What it means
Imagine you run a bakery. The flour, sugar, and baker's wages are direct costs to bake the bread.
SG and A covers everything else needed to keep the doors open and sell that bread. This includes advertising, the salary of the accountant, utility bills for the shop, and software subscriptions.
Selling expenses cover activities required to market, promote, and sell products. General and administrative expenses cover the overhead costs of running the business as a whole.
While these costs do not directly create the product, they are vital for business survival and growth. For non-finance managers, keeping an eye on SG and A is essential because these costs can easily spiral out of control if left unmanaged.
Unlike manufacturing costs that rise naturally when you sell more products, SG and A often stays fixed. Controlling these overheads directly protects your profit margins.
Analysing these costs helps managers spot inefficiencies. If administrative expenses are growing much faster than sales revenue, it is a clear warning sign that the business is becoming bloated.
Benchmarking this metric against industry peers helps ensure your support functions remain lean and cost-effective. SG and A is like the fuel, maintenance, and insurance needed to run a delivery van.
The packages inside are the product, but you need all those supporting costs just to get the van moving.
In practice
Real-world examples
Example 1
A tech startup spends $15,000 per month on Google ads, $5,000 on the founder's salary and $3,000 on cloud software. Total monthly SG and A is $15,000 + $5,000 + $3,000 = $23,000. The founder watches this number each month against revenue.
Example 2
A local manufacturing company pays $2,500 monthly for its head office rent, $1,200 for accountancy fees and $800 for office supplies, a total of $4,500 in SG and A. The factory costs sit elsewhere, in the cost of goods sold. Keeping the two groups apart shows whether the overheads are growing faster than sales.
Example 3
A boutique clothing retailer spends $4,000 a month on store staff wages, $1,500 on window displays and $2,000 on business insurance, making monthly SG and A $7,500. The cost of the clothing itself is not included, because it belongs to cost of goods sold.
Think of it
SG and A is like the fuel, maintenance, and insurance needed to run a delivery van. The packages inside are the product, but you need all those supporting costs just to get the van moving.
Formula
Calculation
Total SG and A = Selling Expenses + General and Administrative Expenses. SG and A Ratio = Total SG and A / Revenue x 100.
Worked example: a firm has $40,000 in marketing and sales costs (selling) and $60,000 in admin salaries and rent (general and administrative). Total SG and A = $40,000 + $60,000 = $100,000.
If the firm's revenue for the same period is $500,000, the SG and A ratio is $100,000 / $500,000 x 100 = 20%. This means 20 cents of every sales dollar goes on selling and running the business, before the cost of making the product is considered.Case study
Seen in the real world
GreenLeaf, a fictional eco-friendly cleaning product company, noticed its profits were shrinking despite record sales. The founder, Sarah, decided to investigate the income statement. Revenue had grown from $1,200,000 to $1,600,000 and production costs were stable, but SG and A had ballooned. General and administrative expenses had doubled from $150,000 to $300,000 due to office upgrades, redundant software subscriptions and rising administrative salaries. Selling expenses had also risen from $120,000 to $180,000 through untracked social media campaigns that failed to bring in new customers.
Total SG and A therefore rose from $270,000 to $480,000. As a share of revenue, that is 22.5% last year against 30% this year. By cutting unnecessary software, pausing low-performing ads and moving to a smaller shared workspace, Sarah reduced SG and A by 25%, which is $120,000, to $360,000. The ratio fell back to 22.5% of the $1,600,000 revenue. This restored healthy profit margins without affecting the quality of the cleaning products.
Watch out
Common mistakes
- Treating SG and A as completely fixed costs that can never be reduced, when software, advertising and premises are all open to review.
- Confusing direct production costs with general administrative overheads, which distorts gross profit.
- Assuming that cutting SG and A always improves business health, even if it harms vital functions like customer support or sales.
Questions
People also ask
Is rent always considered an SG and A expense?
It depends on the space. Rent for a factory or warehouse where products are made goes into production costs. Rent for the corporate head office goes into SG and A.
How does SG and A affect net profit?
SG and A is subtracted from gross profit along with other expenses. Higher SG and A means lower net profit, assuming revenue stays the same, so many managers watch the ratio to revenue.
Why is this category tracked separately from cost of goods sold?
Separating them allows managers to see how much it costs to make a product versus how much it costs to run the business and sell that product.