Selling, General & Administrative (SG&A) Expense
SG&A includes all non-production expenses incurred by a company in any given period. It includes expenses such as rent, advertising, marketing, accounting, litigation, travel, meals, management salaries, bonuses, and more. On occasion, it may also include depreciation expense, depending on what it’s related to.
In an income statementIncome StatementThe Income Statement is one of a company’s core financial statements that shows their profit and loss over a period of time. The profit or, gross profitGross ProfitGross profit is the direct profit left over after deducting the cost of goods sold, or cost of sales, from sales revenue. It’s used to calculate the gross profit margin. less SG&A (and depreciation expense) equals the operating profit, also known as earnings before interest and tax (EBIT)EBIT GuideEBIT stands for Earnings Before Interest and Taxes and is one of the last subtotals in the income statement before net income. EBIT is also sometimes referred to as operating income and is called this because it’s found by deducting all operating expenses (production and non-production costs) from sales revenue..
Image Source: CFI’s Reading Financial Statements course.
Some firms classify both depreciation expense and interest expenseInterest ExpenseInterest expense arises out of a company that finances through debt or capital leases. Interest is found in the income statement, but can also under SG&A. If this is the case, then gross profit less SG&A equals pre-tax profit, also known as earnings before taxes (EBT)Earnings Before Tax (EBT)Earnings before tax, or pre-tax income, is the last subtotal found in the income statement before the net income line item. EBT is found.
The selling component of this expense line is related to the direct and indirect costs of generating revenue (from selling products or services).
Direct expenses are those incurred at the exact point-of-sale for a product or service. Examples of direct selling expenses include transaction costs and commissions paid on a sale.
Indirect selling expenses are incurred either before or after the sale is made, and examples include salaries, benefits, and wages for salespeople, travel, and accommodation expenses.
General & Administrative (G&A) Expense
G&A expenses are the overhead costs of a business, many of which are fixed or semi-fixed. These costs don’t relate directly to selling products or services but rather to the general ongoing operation of the business.
The most common examples are rent, insurance, utilities, supplies, and expenses related to company management, such as salaries of executives, admin staff, and non-salespeople.
SG&A can be forecasted through any of the following methods: as a percentage of sales revenueSales RevenueSales revenue is the income received by a company from its sales of goods or the provision of services. In accounting, the terms “sales” and, a growth rate over the last period, or as a fixed dollar value.
If SG&A is a consolidated, one-line item, the analyst must use discretion to select one of these (or other) methods to account for all the various expenses baked into that one line item.
Sometimes, SG&A will be a section, with items broken out in individual lines. If this is the case, then different line items will have differing forecast methods. For example, rent most likely will be a fixed dollar value every period. On the other hand, advertising expenses will vary with the strategic decisions a company makes during the given period.
The screenshot above is taken from CFI’s financial modeling courses, which cover forecasting SG&A expenses.
Let’s use Amazon as an example of what’s included in this income statement line item. Below is a quote from Amazon’s 2016 annual report.
“General and administrative expenses primarily consist of payroll and related expenses; facilities and equipment, such as depreciation expense and rent; professional fees and litigation costs; and other general corporate costs for corporate functions, including accounting, finance, tax, legal, and human resources, among others.”
Thank you for reading this guide to SG&A. CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)®Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI’s Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below may be useful to you:
- Forecasting the Income StatementProjecting Income Statement Line ItemsWe discuss the different methods of projecting income statement line items. Projecting income statement line items begins with sales revenue, then cost
- Analysis of Financial StatementsAnalysis of Financial StatementsHow to perform Analysis of Financial Statements. This guide will teach you to perform financial statement analysis of the income statement,
- What is EBITDA?EBITDAEBITDA or Earnings Before Interest, Tax, Depreciation, Amortization is a company’s profits before any of these net deductions are made. EBITDA focuses on the operating decisions of a business because it looks at the business’ profitability from core operations before the impact of capital structure. Formula, examples
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