What are Selling, General, and Administrative Expenses (SG&A)?
Selling, General, and Administrative (SG&A) expenses represent the costs incurred by a company that are not directly tied to generating revenue.
- What is the definition of selling, general & administrative (SG&A) expenses?
- What are some common examples of SG&A expenses?
- What is the formula for the SG&A sales ratio?
- How do you project SG&A in financial models?
Table of Contents
Selling, General and Administrative (SG&A) Definition
SG&A expenses are the indirect costs of operating the business day-to-day.
SG&A, an abbreviation of “selling, general & administrative”, is a catch-all category of expenses that is inclusive of spending that isn’t a direct cost, otherwise known as cost of goods sold (COGS).
Recorded on the income statement of companies below the gross profit line item, SG&A captures indirect costs included in a company’s core operating business yet are not directly connected to the manufacturing of the products or delivery of the services.
For companies implementing cost-cutting initiatives, the first area they look at tends to be SG&A as opposed to COGS.
- Operating Income (EBIT) = Gross Profit – SG&A
From here, you can divide EBIT by revenue to calculate the operating margin.
- Operating Margin = EBIT / Revenue
SG&A and Non-Operating Expenses
Note that SG&A excludes interest expense since interest expense is reported as a “non-operating” expense (i.e. non-core).
Likewise, SG&A does not include taxes paid to the government under the same rationale.
Examples of SG&A Expenses
In this section, we’ll provide examples of the most common SG&A expenses.
Examples of “selling” expenses include the following:
- Sales and Marketing (S&M)
- Travel Costs (i.e. In-Person Selling, Trade Shows)
Next, examples of “general” expenses include the following:
- Technology Costs
- Equipment Costs
- Office Supplies
As for the last category, examples of “administrative” expenses are the following:
- Salaries of Employees (e.g. Executives, Administrative Staff, Human Resources)
- IT Professionals
- Consulting Fees
SG&A Ratio Calculation Example
The SG&A ratio is simply the relationship between SG&A and revenue – i.e. SG&A as a % of total sales.
- SG&A Ratio = SG&A / Total Revenue
The SG&A ratio measures what percent of each dollar earned by a company is impacted by SG&A.
For example, let’s say that we have a company with $6 million in SG&A and $24 million in total revenue.
- SG&A Ratio = $6,000 / $24,000
- SG&A Ratio = 25%
The 25% SG&A ratio means that for each dollar of revenue created, $0.25 gets spent on SG&A expenses.
For purposes of creating a projection model, SG&A as a % of historical revenue is calculated, and then either:
- The trend of the SG&A ratio is followed for future periods (i.e. increasing, decreasing) until the normalized % is reached, which is based on industry averages.
- If unchanged in recent years, the SG&A ratio assumption for projected periods can be extended throughout the entirety of the forecast period.
SG&A by Industry
Generally speaking, the lower the SG&A ratio, the better – but the average SG&A ratios varies significantly based on industry.
For example, the SG&A ratio for manufacturers can range anywhere around 20% of revenue, while in healthcare it can be up to 50% of revenue.
Certain companies will file their financial statements with one line for SG&A, while others – for example, software companies – will separately break out G&A and sales & marketing.
The distinction found on the financials will be based on the relative size of each, which depends on the specific industry in question.
SG&A vs Operating Expenses
On the income statement, operating expenses and SG&A typically represent the same costs – those that do NOT qualify as COGS.
But as mentioned earlier, SG&A can be broken out individually depending on the size of the cost and relevance to the core business model.
Therefore, operating expenses and SG&A are terms that are often used interchangeably, but differences can arise if, for instance, depreciation and amortization (D&A) are broken out in a separate line item.