What are SG&A Expenses?
Selling, general and administrative (SG&A) expense includes all the expenses incurred in the selling of the products of the company whether direct or indirect along with the entire general and the administrative expenses during an accounting period under consideration such as advertisement expenses, sales promotion expenses, marketing salaries, etc.
SG&A Expenses are those expenses that are necessary to keep the business going. However, they are not directly included in the manufacturing cost or product costProduct CostProduct cost refers to all those costs which are incurred by the company in order to create the product of the company or deliver the services to the customers and the same is shown in the financial statement of the company for the period in which they become the part of the cost of the goods that are sold by the company..
SG&A Expense is included in the income statement of the company and examples include –
- Accounting and legal expenses
- Sales commission paid
List of SG&A
#1 – Selling Expenses
Selling expenses are divided into direct expenseDirect ExpenseDirect costs are costs incurred by an organization while performing its core business activity and can be attributed directly in the production cost, such as raw material costs, wages paid to factory staff, power & fuel expenses in a factory, and so on, but do not include indirect costs such as advertisement costs, administrative costs, etc. and indirect expensesIndirect ExpensesIndirect expenses are the general costs incurred for running business operations and management in any enterprise. In simple terms, when you want to buy grocery from a supermarket, the transportation cost to get you to the supermarket and back is the indirect expenses..
- Direct expenses are shipping expenses of the product, sales commissions.
- Indirect expenses are the costs that occur throughout the process of manufacturing, which include product advertising and promotional expenses, traveling expenses, and telephone bills of the sales consultants.
#2 – General & Administrative Expenses
General & Administrative Expenses are the overhead expensesOverhead ExpensesOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc. of the company. They are the fixed costs incurred by the company like the rent, mortgages, and insurances that need to be paid. It also includes all the salaries, wages of the workers.
SG&A expense depends on the structure of the company, whether the company has more fixed costs than variable costs and vice versa.
- Scenario 1: If the company has more fixed costs than variable costs, and if fixed cost is high, then it needs to have high annual sales. If even there is a slight dip in revenues, then it won’t be able to cover its fixed costs. Such companies have a high break to generate profits.
- Scenario 2: If the company has more variable costs and very low fixed costs, then it will have more competition. But they survive the phases of fall in revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions. as they don’t have to think to bother about covering fixed costs.
Examples of SG&A Expense
Now we will see an example of General & Administrative Expenses.
Rajesh is an accountant of a startup company XYZ. He needs to calculate the Selling General & Administrative expenses, which will also include the depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. .
Rajesh needs to include the salaries of the people of all the departments of the company and also the associated taxes. E.g., utilities, telephone, insurance, rent, repairs & maintenance, associated with the building. Also, the office equipment and the advertising expenses, commissions, travel expenses, selling and marketing supplies, and administrative and general supplies.
Once he calculates the SG&A Expenses before depreciation, he deducts the depreciation of the office building, the depreciation of the office equipment. The net $ 238500 is the amount that will be reported on the income statementReported On The Income StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements..
We will now see some live examples of Selling, General & Administrative expenses of some companies. We can get the data from the income statement of the company.
SG&A Expenses of ITC is as follows:
We can get the report from the financial tab of ITC limited. We need to choose an income statement to view the SG&A expenses.
Source: Yahoo Finance
We can see that selling, general and administrative expense is reported in the operating expenses sectionOperating Expenses SectionOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit. of the income statement.
Selling, General & Administrative expenses are vital in determining your operating income. If we subtract SG&A expenses from Gross Margin, we get Operating Income.
- It is a key element in determining the company’s profit.
- These costs are essential in keeping the business going.
- Sometimes to boost profitability, these costs need to be regularized.
- During mergers and acquisitionsMergers And AcquisitionsA merger and acquisitions (M&A) agreement refers to an agreement between two existing companies to merge into a new company, or the purchase of one company by another, which is done generally to benefit from the synergy between the companies, expand research capacity, expand operations into new segments, and increase shareholder value, among other things., these costs are a key area to look at. Several repeated positions can be cut down to bring down the SG&A costs and increase the operating income.
Excessive SG&A Expenses will hurt the profit figures of the company and, in return, reduce the shareholder’s returns.
Important Points to Note
- SG&A is an important point to remember when calculating the profitability of a company.
- It is all the costs that are not related to the direct manufacturing of the product.
- It is the total of the costs which are essential for the manufacturing process like advertising costs, commissions, travel costs, etc.
- Research and development costs are not included in SG&A expenses.
The other important point to take note is regarding the situations where there are overspending and the ways it can be reduced.
- When such expenses increase too much without a rise in sales or a drop in sales, then it is very much important to reduce the SG&A costs.
- High Selling, General & Administrative costs decrease the profitability of the shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares..
Ways to Reduce SG&A Expense
- Restructuring and cost-cutting are required to reduce the expenses of Selling, General & Administrative costs.
- Reduction of non-sales personnel salaries, cut in travel costs will help to regularize these costs.
Selling, General & Administrative expenses are a major driver of operating income. As we know, Gross Margin – SG&A = Operating Income, also referred to as EBIT (Earnings before interest taxes)
Therefore an excessive SG&A expense leads to a decrease in EBIT. But these expenses are also important to carry on a day to day activities. Therefore a balanced amount should be spent keeping in mind the structure of the company (more fixed costsFixed CostsFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity. than variable costs and vice versa).
This article has been a guide to what is SG&A Expense and its definition. Here we discuss the list of Selling, General & Administrative Expenses along with practical examples, its importance, and disadvantages. You can learn more about Accounting from the following article s-