SG&A expenses include all the cost that affects the firm’s performance other than cost of goods sold it is an important part of the income statement.
These expenses are the various expenditures made in running the general activities of any organizations, which do not relate to the production line. Controlling of SG&A expenses is essential to keep organization profitability and operation efficiency at its best.
What is SG&A Expense?
SG&A costs consist of all miscellaneous expenses related to the sales function, operation and general administration of the organization.
These costs are not of production nature but they are vital in the operations of a business. It is often reported in the income statement as operating expenses.
Types of SG&A Expenses
1. Selling Expenses
Selling expenses concern the cost of promoting and introducing products or services to customers. Examples include:
- Costs of advertising and marketing related with the business.
- Sales commissions.
- Expense classifies of traveling and eating for sale personnel.
- Purchases, selling, general and administrative expenses, distribution and logistics costs.
2. General Expenses
General expenses on the other hand are the costs that are incurred in operating the business but in selling the products. Examples include:
- Office supplies.
- Utilities.
- Rent for office space.
- Wages and bonuses (having excluded the sales and manufacturing employees).
3. Administrative Expenses
Overhead costs are expenses connected with running the entire business and administration of the company in particular. Examples include:
- Executive salaries.
- Legal and accounting fees.
- Human resources and training costs.
- It involves IT infrastructure and support cost.
Calculation of SG&A Expenses
The overhead could be easily arrived at by adding all the selling, general, and administrative expenses incurred over a given period of time. The formula is:
SG&A = Selling + General + Administrative Expenses
Example Calculation
Assume a company has the following expenses:
- Selling expenses: $50,000
- General expenses: $30,000
- Administrative expenses: $20,000
Selling general and administrative expenses are $100,000 for the period for the company in question.
Importance of SG&A Expenses
1. Evaluating Profitability
- This reduces operating income which in turn reduces the level of profitability of the operations of a firm. The best approach to budgeting these expenses is to track them to be in a position to look for ways of reducing them.
2. Cost Management
- It means that SG&A expenses, being controllable, must be managed to the lowest doable amount particularly where the business can leverage another area as a resource to impact cost.
3. Strategic Decision-Making
- This paper aims at establishing the nature and impact of SG&A expenses, which assist the management in decision making since they indicate efficiency in operations.
4. Budget Planning
- SG&A is important in developing working models on prognosticating and budgeting. Historical information is used to establish achievable expense benchmarks.
5. Comparison and Benchmarking
- By comparing SG&A expenses to other companies, relative cost effectiveness is determined, and areas to be improved are found by a firm.
Examples of SG&A in Various Industries
Retail Industry
- Marketing communication programs related to new product introductions.
- Wages of store managers and salespersons.
- Monthly rental expenses including spaces for stores.
Technology Industry
- Other overhead expenses that accompany the support of customer relations and help lines.
- Overall, only cost of sales and the SG&A broken down by major product categories were considered; salaries for research and development expenses if they were included in SG&A.
- Promotion costs related to marketing software.
Manufacturing Industry
- Expenditure incurred for fairs and marketing campaigns.
- Remunerations for plant administrative posts.
- Utilities for office spaces.
Reducing SG&A Expenses
1. Outsourcing
- The simple operational cost of outsourcing non-competency areas such as information technology or accounting can be minimized.
2. Automating Processes
- Instances such as using the technology to make repetitive activities such as data entry can reduce operation costs.
3. Optimizing Marketing Spend
- Marketing communication costs can be cut by selecting those marketing avenues that yield high returns and avoiding wasteful promotion efforts.
4. Streamlining Operations
- Secularly, general expenses can be cut, through such strategies as office spaces consolidation or rebar gaining suppliers’ contracts.
5. Workforce Management
- It has been found out that fluctuations in staffing and bringing changes about in remunerations can go a long way in saving costs.
Contribution of SG&A to The Financial Statements
It determines a company’s operating income and net income because SG&A expenses are variable Norton, 2013.
A high SG&A line can actually cause more harm to the organization’s bottom line even when the total revenues are healthy. On the other hand, effective control of SG&A has positive effects on the company’s margin and financial health.
Limitations of SG&A Analysis
1. Industry Variations
- The benchmarks for SG&A are quite diverse mostly by industries; hence it is hard for one to set standard benchmarks.
2. Inconsistent Categorization
- Every company is free to allocate its expenses in whatever manner it wishes and this has the effect of distorting the SG&A line.
3. Short-Term Focus
- Cuts to SG&A expenses can result in avoiding sufficiently timely investments needed for future growth.
Conclusion
SG&A is selling, general, and administrative expense. It becomes part of the cost structure for any company,
which involves all costs that come while running the business and taking care of the company.
SG&A nature and ways of computation as well as their significance in increasing profitability of a company can help it to make efficient decisions regarding optimal expense in those areas.
Hence, companies would be able to find the right balance between checking the overhead and growing initiatives through proper analysis and cost-management techniques.
Frequently Asked Questions
1. Is SG&A Different Across Industries?
Yes, while retail or technology companies may be expected to spend more on SG&A than a manufacturing company may because they involve extensive marketing and administrative activities.
2. What Does SG&A Consist of?
- Travel of sales force
- Office rent and utilities
- Executive bonuses and consulting fees
3. How Can One Minimize SG&A?
- Routine tasks automation
- Outsourcing non-core activities
- Reformation of marketing strategies
- Improvement of office space utilization
4. How Does SG&A Expense Get Reported?
They are reported in the income statement as part of the operating expense and have a direct impact on the operating income.
5. Why is SG&A Expense Significant?
It helps to measure the operational efficiency of a company, control overhead costs, and identify cost-optimization opportunities.
6. How Does SG&A Expenses Impact Profitability?
Higher SG&A expenses decrease the operating income while efficient cost management increases profitability.