The Complete Guide To SG&A
Maybe, like many things in accounting, you hear this term thrown around without really knowing what it means.
SG&A stands for Selling, General, & Administrative Expense. It seems simple, but there are a lot of fuzzy areas around it. For example, how do you define what is and is not a selling expense? Couldn’t everything go into the “general” category?
A good rule of thumb for SG&A is to think of it as everything that doesn’t go into COGS (cost of goods sold). If you own a sandwich shop, SG&A isn’t the lunch meat or the tomato—it’s the computer in the back and the cost of your social media intern.
These expenses are what you might think they would be for—selling, administration, and other general costs—but sometimes, it can be a little hard to differentiate. We’re here to help with everything you need to know about SG&A.
The Basics of SG&A
SG&A expenses are a type of operating expense, and they show up on the income statement. They may be fixed or variable.
For example, think of the cost of your storefront where you sell items vs. the commission you pay your salespeople for each item sold.
Both are SG&A expenses, but your storefront cost is fixed while your commission cost is variable.
There is also a difference between sales expenses and general and administrative expenses. Both cannot be directly tied to the production of your product or delivery of your service, but they have some differences:
- Sales expenses involve everything it takes to make the sale. This includes the facilities used for your storefront, advertising, sales commissions, and sales director’s salary.
- General and administrative expenses are what is commonly referred to as “overhead.” Think rent, utilities, salaries for management (excluding managers in your sales department), IT costs, legal costs, and the like.
You may be asking, “Do I have to differentiate between the two on my income statement?”
The answer is no.
You don’t have to, but you should want to. Remember that the more specific you are with where your money is going, the better decisions you’ll be able to make for your business.
Imagine that, a couple of years into your operations, you notice that your SG&A expenses are 25% of your costs when your benchmark for them is 12%.
What do you need to do to get them back to your benchmark next year?
Without differentiation, you may find yourself vigorously rummaging through your rent statements, advertising invoices, and salary records, trying to get a clue about what went wrong.
If you’ve differentiated between sales and overhead, you’ll find it much easier to hone in on the area where you need improvement.
An extra section on your income statement could save you hours of work down the road!
Examples of SG&A on an Income Statement
Curious about how to put your SG&A on an income statement?
It will look a little different depending on what kind of business you own and how you decide to account for your costs.
Below is an example of how it might look for a retailer.
A “Good” SG&A Ratio
Now you may be wondering, what exactly is a good benchmark SG&A ratio? 10%? 25%?
The amount of SG&A that makes sense differs from company to company. It’s dependent on your industry, your stage of growth, your overall strategy, and quite a few things beyond that.
For example, if you’re a young company, you may need to take on more sales costs than a similar company with ten years on you.
You’ll probably have to spend extra money during your first couple of years to get a designer to build your brand, and you will also likely have to spend more on advertising to get your name out into the world.
It makes sense for you to leave more room in your SG&A benchmark costs.
Don’t get locked into thinking that a magic level of SG&A will bring your company success.
We’ve compiled a table of average SG&A costs for your industry below to get a better idea of what your competitors may be spending.
Even so, don’t just rely on comparisons.
Clarify your strategy and understand why you spend the money that you do.
Be honest about what may need to be cut, and also be honest if you think you need to funnel more money toward your sales or overhead.
What’s important is that you monitor your SG&A ratio and respond to what you see.
Average SG&A Costs by Industry
According to information compiled by saibooks.com in their SG&A Benchmark reports, these were the average ratios for SG&A expenses to sales in different industries in 2019.
These specifically were for companies with sales of less than $100 million a year.
This can give you a basic idea of what competitors might be spending on their SG&A. Is your percentage way different than what you see here?
Don’t fear, but consider what the difference might be. Again, your business will be different from other businesses.
That’s not a bad thing, but it may be a signal that there is some room for improvement.
Things to Remember
Though there are rules for income statements, at the end of the day, many decisions for cost placement are up to you, your company, and your accountant.
For example, some companies may say that their CEO’s salary is a general and administrative cost, while others will declare it under COGS.
Neither is wrong—it’s just a matter of how they have decided to account for the cost.
What matters most is that you do account for the cost.
Additionally, once you begin accounting it one way, stick to it! Remember that accounting is not just for taxes.
It’s also meant to help you and your team make wise decisions for your business. The more specific you are in your accounting, the more you will really understand what your money is doing for you.
Additional Reads By Owl Bookkeeping and CFO
Consider Hiring a Professional
About 30% of new businesses fail in the first year, and more than half fail by their fifth year.
BUT, hiring a professional accountant or bookkeeper can increase the odds of success by up to 80 percent.
A bookkeeper can help your business with recording expenses as well as classifying income and expenses.
A certified public accountant can generate this same data, as well as turn it into strategic planning for your business.
Accountants may also file taxes.
Hiring either an accountant or a bookkeeper can be beneficial to your small business– even if you’re only hiring them short term or part time.
You can keep your own books, but as your company grows and tax season approaches, you may find yourself feeling overwhelmed or a little lost.
A bookkeeper or accountant can be a huge help.
Remember that fees for incorrect tax filing or bad bookkeeping can be expensive. And time spent correcting errors can be frustrating.
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They are adept at keeping impeccable and orderly records.
Their skills can save you time and may even help you get some tax breaks.
As a small business owner, you will face various challenges and have numerous responsibilities. I
f accounting is a strong suit of yours, utilize all the tools available to you to help keep tidy records and ensure success.
If bookkeeping is a challenge for you or you’d rather invest your time elsewhere, outsourcing your finance and accounting needs can be a worthy expense allowing you to exercise your strengths and focus on what you do best and enjoy most..
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