When you look at a company's income statement, you'll find selling, general, and administrative (SG&A) expenses listed. These are all the business costs that aren't directly involved in making products or providing services—the day-to-day costs of keeping the lights on. Examples include marketing, advertising, rent, and utilities.

Often called "overhead," most SG&A expenses are incurred regardless of sales volume, making them fixed costs. However, some SG&A expenses may be semi-variable or variable such as commissions ꦑpaid to sales staff, utilities, and distribution costs.

What Are SG&A Expenses?

SG&A are the ongoing costs of running a business while bracketing out the level of production. These expenses are typically recorded below the gross profit line on the 澳洲幸运5官方开奖结果体彩网:income statement. The reason for separating the costs that directly relate to producing a product—the 澳洲幸运5官方开奖结果体彩网:cost of goods sold (COGS)—from the indirect costs that support overall business operations is for companies to assess their 澳洲幸运5官方开奖结果体彩网:operating leverage, or🍷♋ how changes in sales volume affect profitability.

SG&A expenses are often the most significant operational cost center for service-based businesses with minimal COGS. While essential for business operations, these expenses are frequently scrutinized during cost-reduction initiatives as they directly impact a company's operational efficiency and bottom line.

How do companies keep these expeܫnses in check? Usually, through careful budgeting and periodic reviews for ways to cut costs. When times get tough, SG&A is often the first place managers look to trim spending, though they have to be careful not to cut too deep since that can end up hurting operations.

Types of SG&A Expenses

Here, we'll detail further the three different categories that make up SG&A:

Selling Expenses

Sell🌸ing expenses are those directly tied to the efforts made to generate revenue:

• Advertising and marketing: Advertising campaigns, digital marketing, print media, and social media outreach are all included. So are skills training and other efforts used to improve the performance of sales staff.
• Sales commissions and bonuses: Sales teams often earn commissions or bonuses based on performance. These incentive-based expenses are designed to motivate the sales force and directly link compensation to generating more revenue for the firm.
• Promotional costs: Costs related to 澳洲幸运5官方开奖结果体彩网:promotional events, trade shows, product launches, and sampling programs fall under this category.
• Distribution and logistics: While not directly part of manufacturing, expenses related to the delivery of products to customers—such as shipping, warehousing, and handling—are typically included in selling expenses.

General Expenses

General expenses cover the costs necessary to support the overall business environment. Theseꦗ costs are not directly related to sales or administration but are essential for maintaining the company’s infrastructure.

• Rent and utilities: The cost of office space, warehouses, and related utilities (electricity, water, internet) falls under this category. These are basic operational expenses that keep the business environment functional.
• Office supplies and equipment: Everyday supplies like computers, printer paper, stationery, furniture, and other office equipment are included here. These items, although seemingly small in cost, can add up over time.
• Insurance: General 澳洲幸运5官方开奖结果体彩网:business insurance—including property or liability insurance and other forms of coverage—is vital for protecting the company from unforeseen risks and is an essential part of risk management.
• Maintenance and repairs: Keeping the company’s facilities and equipment in good working order requires ongoing maintenance and occasional repairs.

Administrative Expenses

澳洲幸运5官方开奖结果体彩网:Administrative expenses are often the backbone of the companಌy’s governance and overall management. These cost🉐s are associated with the central functions that support business strategy and day-to-day management.

• Executive salaries and benefits: Compensation for top management, including the CEO, CFO, and other executives, is a significant part of administrative expenses.
• Human resources (HR): 澳洲幸运5官方开奖结果体彩网:HR functions such as recruiting, training, payroll processing, and employee relations are essential to maintaining an efficient workforce.
• Accounting and legal fees: Professional services for accounting, auditing, tax preparation, and legal counsel are needed to ensure the company is following regulations and maintaining financial integrity. These fees also cover strategic advice on complex issues.
• Information technology (IT) support: IT infrastructure, 澳洲幸运5官方开奖结果体彩网:cybersecurity, and software maintenance fall under administrative expenses. In the digital age, IT is a central part of almost any business.

Examples of SG&A Expenses

SG&A expenses are reported on a company's income statement, which is part of a company's annual report. For publicly traded companies, these reports must be filed with the U.S. Securities and Exchange Commission (SEC).

Apple Inc. (AAPL) reported $14.29 billion in operating expenses as part of its financial reporting for the third quarter of 2024. Of this, $7.77 billion was for research and development and $6.52 billion was for selling, general, and administrative costs.  

Want to see how well Apple handles its overhead costs? One oft-used method is to look at what percentage of the company's sales goes to SG&A.

Here's the calculation for the quarterly statement above:

• SG&A: $6.52 billion
• Net Sales: $94.93 billion

SG&A-to-sales = 6.52/94.93 = 6.87%

More clearly put, for every dollar of sa💧les, Apple spent about 6.87 cents on overhead expenses

We can then compare that figure to the same quarter the year before (this accounts for﷽ seasonaliꦯty):

Here are🍷 the details for the third quarter of 2023:

• SG&A: $6.15 billion
• Net Sales: $89.50 billion

SG&A-to-sales = 6.15/89.50 = 6.87%

Apple's SG&A expenses were exactly the same after rounding in both quarters, suggesting consistent operational efficiency. Moreover, a ratio below 7% is exceptionally efficient for a large technology company, where SG&A ratios are often well over 20% (see the table above for those industries involved in Big Tech).

It's also useful to compare SG&A to 澳洲幸运5官方开奖结果体彩网:R&D expenses. Apple’s R&D expenses slightly exceed SG&A, highlighting the company’s emphasis on product development. Analysts might track the ratio of R&D to SG&A to understand the balance between developing new products and marketing existing lines. A healthy balance can indicate that the company is both forwa🦩rd-looking and effective in promoting its current offerings.

Impact on Operating Income

澳洲幸运5官方开奖结果体彩网:Operating income is calculated af👍ter subtracting the cost of sales and operating expenses (including SG&A) from net sales. Working from the same Apple quarterly statement, we get the following:

• Net Sales: $94.93 billion
• Total Cost of Sales: $51.05 billion
• Operating Expenses (R&D + SG&A): $7.77 billion + $6.52 billion = $14.29 billion

Operating Income = 94.93 – 51.05 - 14.29 = $29.59 billion

By examining SG&A within the broader context of operating expenses, we see that Apple’s revenue generation capacity remains strong enough to absorb higher overhead costs as the company grows. However, further analysis would be needed to determine if these costs are producing proportional benefits in sales or brand equity.

The Bottom Line

Getting SG&A right is a balancing act that can make or break a company. While these overhead costs directly impact the bottom line, simply slashing them isn't always the answer. Savvy company leaders look at what's typical for their industry and make sure they're investing enough in areas that give them an edge over competitors. The key is to take a hard look at these expenses now and again to figure out where you can trim fat without cutting into muscle. After all, you need to keep growing, but you can't do that without keeping the lights on.