR, legal, etc.
- It supports the overall functioning of a business like an office rent, insurance, technology, and infrastructure.
- It enables the final sales of goods.
- It is not an indirect or non-operational expense like interest expenses, lawsuit settlement, or inventory write-offs.
Step 2: Categorise sg&a into fixed and variable expenses
Divide every sg&a expense as fixed or variable expenses. Fixed expenses include salaries, rents, utilities, etc., while variable expenses can be sales commissions, certain marketing costs, equipment, etc.
Step 3: Add the expenses and calculate the sg&a ratio
Add all the selling, general and administrative expenses and then divide the sum by your sales for the specific period.
This ratio will tell you the percentage of money earned by the company used for sg&a costs. As the sg&a ratio increases, it becomes more and more difficult for businesses to sustain their profits. This is why sg&a expenses are often considered for reductions.
The formula for calculating SG&A expenses
The formula for calculating Selling, General, and Administrative (SG&A) expenses is as follows-
SG&A = Total Selling Expenses + Total General and Administrative Expenses
What is the SG&A ratio?
The Selling, General, and Administrative (SG&A) to Sales Ratio measures the proportion of a company’s SG&A expenses relative to its total sales. It is calculated by dividing the total SG&A expenses by the total sales for a specific period, typically expressed as a percentage.
The SG&A to Sales Ratio is an important financial metric for companies as it provides insight into the efficiency and competitiveness of a company’s operations and helps to identify trends in a company’s expenses over time.
A high SG&A to Sales Ratio may indicate that a company is incurring excessive expenses relative to its sales, which could negatively impact its profitability and financial performance. On the other hand, a low SG&A to Sales Ratio may indicate that a company is operating efficiently, with relatively low expenses relative to its sales.
What is the significance of SG&A expenses?
Selling, General, and Administrative (SG&A) expenses are significant for companies as they play a crucial role in their financial performance and decision-making.
The significance of SG&A expenses can be seen in the following ways:
- Cost management: SG&A expenses are a significant portion of a company’s overall expenses, and understanding and managing these costs is important for improving profitability and financial performance.
- Budgeting and forecasting: Companies use SG&A expenses as a key component in budgeting and forecasting future financial performance, as they help to provide a comprehensive view of a company’s expected costs.
- Financial analysis: SG&A expenses are used to evaluate a company’s financial performance, assess its efficiency and competitiveness, and compare its performance to other companies in the same industry.
- Strategic decision-making: SG&A expenses provide valuable insights into a company’s cost structure and operations, which can be used to make informed decisions about investments, cost-saving measures, and other key business initiatives.
Overall, SG&A expenses are an important metric for companies to monitor and understand, as they can provide a wealth of information about a company’s financial performance and prospects.
How to reduce SG&A expenses?
Every company wants to reduce cash outflows to increase its profit margins. Naturally, SG&A cost-cutting is an essential function for overall cost reduction.
During mergers and acquisitions, sg&a is often the first cost that comes under scrutiny and goes under the knife to boost the company’s profitability.
How to reduce selling expenses?
Reducing selling expenses requires careful planning and detailed analysis of selling expenses up till the current quarter. To analyze the returns vs. cost value of any department or function, you must first quantify performance. For example, you can measure the performance of a digital marketing team by looking at websites, social media KPIs, inbound leads generated, etc.
It is essential to acquire information about multiple cost dimensions and not rely on guesswork while analyzing selling expenses. While setting a budget, ensure you have incorporated insights from your analysis, industry standards, and customer lifetime value.
Travel expenses also comprise a significant part of selling expenses. You can optimize travel expenses using intelligent travel and expense management software that can improve reimbursement processes, reduce fraud and increase savings by increasing policy compliance.
Happay’s travel and expense management solution is one such platform that offers end-to-end travel management solutions.
Quick Read: Expense Reimbursement
How to reduce general and administrative expenses?
Most general and administrative expenses are fixed costs, and reducing them without affecting the overall functioning of revenue-producing business areas can be tricky.
However, consolidating your expense management systems, frequent auditing, regular identification, and eliminating bottlenecks can reduce administrative expenses. Another way to reduce administrative costs is to ensure that utilities are not wasted. If employees misuse electricity and phone charges alone can accumulate into mammoth bills.
Explore various administrative and HR software that offers automation. Automation can improve organizational efficiency, boost employee productivity and, in turn, save on HR and administration salaries.
Accounting for SG&A expenses
The company’s income statement accounts for selling, general, and administrative expenses. These costs do not correspond to specific goods and services and are not clubbed with the cost of goods sold.
Some businesses can account for sg&a and operating expenses together, while some may put sg&a as a part of operating expenses.
Quick Read: Expense Accounting
How to forecast SG&A expenses?
Three methods can do SG&A forecasting: percent of revenue from sales, fixed value, and growth rate applied over the last period.
To predict sg&a cash outflows, you can estimate the individual components. Most fixed costs, like rent, salaries, etc, remain constant or increase predictably. Administrative costs, like technology, utilities, etc., can also be estimated, inflated, and planned.
The variable sg&a expenses like sales commissions and shipping costs are a little tricky to estimate, but the analysis of previous quarters can give an insight into the approximate spending. Based on previous data, customer acquisition, retention, and entertainment costs can also be approximated. However, variable costs can not be accurately estimated and can always be subject to change.
The importance of expense tracking software
Analyzing and calculating the selling, general and administrative costs is imperative to the financial health of a business. So far, we have learned how to calculate, forecast, and analyze the sg&a costs.
However, these forecasts and analyses start leaning towards inaccuracy when expense data gets contaminated because of manual processes. This can lead to errors during critical decision-making and budgeting processes. To avoid that, it is crucial for businesses, especially large companies, to adopt and deploy expense-tracking software.
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