Selling Expenses Vs. Administrative Expenses
The manufacturing costs associated with a product or service are made up of all the expenses required to produce one unit of that product. For example, if your company produces sewing machines, your manufacturing costs might include raw materials such as steel, plastic and lubricants, along with research and development expenses. However, the cost of marketing the product and of running the company itself is not included in this figure. So how do you keep track of all those expenses that occur at regular intervals and that are not directly associated with your product or service? These are known as selling, general and administrative expenses (SG&A), and it’s crucial that you know the differences between them.
Selling, general and administrative expenses are the day-to-day costs not directly related to the manufacture of the product or service. You can typically find SG&A expenses listed on the income statement. As you may have guessed, these costs are the sum of all selling expenses, general expenses and administrative expenses, whether direct or indirect.
When a business owner finds that net profits are lower than they would like and a check of the books comes back clean, there are three go-to options:
- Increase sales
- Lower costs
- Cut SG&A expenses
Of these three, only cutting SG&A provides immediate results.
Sales expenses can include costs for all marketing efforts, advertising, public relations, promotions and salespeople. Some companies list all marketing costs in a separate category to create two categories: sales and marketing. If you are going to segregate sales from marketing, your sales category includes the cost of sales materials such as brochures and fliers but not the time it takes your marketing team to produce them. Other sales expenses include:
- Phone bill
- Travel expenses
- Credit card processing
- Online shopping cart design and maintenance
You can break the sales category down further into direct and indirect expenses. Direct expenses are those generated during the actual sale of a product and service. This may include shipping costs, delivery charges and commissions. Indirect expenses are the costs that are generated throughout the entire manufacturing process.
General and administrative expenses comprise the general overhead of the company. These expenses are incurred just by being in business and are not directly tied to or involved with the product or service. This may include:
- Manager salaries
- Human Resources
Additionally, office supplies such as desks, chairs, computers, software, fax and copy machines, and phones fall under into this category. However, as companies grow, they sometimes move these more mundane expenses to an operating expenses subcategory.
There are several other potential administrative costs you should be familiar with:
- Accounting department wages and benefits
- Executive compensation
- Consulting fees
- Legal fees
Ultimately, how you classify these expenses is up to you.
Low profits are always a cause for concern, but the cause can be hard to pin down. You could be losing money due to a poor product or service, ineffective marketing, excessive expenses, or any number of other reasons. Cutting selling expenses and general and administrative expenses allows you to increase profits without making changes to the manufacturing process.
The advantage here is that you won’t incur additional research and development costs. The potential downside is that reducing selling and administrative expenses often means layoffs. This typically takes the form of cutting non-sales personnel. Layoffs can negatively impact company morale.
Another good time to look at selling and administrative expenses is when you plan to merge with or acquire another company. Locating and removing inefficiencies can save you a lot of money.