The acronym SG&A refers to two different expense categories incurred by a company in each period: "selling" and "general and administrative" expenses. Together, these expenses show all the expenses associated with making a product. In an income statement, gross profit less SG&A equals the operating profit, also known as the earnings before interest and tax.
TL;DR (Too Long; Didn't Read)
SG&A refers to Selling, General and Administrative Expenses. The lower the SG&A as a percentage of revenue, the better the company's profitability.
SG&A is a broad costs category. It covers all the expenses incurred during a company's daily operations that are not directly related to manufacturing the product. Examples include the marketing, promoting and shipping of a product as well as accounting and legal costs. SG&A expenses appear in the income statement below the cost of goods sold. Some companies break SG&A into several expense line items, while others combine them into a single expense line. Which you choose typically depends on the relative size of each expense.
Examples of Selling Expenses
The selling component of SG&A includes all the costs associated with selling your products or services. It breaks down into two sub-categories: direct and indirect selling costs. Direct selling expenses are those that you incur only when you sell something, such as shipping charges, sales commissions and credit card processing fees. Indirect selling expenses are those that occur regardless of whether the business makes a sale. This category includes telephone bills, wages for salespeople, travel costs, accommodation expenses and marketing expenses.
Examples of General and Administrative Expenses
General and administrative expenses are your overhead costs. These expenses are the costs you must pay just to stay in business – even if you are not profitable. The most common examples are rent, utilities and insurance expenses. This category also includes executive salaries and the salaries of all personnel, except sales.
Why SG&A Matters for Your Business
Gross profit less SG&A equals the operating profit, or the income you have earned from the business. A low operating profit shows you may have an inferior product or too high expenses. If operating profit is negative, you may need outside funding to stay in business. One of the quickest ways to raise operating profit is to cut the costs of your SG&A. Some SG&A costs are fixed costs such as rent. But reducing staff and training costs are a couple of ways to cut SG&A during challenging times.