SG&A (selling, general and administrative expenses)
The operating costs of selling a product and running the company that are not part of making the product or delivering the service.
In short
- It covers the cost of selling and running the company, not the cost of making the product.
- It sits below gross profit; subtracting it is a large step toward operating income.
- The SG&A ratio, SG&A divided by revenue, shows how heavy overhead is relative to sales.
SG&A = Selling expenses + General and administrative expenses SG&A ratio (%) = SG&A ÷ Revenue × 100
Use the same revenue figure each period, usually net revenue after returns and discounts, to keep the ratio comparable over time.
SG&A stands for selling, general and administrative expenses: the costs of selling what the business offers and of running the company, apart from the direct cost of producing it. On an income statement, it usually sits below gross profit and is one of the largest operating expense lines.
What goes in it
- Selling: sales salaries and commissions, advertising, trade shows, sales travel and customer entertainment.
- General and administrative: executive and office salaries, head office rent, accounting and legal fees, insurance, office supplies and most software subscriptions.
What stays out
The cost of goods sold stays out: materials, production labour and the other direct costs of making a product or delivering a service. Research and development, interest, depreciation and income taxes are often shown on their own lines too. The split is a reporting choice, and some companies group expenses by nature, such as salaries or rent, rather than by function. When you compare SG&A between two companies, check what each one includes.
The SG&A ratio
Dividing SG&A by revenue shows how much of every dollar of sales goes to selling and overhead. A falling ratio as revenue grows means overhead is spreading over more sales. A rising one deserves a closer look, line by line. Much of SG&A arrives as receipts, card charges and recurring bills, which is why coding them to the right account each month matters for the ratio to mean anything.
Worked example
A distributor's income statement
A distributor has $2,400,000 in revenue and $1,440,000 in cost of goods sold, for a gross profit of $960,000. Its SG&A is $620,000: $310,000 of sales salaries and commissions, $90,000 of marketing and $220,000 of administration. Its SG&A ratio is 25.8% and its operating income is $340,000.