How SG&A Impacts Business Profitability and Costs
Are rising business expenses cutting into your profits? Managing Selling, General, and Administrative (SG&A) expenses is key to maintaining a healthy balance between cost control and business growth. For corporate leaders, understanding how SG&A impacts the bottom line can help them make smarter financial decisions and improve operational efficiency. Here’s how you can effectively manage SG&A while still driving success.
What is SG&A, and Why is it Important?
SG&A, which stands for Selling, General, and Administrative expenses, refers to the day-to-day costs a business has to pay to keep running, aside from producing its products. These expenses cover things like advertising, rent, office supplies, and the salaries of people who aren’t directly involved in making the product. It’s kind of like the glue that holds the business together, even though it’s not tied directly to production.
In business accounting, SG&A is a big deal. It’s one of the most common costs you’ll find on an income statement. Tracking SG&A helps companies figure out where their money is going and whether they’re spending too much on things that don’t lead directly to making or selling products. If a business wants to stay in good financial health, it needs to keep these costs under control.
Why SG&A Matters
SG&A is important because it affects a company’s profits. The more a business spends on things like marketing and admin, the less profit it makes. If SG&A costs get too high, it can cut into the money the business has left over to grow or invest in new opportunities.
Too much spending in these areas can also suggest the company isn’t running efficiently. On the flip side, smart businesses manage their SG&A expenses carefully, making sure they spend just enough to keep things running without overdoing it. It’s all about finding that sweet spot where spending supports growth without hurting the bottom line.
The Three Key Components of SG&A
SG&A includes three main types of expenses:
Selling Expenses
These are costs directly linked to selling your product or service. Think about sales commissions, advertising costs, or marketing campaigns. If a company is running ads or offering bonuses to its sales team for hitting targets, those are selling expenses.
General Expenses
These are the everyday costs of keeping the business running, like rent, utilities, and office supplies. Paying the electricity bill or buying printer paper falls under general expenses.
Administrative Expenses
These include things like the salaries of employees who aren’t involved in sales or production, legal fees, and accounting costs. For example, the HR team or the accountants handling payroll and taxes fall under administrative expenses.
SG&A vs. Operating Expenses: The Similarities & Differences
Operating expenses, or OPEX, cover everything a business spends to keep running. SG&A is part of operating expenses, but it’s not the same thing. The key difference is that SG&A doesn’t include the costs of actually producing the product, like raw materials or factory workers’ wages.
In other words:
Operating Expenses
These include both production and non-production costs, such as raw materials or direct labor.
SG&A
This covers non-production costs, like administrative salaries and rent, but excludes production costs.
For example, the electricity bill for running the production line in a factory is an operating expense, but the office rent for the sales team is part of SG&A. This distinction helps businesses understand which costs are tied directly to making their product and which ones are more about running the business overall.
Where Does SG&A Appear in Financial Statements?
SG&A shows up as a separate line on a company’s income statement, usually below the gross profit. This makes it easy to see how much the business is spending to keep the lights on and to promote its products, aside from the costs of actually making those products.
Tracking SG&A in financial statements helps businesses:
- Stay on top of their non-production costs.
- Get a clear idea of how much they’re spending on marketing, rent, and office staff salaries.
- Understand its impact on operating income.
Since SG&A is subtracted from gross profit to get operating income, this number is critical in understanding a business’s overall efficiency.
Why Investors and Managers Care About SG&A
Investors and business owners pay close attention to SG&A because it can be a good indicator of whether a company is managing its expenses wisely. If SG&A is too high, it could be a sign that the business is spending too much on non-essential things, which can hurt profitability.
When managers and investors look at SG&A, they’re trying to figure out how efficiently a business is running. If a company can keep SG&A under control, it can boost its profits without having to sell more products. That’s why businesses always aim to optimize these costs.
How to Calculate SG&A
Calculating SG&A is simple. You just add up all the costs related to selling, general operations, and administration. The formula looks like this:
SG&A = Selling Expenses + General Expenses + Administrative Expenses
For example:
- Advertising costs: $30,000
- Office rent: $25,000
- Staff salaries: $45,000
Total SG&A = $100,000.
This number helps businesses see how much they’re spending on these types of expenses, separate from the costs of making their products.
The Financial Impact of SG&A
SG&A affects a company’s net income because it’s subtracted from gross profit to get operating income. If SG&A costs are too high, they can eat away at profits, which is why companies need to keep these expenses in check. But higher SG&A expenses aren’t always a bad thing.
For example, a business might see its SG&A go up if it’s investing in a new marketing campaign or hiring more staff to support future growth.
The trick is finding the right balance. Companies don’t want to cut SG&A too much, especially in areas that help them grow, like marketing. On the other hand, spending too much on things like office supplies or rent can hurt profits. Smart businesses keep a close eye on SG&A, making sure they’re spending enough to grow without overextending themselves.
