Selling, general and administrative expenses are the combined operating costs a company incurs to sell its products and to run the business as a whole, excluding the direct costs of producing goods or services. The figure is often shortened to SGA in speech and reports. It brings together two groups: selling expenses, such as sales salaries, commissions, advertising and delivery costs, and general and administrative expenses, such as executive salaries, accounting, legal, human resources, IT, insurance and head office rent.
These costs appear on the income statement below gross profit and are subtracted to arrive at operating income. They are period costs, expensed when incurred, rather than product costs that become part of inventory. For many service and technology companies, they are the largest expense on the income statement.
What is included and excluded
- Included: salaries and benefits of sales, marketing, management and support staff; advertising and promotion; rent, utilities and depreciation for offices and stores; professional fees for auditors and lawyers; office supplies; corporate insurance; and travel.
- Usually excluded: direct materials, direct labor and factory overhead, which belong in cost of goods sold; research and development, which many companies show on a separate line; interest expense and income taxes, which are below operating income; and impairment or restructuring charges, often shown separately.
Classification varies between companies. Some retailers include store occupancy costs in cost of sales, others in SGA. Some include depreciation and amortization in SGA, others show it separately. Analysts therefore read the notes and the Form 10-K before comparing companies.
Worked example
A consumer electronics company reports the following for a year:
| Item | Amount |
|---|---|
| Net sales | $50,000,000 |
| Cost of goods sold | $32,000,000 |
| Gross profit | $18,000,000 |
| Selling expenses | $6,500,000 |
| General and administrative expenses | $4,500,000 |
| Research and development | $2,000,000 |
| Operating income | $5,000,000 |
Total selling, general and administrative expenses are $11,000,000. A common measure of overhead efficiency is:
Here the numerator is the total of both groups of expenses and the denominator is revenue after returns and discounts. The company's ratio is $11,000,000 divided by $50,000,000, or 22 percent. If a competitor has a ratio of 17 percent with similar gross margins, it converts five more cents of every sales dollar into operating profit.
Analysis and management
Much of SGA consists of fixed costs that do not rise in step with sales, such as head office salaries and rent. When sales grow, SGA as a percentage of sales tends to fall, so operating margins widen; when sales fall, the ratio rises and margins are squeezed. This operating leverage is a key driver of earnings swings. Other parts, such as commissions and freight, are variable costs.
Because SGA is largely discretionary, it is often the first target in cost-cutting programs. Analysts watch for cuts that may hurt future growth, such as reduced advertising or sales staff, and for unusual items buried within the line. They also compare SGA with gross profit, since a company whose overheads consume most of its gross profit has little room for error. SGA does not include financing costs, so it feeds into both EBIT and EBITDA calculations, with depreciation added back for the latter where it is included in SGA.
US public companies present expenses on the face of the income statement under SEC Regulation S-X, which lists selling, general and administrative expenses as a standard caption for commercial and industrial companies. IFRS allows expenses to be presented either by function, which produces similar captions, or by nature, such as staff costs and depreciation. New IFRS 18 rules, effective from 2027, will require more consistent operating profit subtotals and additional disclosures when expenses are presented by function.