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Aggregates overhead costs for sales, management, and administration, exposing the fixed cost structure the company carries independent of production volume.
SG&A (Selling, General and Administrative) covers overhead costs such as salaries, rent, marketing, and management expenses. It is a major component of operating expenses.
Selling, general, and administrative (SG&A) expenses encompass all operating costs not directly tied to production, including sales and marketing, corporate overhead, executive compensation, and administrative functions. This operating expense category represents the cost of running the business beyond making products or delivering services.
Components of SG&A:
- Selling expenses: Sales salaries, commissions, advertising, marketing, trade shows
- General expenses: Executive salaries, legal fees, accounting, consulting
- Administrative expenses: Office rent, utilities, insurance, IT systems, HR
The formula:
Operating Income = Gross Profit - SG&A - R&D - Other Operating Expenses
Why SG&A matters:
- Operating efficiency: Lower SG&A relative to revenue indicates lean operations
- Scalability: How much does SG&A grow as revenue increases?
- Profitability lever: SG&A control directly impacts operating margins
- Cost structure: Fixed vs. variable components affect breakeven
Analysing SG&A:
- SG&A as % of revenue: Primary efficiency metric; compare to peers
- Trend analysis: Growing faster or slower than revenue?
- Operating leverage: Do fixed SG&A costs create margin expansion as revenue grows?
- Component breakdown: If disclosed, examine selling vs. G&A trends separately
Industry variations:
- Software: High SG&A (30-50%) due to sales and marketing intensity
- Consumer goods: Moderate SG&A (20-30%) for brand marketing
- Manufacturing: Lower SG&A (10-20%) with production focus
- Financial services: High SG&A from compensation and compliance
Efficiency indicators:
- Revenue per employee: Higher is generally better
- Sales efficiency: Revenue generated per sales dollar spent
- Overhead ratio: G&A relative to total costs
Warning signs:
- SG&A growing faster than revenue: Deteriorating efficiency
- High SG&A vs. peers: May indicate bloated overhead
- Sudden SG&A cuts: May boost short-term profits but harm long-term competitiveness
Effective SG&A management balances efficiency with necessary investment in sales capability and corporate infrastructure. Track SG&A trends alongside revenue growth to assess operating leverage.