Strategies to Reduce & Manage SG&A for Higher Profits
Reducing SG&A expenses is critical for improving a company’s profitability without affecting its core operations. Some effective strategies companies use include:
Cutting Administrative Expenses
Administrative costs can balloon if not carefully managed. Companies often reduce these expenses by automating routine tasks, such as payroll processing, invoicing, and inventory management. Automation not only saves money on salaries but also increases efficiency by reducing errors.
Additionally, businesses may streamline teams by eliminating redundant roles or outsourcing non-core functions like IT support or customer service, allowing them to focus on strategic operations.
Negotiating Lower Rent or Utility Costs
Office space and utilities often form a large portion of SG&A. Businesses can save by renegotiating lease terms to secure better rates, moving to smaller or shared office spaces, or even transitioning to a remote or hybrid working model. This reduces the need for large office spaces, utilities, and overhead costs associated with maintaining physical offices.
For example, a company might consolidate multiple office locations into one smaller space or use coworking environments for flexible work arrangements.
Reducing Marketing Costs Without Sacrificing Revenue
Instead of slashing marketing budgets entirely, companies can shift their focus to more cost-effective marketing strategies. Digital marketing, especially through social media, search engines, and email campaigns, is not only cheaper than traditional advertising methods but can also be more targeted.
Businesses may use data analytics to optimize their ad spend, focusing on campaigns that deliver higher ROI. A great example is a company reducing its spending on TV ads and print media and focusing on personalized email marketing campaigns or targeted social media ads, which cost less but reach more specific audiences.
When Cutting SG&A Completely Isn’t a Good Idea
While reducing SG&A can boost profitability, there are risks in cutting too much or cutting the wrong areas. For example, slashing the marketing budget might reduce costs in the short term but could also result in fewer customers and lower revenue. Marketing is often an investment in future growth, so it’s essential to evaluate where cuts can be made without stalling business momentum.
Administrative functions, such as human resources and finance, are also crucial for smooth operations. Cutting back too much on these departments can create bottlenecks, slow down operations, or lead to compliance risks.
A balanced approach is necessary—cut costs where possible, but don’t undermine the support structures that keep the business running effectively. It’s about finding the right mix of cost-saving and investment to ensure the business can continue to grow and remain competitive.
Common Challenges in Managing SG&A
Fluctuating SG&A Costs
SG&A costs often fluctuate based on business cycles or seasonal demands. For example, retail businesses frequently see a spike in SG&A during the holiday season, when they need more advertising, extra staff, and additional resources to handle increased customer demand.
Other industries, like travel, also face seasonal shifts. Airlines, for instance, spend more on customer service and marketing during peak travel seasons, such as summer vacations or the holiday period. These fluctuations make it tricky for companies to manage SG&A consistently throughout the year.
Balancing SG&A with Business Growth
As companies grow, SG&A expenses typically rise as well. This increase is natural, as expanding businesses need more employees, larger office spaces, and greater marketing efforts to support their growth.
However, businesses must be cautious not to let these costs balloon too quickly. Growing companies need to scale their SG&A efficiently. For example, hiring additional staff or increasing marketing spending should be done strategically to ensure it supports long-term growth without causing unnecessary overspending. Managing this balance effectively is key to maintaining profitability.
Takeaway Note
SG&A is a crucial part of managing business costs. Whether through reducing unnecessary expenses or balancing spending to support growth, businesses that effectively manage SG&A can improve profitability and maintain competitiveness. Smart cost control can lead to sustainable growth and better financial health.
FAQs
What is Included in SG&A?
SG&A includes all the costs related to selling products and running a business, such as marketing, office rent, administrative staff salaries, and utilities. It doesn’t include production costs.
What is SG&A vs COGS?
SG&A refers to expenses that are not directly tied to making a product, like marketing and rent. COGS (Cost of Goods Sold) refers to the direct costs of producing goods, like raw materials and labor.
What is the Difference Between SG&A and G&A?
SG&A includes both selling and general expenses. G&A (General and Administrative) expenses, however, only cover the costs needed to run the business, like office supplies and admin salaries, excluding sales-related costs.
Is SG&A Equal to OPEX?
No, SG&A is just one part of OPEX (Operating Expenses). OPEX includes all the costs to run the business, both production and non-production-related, whereas SG&A focuses only on the non-production costs.
Can High SG&A Impact Profitability?
Yes, if SG&A costs are too high, they can cut into profits. Businesses need to balance spending on essential functions like marketing and administration without overspending in these areas.
over the costs needed to run the business, like office supplies and admin salaries, excluding sales-related costs.
Is SG&A equal to OPEX?
No, SG&A is just one part of OPEX (Operating Expenses). OPEX includes all the costs to run the business, both production and non-production-related, whereas SG&A focuses only on the non-production costs.
Can high SG&A impact profitability?
Yes, if SG&A costs are too high, they can cut into profits. Businesses need to balance spending on essential functions like marketing and administration without overspending in these areas.
