Expenses: SG&A vs COGS
What Is SG&A?
SG&A stands for Selling, General & Administrative Expense.
SG&A is reported on a business’s income statement and reflects the sum of all selling expenses (both direct and indirect). Just what the acronym stands for, it’s the tracking of these three expenses , essentially a summary of all the expenses that it takes to run your business from top to bottom.
SG&A is a great tool to keep a macro view of your business so that you can navigate your way to success.
How is SG&A different from Profit and Loss (PNL)?
As a business executive, you’re no doubt familiar with profit and loss. After all, that’s probably what keeps you up at night. It’s what the board and your investors keep asking about.
But many business leaders gloss over the actual profit and loss statement. And that’s a mistake. Even if someone else is responsible for preparing, analyzing, presenting, and reacting to the profit and loss statement, it’s important that you — and, ideally, everyone else — truly understand what it means and how to make it a powerful tool for your business.
One of the most common problems with profit and loss statements is that different companies use different categories and terminology to refer to different types of expenses. This can lead to confusion and misunderstandings over what’s actually driving costs in your business.
We think it’s valuable to scrutinize your profit and loss statements to make sure everyone’s on the same page and nothing is able to hide.
Be sure to read our Complete Guide to SG&A to learn more about selling, general, and administrative expenses.
One place to start: Instead of simply looking at expenses at a whole, examine Cost of Service (COS) or Cost of Goods Sold (COGS) separately from Operating Expense (OE) or Sales, General, and Administrative Expense (SG&A).
Here’s more about what that means:
If you’re a service provider (as opposed to a widget seller), COS is relevant for you. Cost of Service includes every expense that directly relates to the service you provide. That typically includes compensation for the people who provide the service, along with any non-renewable supplies that are used in the process of providing the service.
For widget sellers, Cost of Goods Sold includes all expenses associated with the production of your widget. The expense occurs due to a sale (though the cost is usually incurred in advance of the sale, unless you produce to order).
Operating Expenses refer to the costs associated with (you guessed it) operating your business. Some of these expenses are totally static, such as your rent. Others, like advertising, may fluctuate somewhat. Regardless, operating expenses aren’t directly tied to sales and thus can put you in a big crunch if you’re in a sales slump. (Even if your widgets aren’t selling, you still need to keep your electricity on.)
For many businesses, SG&A expenses are exactly the same as Operating Expenses. Still, some businesses separate Sales, General, and Administrative Expenses, often as a line item under Operating Expenses. SG&A is a blanket label that can be used to lump salaries, marketing costs, insurance, and other items together. This is often done if profit and loss statements need to be reported externally and business owners don’t want to report the exact details of employee compensation or other sensitive expenses.
What terminology does your business use? Where do marketing and advertising costs fall? If you’re in a crunch, where’s the least damaging place you can make a cut?
If you don’t have quick answers to these questions, it’s time to talk to someone who can help you sort everything out. (Pssst…we could be that someone.)
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