Your COGS are the direct costs related to making, packaging and shipping the soaps—raw materials, the wages you pay your soap maker Cheryl, the fancy packaging paper you use, shipping costs, etc. However, the SG&A expense must be standardized to be compared side-by-side to industry comparables, and the average benchmark varies significantly based on the specific industry. Generally speaking, the lower a company’s SG&A expense, the better – since that implies the company is more profitable, all else being equal. The screenshot above is taken from CFI’s financial modeling courses, which cover forecasting SG&A expenses.
Does SG&A include profit?
SG&A has a very specific place on a company's income statement. Net revenue is always reported at the top, then COGS is deducted to arrive at the gross margin. SG&A and any other expenses are listed below the gross margin. When these expenses are deducted from the gross margin, the result is operating profit.
Cutting operating expenses can be less damaging to the core business. SG&A costs are typically reduced after a company merger or acquisition makes it possible to reduce redundancies. Companies may aggregate all of these expenses in a single SG&A line, or it may segregate selling costs from general and administrative costs. When these expenses are deducted from the gross margin, the result is operating profit. It’s important to note that not all expenses have been recorded when calculating operating expenses.
What Are Selling, General, and Administrative Expenses (SG&A)?
Larger companies often separate these types of costs into smaller, specific SG&A categories as this is often easier for companies to track and monitor costs in these groups. Management often has discretion how many of these costs are reported on the income statement in respects to how to group these types of costs. SG&A expenses are mostly comprised of costs that are considered part of general company overhead, since they cannot be traced to the sale of specific products. For example, sales commissions directly relate to product sales, and yet may be considered part of SG&A. When an SG&A cost is considered a direct cost, it is acceptable to shift the cost into the cost of goods sold classification on the income statement. Selling, General & Administrative (SG&A) expenses are the costs a company incurs to promote, sell and deliver its products and services, as well as to manage day-to-day operations.
After a merger, for example, businesses often focus on reducing SG&A by consolidating duplicative functions and reducing headcount. Some firms also manage SG&A by outsourcing functions or relying more on temporary workers.
Departments like human resources and information technology support the business but do not take a direct role in product creation. Net revenue is always reported at the top, then COGS is deducted to arrive at the gross margin. The SG&A to sales ratio (also sometimes called the percent-of-sales method) is what you get when you divide your total SG&A costs by your total sales revenue. It tells you what percent of every dollar your company earned gets sucked up by SG&A costs.
If the ratio of SG&A to sales revenue increases over time, it may become more difficult to earn a sustainable profit. Reducing SG&A lowers the level of revenue needed to earn a profit, which is why companies often focus on SG&A when attempting to cut costs. Do you need all of that office space you’re currently using, or could you sublease some of it to another business? Are you being as efficient with your electricity and heating costs as you could be? Look through each of your business’ monthly expenses and make sure you aren’t overpaying for them. To calculate a total SG&A figure for an annual income statement, you’ll have to go through your company’s books for that year and add up all of the non-COGS, interest or income tax expenses you see there.
Keep closer track of your spending
This line item includes nearly all business costs not directly attributable to making a product or performing a service. SG&A includes the costs of managing the company and the expenses of delivering its products or services. SG&A reflects the non-production, everyday expenses of running a business, such as costs to promote, sell, and deliver its products and services, as well as rent, salaries and advertising and marketing.
GEP SMART is an AI-powered, cloud-native source-to-pay platform for direct and indirect procurement. The calculation excludes interest expense since interest is reported as a “non-operating” expense (i.e. non-core). Likewise, the taxes paid to the government are also not included under the same rationale. The SG&A ratio is simply the relationship between SG&A and revenue – i.e. the expense expressed https://personal-accounting.org/selling-general-and-administrative-expense-sg-a/ as a percentage of total sales. With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. When SG&A expenses are “ordinary” and “necessary” to your type of business, the IRS typically allows you to deduct them for the tax year in which they were incurred.