What is Selling, General and Administrative? SG&A Meaning & Definition

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sg&a meaning

For example, if SG&A rises significantly but sales do not, the business will become less profitable. If SG&A goes down, while sales rise, the business will become more profitable. The bottom line expenses, such as “interest expense” and “provision for income taxes,” come next. Below are two real-life income statement examples from Microsoft Inc.’s (MSFT) 10-K form and Netflix, Inc.’s (NFLX) latest 10-Q filing. We think it’s valuable to scrutinize your profit and loss statements to make sure everyone’s on the same page and nothing is able to hide. Being aware of your SG&A as they evolve and respond to external events is an essential tool for maintaining and improving your profitability and setting your business firmly on the road to success.

As part of its Q financial reporting, Apple reported $12.809 billion of operating expenses for the quarter. Of this, $6.797 billion was research and development, while $6.012 billion was selling, general, and administrative. Although the company does state that increases to SG&A from prior periods relates to headcount, advertising, and professional services, there is little more transparency beyond these notes. Whether indirect or direct selling costs, general expenses like rent and utilities, or administrative costs like salaries and legal fees, SG&A costs are essential.

Things to Consider Before Calculating the Selling, General and Administrative Expenses (SG&A)

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What is not included in SG&A?

Costs such as interest and taxes are not included in SG&A as they are deducted from operating income. Determine your reporting period. SG&A can be calculated for any period (i.e. any month, quarter, or year). Be mindful that nominal accounts such as expenses are closed at the end of the accounting year.

For example, rent most likely will be a fixed dollar value every period. On the other hand, advertising expenses will vary with the strategic decisions a company makes during the given period. If the ratio of SG&A to sales revenue increases over time, it may become more difficult https://www.bookstime.com/articles/sga to earn a sustainable profit. Reducing SG&A lowers the level of revenue needed to earn a profit, which is why companies often focus on SG&A when attempting to cut costs. A company’s management will try to grow revenue while simultaneously keeping operating expenses under control.

SG&A: Selling, General, Administrative Expenses – Definition and Explanation

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  • For example, manufacturers range anywhere from 10% to 25% of sales, while in health care it isn’t unusual for SG&A costs to approach 50% of sales.
  • It can make it challenging to compare SG&A expenses between companies, and it’s important to consider other factors, such as revenue and operating income when comparing.
  • By tracking SG&A expenses, a company can identify areas where it can reduce costs and improve its profitability.
  • If SG&A is a consolidated, one-line item, the analyst must use discretion to select one of these (or other) methods to account for all the various expenses baked into that one line item.
  • If this is the case, then gross profit less SG&A equals pre-tax profit, also known as earnings before taxes (EBT).
  • SG&A expenses are an important financial metric impacting a company’s profitability and efficiency.
  • Once SG&A is deducted from gross profit – assuming there are no other operating expenses – operating income (EBIT) remains.
  • SG&A costs are the residual expenses necessary to run the organization and incur costs less specifically tied to the cost of making the product.
  • Companies with low available prices and efficient operations can generate higher profits.

It’s also important to distinguish your capital expenditure (CapEx) which is what you invest in acquiring, maintaining and upgrading your buildings, machinery and vehicles. SG&A is an essential metric for investors, as it helps to measure a company’s efficiency and the effectiveness of its operating model. Get your employees to use a dedicated receipt app to scan and keep track of all receipts.

How to Calculate SG&A Expenses

Operating expenses, or OPEX for short, are the costs involved in running the day-to-day operations of a company; they typically make up the majority of a company’s expenses. Sometimes, operating expenses are listed under an “operating expenses” heading, though this is not always the case, as seen in these examples. Accounting for SG&A is relatively simple, though it’s important to separate other expenses such as R&D, COGS, non-operating expenses, and depreciation and amortization. COGS covers the expenses necessary to manufacture a product, including labor, materials, and related overhead expenses. SG&A covers almost every other operating expense, excluding R&D and depreciation and amortization. The individual costs making up a company’s SG&A are not usually shown.

sg&a meaning