Selling, general, and administrative expenses are operating expenses unrelated to the production of goods or services provided. Examples are executive salaries, salaries of non-production staff, insurance, advertising and promotions, and travel and entertainment.
Why does it matter
SG&A expenses increase the breakeven point of business because it consists mostly of fixed costs. If it’s too significant, it requires higher sales or higher product profits to generate profits for the entire business.
The company must pay, even when sales are falling. For this reason, management usually maintains strict controls over SG&A expenses.
SG&A expenses play an essential role in the profitability of the company. To get a net profit figure, you have to deduct gross profit with SG&A expenses and add other profit (loss) components. If SG&A rises, it reduces net profit.
In the analysis, you can observe the ratio SG&A expenses to revenue. If the ratio rises over time, it indicates an increased pressure on the company’s profitability. That shows SG&A expenses increase higher than revenue, thereby reducing the company’s net profit.
SG&A expenses are the main intention of management in carrying out operational efficiency and increasing profits quickly, especially during mergers or acquisitions. Cutting these expenses less harms the main operation because it is unrelated to the production of products or the provision of services.
How to calculate the selling, general and administrative expenses
To calculate sales, general, and administrative expenses, you can sum the following three components:
- Selling expenses
- General expenses
- Administrative expenses
Most of the three are fixed costs, and they are unrelated to production levels. Companies must pay them even if production is zero. So, those expenses increase the breakeven point of business. Accordingly, management supervises and controls strictly such costs.
What is selling expenses
Selling expenses cover various expenses related to marketing, distribution, and product sales. These expenses do not contribute directly to the production of products or the provision of services. Hence, those fall into indirect costs.
Examples of sales expenses are:
- Logistics costs
- Shipping expense
- Marketing expenses such as advertising and promotion, both in conventional media and social media
- Website maintenance costs
- Salesforce salary and commission
But, some costs may fluctuate with production levels. For example, logistics and shipping costs increase as companies sell more products. For this reason, selling expenses usually fall into the category of semi-variable costs.
What are general expenses
General expenses comprise daily operating expenses and unrelated to sales or operating activities. Examples are rental expenses, utilities, and computer equipment in offices.
General expenses are categorized as fixed costs because the company must pay them, regardless of production or sales volume. Companies must pay office or equipment rental, even when production volumes drop dramatically.
What are administrative expenses
Administrative expenses include various types of expenses related to administrative activities. Examples are salary and bonuses for accounting personnel, information technology, and human resources. Executive salaries also fall into this category. Other examples are postal and telecommunications expenses, professional fees, travel expenses, conferences, and meetings.
Just like general expenses, administrative expenses are indirect and unrelated to sales or production. The company pays them to support the daily operations of the business. For manufacturing companies, administrative expenses are usually fixed because they do not depend on sales volume or production volume.
Tips to reduce general selling and administrative expenses
Cutting SG&A expenses is a strategic step to increase profits without sacrificing business. Pruning provides greater flexibility in pricing strategies and improves cash flow because most of them are fixed costs.
How to? Let me briefly present some options to reduce SG&A expenses:
Short term rent. Management can rent the less important property or equipment instead of buying or renting it in the long run. That gives flexibility when the company moves office locations.
Outsource non-main administrative activities. Management can also outsource back-office staff instead of recruiting them permanently.
Cutting less important travel and entertainment expenses. For example, management can adjust spending for entertainment expenses with profitability conditions. Of course, it should not for costs related to relationship management with customers or suppliers. Management also doesn’t need to spend a lot of money just for meetings at five-star hotels.
Empowering technology. Management can utilize technology to increase productivity and operational efficiency. For example, employees don’t need to spend a lot of paper just on unimportant internal reports. Digital reports will be more cost-effective. Companies can also use the internet to facilitate purchasing, customer management, or product sales.
Reducing expert fees. Companies can invest more money on internal employee training. It increases employee competence and, at the same time, reduces dependency on professional services from outside.