SG&A

These costs involve day-to-day business operations but are not used to produce services and goods. 

Costs that involve day-to-day business operations but are not used to produce services and goods. 

These expenses do not include cost-related to the production operations of a company. Businesses must use and track Selling, General & Administrative expenses to manage costs and expand profits.     

Operating expenses on the income statement also comprise selling, general, and administrative costs. Selling, General & Administrative expense is occasionally split into two line items. Sometimes SG&A is divided into two line items. Direct and indirect SG&A. 

Direct SG&A are expenses that are used with production. Including shipping and salaries to salespeople. Indirect Selling, General & Administrative expenses are less correlated with production. Including marketing spending and management salaries.  

SG&A is a part of operating expenses. It is not included in the cost of goods sold (COGS). It is also separate from other operating expenses, such as research and development (R&D).   

Selling, General, and Administrative Expenses are the total business costs. They cover a wide range of expenses that don't relate to the production or distribution of goods. It includes:

  • Salaries for executives and other company employees
  • Rental costs for office space, storage facilities, and equipment
  • Advertising and marketing campaigns for the company's products
  • Utility bills for things like electricity and gas
  • Cost to purchase physical inventory

Selling Expenses

Selling, general, and administrative expenses are not used in production. Selling expenses are related to the activities that generate sales revenue. Selling expenses are categorized into indirect and direct expenses. 

Indirect selling expenses are incurred before and after the sale is made. Examples include:

1. Marketing

Expenses are based on the promotion of a company's products and services. Marketing informs consumers about business offerings and convinces their need for the offerings. 

Marketing expenses can be through digital platforms. Such as television commercials or social media promotions. But it can also be more direct through the mail or newspapers.  

In recent years Mcdonald's has partnered with many celebrities to create signature celebrity meals. 

The company has invested millions in selling expenses into this marketing campaign. The celebrity campaign was successful and created lots of revenue. Additionally, they created lots of attention on social media from the collaboration. 

2. Travel and Accommodation

The cost spent by a business for travel and accommodation. Businesses will use travel for various reasons. Such as meeting with clients, building a new factory, or other business activities. 

Travel expenses include airfare, lodging, transportation, food, and communication devices. 

When BlackRock looks to expand its global business by investing in a foreign company. Top employees will travel to understand the foreign business and determine if the company will invest. 

Travel expenses are important to BlackRock. Therefore, they must have a hands-on approach to investing in foreign businesses. 

Direct selling expenses are incurred at the point of sale of a product or service. Examples include: 

1. Freight Cost

These are expenses from the shipping process. This means the cost of shipping supplies and shipping transportation. This can change due to company demand. Outside factors such as fuel cost and government regulations can also impact this cost. 

In 2021, Amazon spent 76.7 billion dollars on freight costs. While this is a massive cost for the company, it is important. Customers value the speed and efficiency Amazon provides

2. Compensation of Salesperson

Salaries and commissions of salespersons are also considered selling expenses. Salespersons are only related to the sale of the product and have no impact on production. How a company decides to compensate its salespersons will impact the cost. 

Allstate Insurance relies on its sales team to attract new clients. As a result, their sales team is crucial to growing the business. 

To get the top salesperson talent, they must offer great compensation. Having a strong sales team is one of the advantages Allstate has against its competition.  

General and Administrative Expenses

General and administrative (G&A) expenses are daily costs necessary for the business to operate. These expenses do not directly affect production but are essential for operations. 

General and administrative are also known as overhead costs. However, most G&A costs are fixed or semi-fixed costs. Examples include:

1. Rent

The cost incurred by a company to use a property or location. Companies pay rent on their office, factory, and storage locations. Rent costs are fixed but vary on location, size, and market conditions. 

Volkswagen is one of the largest manufacturers in the world. Due to their manufacturing level, they have over thirty factories on five continents. 

These factories are responsible for building their cars. But their large factories mean the company has to pay large rent expenses.

2. Professional Services

Companies use professional services when employing the services of outside professionals. 

Professional services are used to assist companies by providing expertise in non-production-related operations. Common professional services are accounting firms, law firms, and engineering firms. 

For over a decade, Apple and Samsung have been competing with each other. As a result, there are constant legal battles among the tech giants. These legal battles cost the companies millions of dollars in fees to law firms. 

The battle in court is important because it has provided key advantages to both companies over the years. 

Both companies have won lawsuits against each other. They have resulted in blocking the companies from making a product or ordering them to pay settlements. 

3. Human Resources (HR)

Human resource performs various functions for a company. Some functions of HR are interviewing, administration, talent acquisition, and compliance. 

Human resources are important to companies and perform much of the behind-the-scenes work. 

Goldman Sachs is known for having some of the top employees in the world. The company is very selective and only chooses to hire those who fit with the company. 

This is possible with a great human resources staff. The human resources staff is crucial for the company to attract and choose the best employees.  

4. Insurance

Businesses must have insurance policies for their business. Insurance protects the business's employees, property, and other assets. 

Common types of insurance include workers' compensation and general & professional liability. Insurance costs will vary based on the needs and industry of the business. 

Walmart has over $240 billion in assets. Many of their assets, such as inventory, retail, and warehouse locations, are vulnerable. Therefore, the company must have insurance if its assets are damaged. 

5. Salaries 

Employees' salaries who are not involved in the production are included in G&A. Depending on company structure, employees in marketing, human resources, information technology, and other departments' salaries are included in G&A. Additionally, executive salaries are also included in G&A.

How is SG&A Calculated?

Selling general and administrative expenses is found by adding selling expenses with general and administrative expenses. Therefore, the SG&A is listed on the income statement. However, it is ultimately added to operating expenses. 

When a company calculates the expenses, it will go through its recorded transactions for the accounting period. They will take past transactions and then list the total for the period on the income statement. The formula is as follows:

Role

Major business expenses include selling, General, and Administrative Expenses. These expenses have an important role in expanding the business. Many of these expenses are used to attract new customers or orchestrate business deals. 

Symbols

For example, an important role of SG&A is to increase the awareness and profitability of a brand. Advertising is a great way to reach customers who may need to be aware of your business. It also helps you create a specific image for your brand. 

Advertising also helps communicate key messages about your products and services. Suppose companies want to spend less money on advertising. They still put some effort into online marketing using social media and search engine optimization. 

Even if you post interesting content on social media sites like Facebook, Twitter, and Instagram, the business will be able to reach more people than if you did not market at all.

Managers use SG&A to cover lots of necessary expenses. This includes rent and shipping costs. Managers track these expenses to ensure they pay only what their competitors are. As a result, SG&A spending is closely tracked and is the first to lose funding when a company loses profits. 

SG&A vs. Operating Expenses 

SG&A and operating expenses are mistakenly used interchangeably. Both are not the same. SG&A is included in operating expenses. But, operating expenses encompass more than just SG&A. 

An expense a business faces as a result of ongoing operations is referred to as an operating expense. Operating expenses (OPEX), including 

  • Rent 
  • Tools 
  • Inventory costs 
  • Marketing, 
  • Payroll
  • Insurance 
  • Step charges, and 
  • Money set aside for R&D.

Research and development (R&D) expenses are also included in operating expenses. R&D expenses are costs related to the innovation of new products or services. The goal of R&D is to create new products for the company.

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Researched & Authored by Liam

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