Selling, General, and Administrative Expenses (SG&A)

Selling, General, and Administrative Expenses, written as SG&A, is the income statement line item that captures all non-production overhead costs a business incurs to operate and generate revenue. You find it below gross profit and above operating income. The difference between gross profit and SG&A, plus any other operating expenses, is your operating profit, also called earnings before interest and tax.

Think of SG&A as the cost of running the business rather than the cost of making the product.

What Goes Into SG&A

SG&A bundles three categories of overhead into one line item. Each covers a distinct area of the business.

• Selling expenses: Direct and indirect costs tied to generating revenue. This includes sales commissions, advertising spend, travel and entertainment for salespeople, trade show costs, and marketing salaries.
• General expenses: The ongoing fixed costs of keeping the business running. Office rent, utilities, insurance, office supplies, and general IT infrastructure fall here.
• Administrative expenses: The cost of managing the company itself. Executive salaries, legal fees, accounting and audit costs, human resources, and investor relations expenses belong in this bucket.

Research and development is typically reported as a separate line item from SG&A under U.S. generally accepted accounting principles. Depreciation may appear within SG&A or separately, depending on the company's reporting structure.

The SG&A Ratio Tells You How Efficiently a Company Operates

Analysts divide SG&A by total revenue to get the SG&A ratio. This percentage shows how many cents of every dollar earned go to support the business rather than staying as profit.

The formula is: SG&A Ratio = (Total SG&A / Total Revenue) x 100

Industry context matters enormously when interpreting this ratio. According to McKinsey research, consumer packaged goods companies spend an average of 21% of revenue on SG&A. For manufacturers, the range is closer to 20%. Healthcare companies can spend up to 50% of revenue on SG&A, driven by large sales forces, compliance requirements, and administrative complexity.

Why SG&A Is the First Target in Cost Reduction

When companies pursue cost cuts, SG&A is typically the first area they attack. The cost of goods sold is directly tied to making products, and reducing it usually means reducing output or quality. SG&A is more flexible. Headcount reductions, office consolidations, advertising pullbacks, and renegotiated vendor contracts all reduce SG&A without directly touching production.

After a merger, companies almost always cite SG&A synergies as a justification for the deal. Combining two finance departments, two legal teams, and two sets of executive offices into one eliminates duplicated fixed costs quickly and visibly.

SG&A vs. Cost of Goods Sold

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Sources:

• https://corporatefinanceinstitute.com/resources/accounting/what-is-sga/
• https://www.netsuite.com/portal/resource/articles/accounting/selling-general-administrative-sga.shtml
• https://www.wallstreetprep.com/knowledge/selling-general-administrative-sga/
• https://ramp.com/blog/selling-general-and-administrative-expenses