Selling, General, and Administrative Expenses (SG&A)

August 31, 2024 Financial Statements

SG&A combines selling costs and administrative overhead. Learn common components, the SG&A ratio, a worked income-statement example, and comparison risks.

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Selling, general, and administrative expenses (SG&A) are operating costs grouped into selling activities and corporate or administrative support functions. SG&A commonly includes sales payroll, commissions, advertising, executive and office payroll, professional fees, and corporate facilities, but its exact boundary depends on the company, industry, and accounting presentation.

SG&A excludes costs assigned to inventory or cost of sales and may exclude research and development, restructuring, depreciation, or other operating expenses when those amounts are presented separately.

Key Takeaways

SG&A is a function-based operating-expense category, not a universal list of accounts.
Selling expenses support customer acquisition, distribution, and sales activity; G&A supports the organization as a whole.
SG&A can contain cash and noncash costs, fixed and variable costs, and recurring and unusual items.
Classification differences can change gross margin and SG&A ratios even when operating income is unchanged.
Analysts should examine both the dollar amount and SG&A as a percentage of revenue.
Cost reductions can improve near-term profit but harm controls, service, demand generation, or growth if they remove productive capacity.

What SG&A Can Include

Component	Common examples	Classification questions
Selling	Sales salaries, commissions, advertising, promotion, travel, customer acquisition	Are fulfillment, customer support, and distribution included here or in cost of sales?
General	Executive management, finance, legal, human resources, internal audit	Are shared-service costs allocated to segments or retained centrally?
Administrative	Office rent, corporate IT, insurance, supplies, professional fees	Are leases, depreciation, and cloud costs included or presented separately?
Noncash elements	Depreciation, amortization, share-based compensation	Which functions receive the expense, and is it separately disclosed?

The same cost can be classified differently across businesses. A software company’s customer-success payroll may sit in cost of revenue, sales and marketing, or another line depending on the work performed and policy. The caption alone is not enough for peer comparison.

Formula and SG&A Ratio

A basic relationship is:

\text{SG\&A}=\text{Selling Expenses}+\text{General and Administrative Expenses}

Analysts often scale the amount by revenue:

\text{SG\&A Ratio}=\frac{\text{SG\&A}}{\text{Revenue}}

The ratio is meaningful only when the numerator and revenue presentation are comparable across periods and companies.

Worked Income-Statement Example

Assume a company reports the following annual amounts in millions:

Profit bridge	Amount
Revenue	$100
Cost of sales	(55)
Gross profit	45
Selling expenses	(12)
General and administrative expenses	(8)
Research and development	(6)
Operating income	$19

SG&A is $20 million:

\$12\text{ million}+\$8\text{ million}=\$20\text{ million}

The SG&A ratio is 20%:

\frac{\$20\text{ million}}{\$100\text{ million}}=20\%

Research and development is excluded because the company presents it separately. Combining it with SG&A would produce $26 million, or 26% of revenue, but that is a different expense boundary and must be labeled accordingly.

Category	Typical role	Key distinction
Cost of Goods Sold	Costs assigned to goods or services sold	Deducted in calculating gross profit when that subtotal is presented
Selling expense	Customer acquisition and sales support	One component of SG&A
General and Administrative Expense	Central management and corporate support	Another component of SG&A
Research and development	Research and product-development activity	May be a separate operating line
Operating Expenditure	Broad current-period operating spending	Can include SG&A, cost of sales, R&D, and other operating categories depending on usage
Income-tax expense	Current and deferred income-tax effects	Normally outside SG&A

Capitalized costs are not SG&A merely because the underlying payment supports the business. Recognition as an asset or expense depends on the applicable accounting requirements and facts, not management’s preferred margin presentation.

How SG&A Affects Profitability

SG&A is normally deducted after gross profit when expenses are presented by function. If revenue grows faster than SG&A, the SG&A ratio can fall and operating margin can improve. This is often described as operating leverage.

The reverse can occur when a company invests ahead of growth, integrates an acquisition, launches a product, adds controls, or experiences wage, advertising, legal, or technology cost pressure. A rising SG&A ratio is not automatically inefficient; the spending may support future revenue or reduce risk.

How Analysts Evaluate SG&A

Reconcile the reported caption to note disclosures and management discussion.
Separate selling expenses from G&A when the company discloses both.
Compare dollar growth, percentage growth, and SG&A as a percentage of revenue.
Identify acquisitions, foreign exchange, restructuring, litigation, share-based compensation, and impairment effects.
Distinguish variable commissions and advertising from more fixed office and management costs.
Check whether costs moved between cost of sales, R&D, SG&A, and other operating lines.
Evaluate whether spending supports current revenue, future growth, compliance, service, or corporate infrastructure.
Compare peers only after aligning revenue and expense classifications.

Segment disclosures also matter. Corporate SG&A may be allocated to business segments, retained as an unallocated central cost, or reported using a management measure that differs from the consolidated statement.

IFRS 18 Presentation Context

IFRS 18 applies for annual periods beginning on or after January 1, 2027, with earlier application permitted. It requires operating expenses to be presented using nature, function, or a mix that provides the most useful structured summary. A company using function line items also provides specified expense information by nature in the notes.

SG&A is therefore not mandatory as one universal caption. An entity can use more descriptive functional lines, nature-based lines, or a mixed presentation under the standard’s requirements. U.S. GAAP and industry regulators have their own presentation and disclosure requirements.

Common Mistakes and Limitations

Assuming every company places the same costs in SG&A.
Treating SG&A as entirely fixed or entirely cash-based.
Comparing SG&A ratios when one company reports revenue gross and another net.
Excluding share-based compensation or depreciation without explaining the adjusted measure.
Calling every legal, restructuring, or acquisition cost nonrecurring when similar costs recur.
Interpreting lower SG&A as automatically positive without considering growth, controls, service, and execution.
Comparing a bank, retailer, manufacturer, and software company without adjusting for business-model differences.
Using quarterly SG&A without checking seasonality and advertising timing.

Authoritative Sources

The IFRS Foundation’s IFRS 18 effect analysis explains presentation of operating expenses by nature, function, or a mixed approach and the related disaggregation requirements.
The SEC’s How to Read a 10-K/10-Q explains how financial statements, notes, and management discussion provide context for costs, estimates, trends, and operating results.

General and Administrative Expenses: Central management and support costs commonly included in SG&A.
Cost of Goods Sold: Costs assigned to products or services sold.
Gross Profit: Revenue less cost of sales before SG&A and other operating expenses.
Operating Income: Profit after recognized operating expenses under the statement’s classification.
Depreciation: Allocation of depreciable asset cost that may be included in SG&A or another function.

FAQs

What is included in SG&A?

Common items include sales payroll, commissions, advertising, executive and administrative payroll, office costs, professional fees, and corporate technology. The actual boundary depends on the issuer’s policy and presentation.

Is SG&A the same as operating expenses?

SG&A is usually part of operating expenses. Operating expenses can also include cost of sales, research and development, restructuring, depreciation, or other lines depending on how the term is used.

Is depreciation included in SG&A?

Depreciation on corporate or selling assets may be included in SG&A, while depreciation on production assets may be included in cost of sales. Some companies disclose depreciation separately.

Is a lower SG&A ratio always better?

No. A lower ratio can reflect efficiency or operating leverage, but it can also result from underinvestment in sales, service, controls, people, or systems. Business outcomes and classification consistency matter.

This article is for financial education only and is not accounting, audit, tax, legal, valuation, securities, or investment advice. Expense recognition and presentation depend on the framework, entity, industry, and reporting period.

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