SG&A is an acronym that represents some of the major costs incurred by businesses across all industries. It stands for Selling, General and Administrative Expenses. The term is used to describe the expenses that are not associated with making or producing a product, but for selling or general operation of the business. SG&A expenses are generally the largest operational cost for most businesses. Understanding these expenses and how to appropriately allocate them is very important for a healthy bottom line. In this article, we’ll break down the mystery of what SG&A is and how it affects businesses.
Breaking Down the Three Components of SG&A
SG&A expenses are divided into three broad categories, namely, Selling, General and Administrative Expenses. Though these expenses may vary from business to business, the following are the common expenses that fall under each category:
Selling expenses cover the cost of selling and delivering products or services to customers. This category of expenses typically includes costs associated with:
- Advertising and promotion
- Commissions and salaries for salespeople and sales managers
- Cost of sales-related travel and entertainment
- Delivery expenses
General expenses are the operating costs that are not directly connected to the production of a product or service. These expenses are typically fixed and include:
- Rent, utilities, and insurance on the company’s office
- Depreciation of office equipment, supplies, and furniture
- Legal and accounting fees
- Salaries of employees who are not involved in selling or producing products or services
- Maintenance and repair costs
Administrative expenses include the costs of managing the business, including:
- Salaries and benefits of top executives and their staffs, such as the CEO, CFO, and human resources managers
- Cost of corporate travel and entertainment
- Costs of legal and accounting services related to governance or management
- Costs of IT systems, including hardware, software, and maintenance
- Other overhead expenses that cannot be allocated to selling or general expenses
The Importance of SG&A in Business Operations
SG&A expenses often represent the largest expense category for a business, which can make it difficult to increase profitability. Since businesses cannot operate without these expenses, they play a vital role in the success or failure of a company. Effective management of these expenses can significantly improve a company’s profitability. Generally, managers view SG&A as a percentage of total revenue. Therefore, increasing revenue without increasing SG&A expenses is a good way to enhance profitability. Additionally, reducing SG&A expenses while maintaining revenue levels is another way of achieving the same goal.
Benefits of Effectively Managing SG&A Expenses
Effective management of SG&A expenses has a direct impact on a company’s bottom line. Here are some benefits a company can realize by effectively managing SG&A:
- Improved profitability: Better management of SG&A expenses leads to an improvement in a company’s profitability. With lower SG&A expenses, companies have greater expectations of earning a higher profit margin.
- Competitive advantage: Effective management of SG&A expenses provides businesses with a competitive edge over their competitors who have higher costs. A company that operates at a lower cost level can offer lower pricing to customers or better profitability than its competitors.
- Better financial control and forecasting: By closely monitoring and projecting future expenses, companies can budget more accurately and make better financial decisions to achieve financial stability.
- Increased operational efficiencies: Effective management of SG&A expenses also leads to increased operational efficiencies. Establishing more robust and efficient operational systems can reduce the cost of non-working activities and improve productivity.
How to Reduce SG&A Expenses
The following are some effective solutions for reducing SG&A expenses:
Reduce Employee Costs
Employee costs represent a significant portion of SG&A expenses. Companies can implement measures aimed at reducing the number of employees or their remuneration. This can be achieved by:
- Outsourcing: Outsourcing work to third-party firms can help a company save costs associated with employee salaries and benefits. This strategy can also help to reduce the cost of employee training and turnover, such as Recruitment & HR fees.
- Redesigning work systems: By restructuring work systems, such as scheduling of tasks and assigning tasks requiring specific expertise, companies can reduce the number of employees and, thus, employee costs.
- Non-salary cost reduction: Measure that can be implemented to ensure the employees’ operating costs, such as travel expenses, are the minimum or a designated budget.
Reduce Marketing and Advertising Costs
Marketing and advertising expenses are among the most significant SG&A expenses for many businesses. To reduce these costs, start by:
- Focus on Cost-effective Strategies: Social media strategies can effectively reach a more engaging audience while reducing costs.
- Content is Key: Creating content that is shareable can also have a tremendous impact on marketing expenses because it allows customers to better relate to your business without the need for expensive ads.
- Referral Programs: Referrals have proven to offer the highest ROI of any marketing strategy, and it costs close to nothing. This strategy also brings the benefit of increased brand recognition as well.
Reduce Overhead Costs
Overhead costs are recurring cost expenses that are non-essential to production or services delivered. Reducing overhead through the following strategies has a direct impact on SG&A expenses:
- Energy-efficient solution: Energy-saving practices can reduce utility bills, leading to a drastic reduction in the operating expenses.
- Cloud-Based Solutions: Embracing technology by moving towards online-based systems offers endless opportunities for cost savings. Using cloud-based solutions reduces hardware expenses as well as maintenance requirements for IT support.
- Reduction of Space Required: More companies opt-in on remote work, reducing the cost of rent, utility expenses further, and other overhead charges linked to physical office space retention.
SG&A is an essential component of any business operating cost. Effective management of selling, general, and administrative expenses is key to improving a company’s bottom line. While effective cost-reduction strategies can lower SG&A expenses, some unavoidable costs cannot be cut without negatively affecting the company’s performance. Managing SG&A expenses effectively requires a balanced approach that keeps cost-reduction strategies in line with the company’s overall objective of delivering quality goods and services to consumers.
Here are some commonly asked questions about SG&A:
- What are SG&A costs?
- SG&A stands for Selling, General and Administrative Expenses, which refers to the cost associated with selling, general operations, and administration of a business. These costs can cover anything from rent to legal fees, from marketing expenses to salaries and benefits of senior executives and support staff.
- Is SG&A a variable or fixed cost?
- SG&A costs are not fixed nor variable but can be described as semi-variable costs, as a considerable portion of the costs, such as rent or salary, remains fixed in the short term but can be flexible in the long run, such as laying off employees or relocating the office.
- How can companies manage SG&A costs?
- Companies can reduce their SG&A costs by adopting cost-cutting strategies such as workforce downsizing, outsourcing, reducing overhead costs related to utilities, rent, and leases, and adopting more efficient business systems such as cloud-based technology.
- Why is it important to manage SG&A expenses?
- SG&A expenses are usually the largest expenses for businesses. Effective management of these expenses can lead to higher profitability, increased operational efficiency, better financial control, and better overall financial forecasting.
- Can SG&A expenses be tax-deductible?
- Some SG&A expenses can be tax-deductible, such as advertising costs, legal fees, and office supplies. However, it is advisable to consult an accounting or tax professional to determine which SG&A expenses can be tax-deductible based on the country’s rules and regulations.
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