A Guide to Understanding SG&A

Aug 09, 2021 • 7 min read
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      Bookkeeping can make your head spin with all its terms and acronyms. Let’s tackle the meaning of SG&A and explore how it impacts your business.

      What Is SG&A?

      Selling, general, and administrative (SG&A) expenses are often called overhead costs, or the indirect cost of doing business. It’s not an expense required to produce your company’s product or service, but you need to incur SG&A to stay in business and turn a profit.

      SG&A expenses appear on your profit and loss (P&L) statement under the expenses category. Depending on how your financial books are configured, SG&A may be broken down into subcategories (e.g., rent, utilities) to show what comprises the sum of your SG&A expenses.

      What Is Included in SG&A? 

      SG&A expenses include:

      • Depreciation, usuallywe’ll cover this more in-depth below
      • Fees for outside services such as accountants, lawyers, and IT consultants
      • Marketing expenses such as business cards, brochures, and advertising fees
      • Rent and mortgage payments
      • Salaries unrelated to cost of goods sold (COGS)—for example, a salesperson’s salary  (however, if you run a consulting business, the salary for your employee who provides consulting services to your client would be a COGS expense)
      • Software, including digital tools used to automate your business
      • Travel
      • Utilities including water, electricity, phone, and internet services

      This list isn’t complete, but it gives you an idea of what falls under SG&A expenses. Generally, if the expense isn’t related to COGS, interest, or income tax, it’s probably an SG&A expense. When in doubt, ask your bookkeeper.

      Why Track SG&A Expenses?

      As a small business owner, why should you categorize expenses as SG&A? Isn’t knowing your income and expenses enough to understand your business’s profitability?

      Reasons to track SG&A expenses precisely include:

      Let’s be clear—reducing your SG&A expenses to 0 would be an impossible feat. You have to spend money to make money. But keeping SG&A expenses under control may increase your business’s profitability by allowing you to measure your operating profit margin accurately.

      Tracking expenses, including SG&A, helps to improve your money management skills. If you don’t know where you’re spending money, you can’t make strategic business decisions.

      When you apply for business funding, lenders look at your income-to-expense ratio. Showing which expenses are SG&A versus COGS can give a lender a clearer picture of your business’s overall financial health.

      What Is a Good SG&A?

      So there must be a “good” SG&A number, right? If your SG&A as a percentage of revenue falls in a specific range, are you in the clear?

      Typically, 15–25% of revenue spent on SG&A is considered a reasonable targetbut the correct answer for your business is more art than science.

      Like any expense, usually “the less, the better” is wise for SG&A expenses so long as your long-term goals and strategies aren’t impacted. For example, you could slash your marketing budget to reduce your SG&A expenses. But that only makes this month’s income statement look good at the risk of impacting next quarter’s sales.

      Additionally, SG&A numbers differ based on a business’s size and industry. Economies of scale can skew the ratio so that buying new software looks less expensive for a 20-person business versus a sole proprietor. And industry profit margins vary widely: a service-based business is likely to have fewer expenses overall compared to a restaurant.

      What’s “good” for your business this year may change next year. A McKinsey survey indicated that, due to the ongoing coronavirus pandemic, “respondents said they were aiming for an average cost-reduction target of about 16% for SG&A over the next year.” It’s not unusual for cost-cutting activities to target SG&A expenses first.

      What Is the Difference Between COGS and SG&A?

      COGS and SG&A are 2 different types of expenses.

      COGS expenses are expenses that come with the production of goods. If it’s an expense necessary to produce your product or your service, it’s COGS. If it’s an indirect cost to stay in business and not directly related to producing a good or service, then it’s probably SG&A.

      Examples of COGS expenses are:

      • Cost of materials
      • Direct labor costs (e.g., the wages for the employee making your bakery’s donuts)
      • Shipping and packing costs

      Is Depreciation an SG&A Expense?

      Should you categorize depreciation as an SG&A expense? The short answer is maybe.

      Depreciation can be used for many purchases, including fleet vehicles, office furniture, and computer equipment. One benefit of depreciating eligible assets is producing accurate financial statements.

      Depreciation follows the same general rule as categorizing other expenses. If it’s depreciation on an asset directly related to producing a good or service, it’s a COGS expense. If it’s depreciation for an asset indirectly associated with the good or service, it’s an SG&A expense.

      Entrepreneur sums it up best: “Whether depreciation is included in cost of goods sold or in operating expenses depends on the type of asset being depreciated. Depreciation is listed with cost of goods sold if the expense associated with the fixed asset is used in the direct production of inventory. Examples include the purchase of production equipment and machinery and a building that houses a production plant. Depreciation is listed with operating expenses if the cost is associated with fixed assets used for selling, general and administrative purposes. Examples include vehicles for salespeople or an office computer and phone system.”

      How Can You Reduce SG&A Expenses?

      Now that you know the meaning of SG&A, you can take steps to control or reduce these expenses to fuel your business’s success.

      Bookkeeping software like Lendio’s software can help you to track and categorize your expenses properly. Understanding where you’re spending money is the first step in making strategic decisions (e.g., should you spend more on social media advertising next month?).

      Changes to your SG&A expenses should always tie back to specific business objectives. Since SG&A expenses are the cost of doing business, plan your budget accordingly to continue to meet your business goals.

      About the author
      Katherine O'Malley

      Katherine O'Malley is a contributor to the Lendio blog. A technology geek at heart, she splits her time between traveling, freelance writing, database administration work, and implementing SEO on her travel blog. In her free time, she loves to research the challenges small-to-midsize tourist suppliers face and find ways that technology can help them out.

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