What Is SG&A? Selling, General and Administrative Expenses Explained

Search Fintrev

Search our guides, reviews and glossary.

SG&A (selling, general and administrative expenses) is the income statement line that groups the costs of running a business that are not directly tied to producing its goods or delivering its services. Advertising, sales commissions, office rent, executive pay, accounting fees and corporate IT are typical SG&A items. Wages on a factory floor, raw materials and the depreciation of production machinery are not, because those belong in cost of goods sold (COGS). In short, SG&A is overhead plus the cost of selling.

What SG&A includes

Many companies report the three groups as one combined line, but they describe different activities.

Selling expenses

Selling expenses are the costs of generating revenue and getting products to customers:

• Advertising and marketing: campaigns, digital and print media, social media, and sales training.
• Sales compensation: salaries, commissions and performance bonuses for the sales team.
• Promotion: trade shows, product launches, events and sampling programs.
• Distribution: shipping to customers, warehousing of finished goods and handling. Companies classify these costs differently, and some place outbound freight in cost of sales.

General expenses

General expenses keep the business infrastructure running without belonging clearly to sales or to management:

• Rent and utilities for offices and non-production facilities.
• Office supplies, furniture and equipment.
• General business insurance, such as property and liability coverage.
• Maintenance and repairs on non-production facilities.

Administrative expenses

Administrative expenses pay for the central functions that govern and manage the company:

• Executive salaries and benefits (CEO, CFO and other officers).
• Human resources: recruiting, payroll processing, training and employee relations.
• Accounting, audit, tax and legal fees.
• Corporate IT, cybersecurity and software maintenance.

The practical difference is purpose. A selling cost exists to win or serve revenue and tends to rise with sales activity. An administrative cost runs the organization and stays roughly the same whether sales rise or fall in a given quarter.

How SG&A works on the income statement

A simplified multi-step income statement runs in this order:

1. Revenue (net sales)
2. minus cost of goods sold = gross profit
3. minus SG&A, R&D and other operating expenses = operating income
4. minus interest and taxes, plus or minus other items = net income

Because SG&A comes after gross profit, a company can have a healthy gross margin and still lose money at the operating level if overhead is too heavy. Separating unit-driven COGS from the cost of supporting the whole operation is what lets analysts study operating leverage, or how a change in sales volume changes profit.

Fixed, variable and semi-variable SG&A

SG&A is often described as fixed overhead, and much of it is: office leases, executive salaries and insurance premiums do not change because the company sold more units this month. Part of it does move with activity, though. Sales commissions are variable. Distribution costs and utilities are semi-variable, with a base amount plus a component that rises with volume. A company whose SG&A is mostly fixed gains more profit from each additional dollar of sales, and also loses more when sales fall.

SG&A as a period cost

Under U.S. GAAP, SG&A costs are period costs: they are expensed in the period in which they are incurred. Production costs are product costs. They are first capitalized into inventory and reach the income statement as COGS only when the goods are sold. If a manufacturer pays factory wages in March but sells the goods in June, those wages hit earnings in June. The March office rent hits earnings in March regardless of sales.

For SEC registrants, Regulation S-X lists “selling, general and administrative expenses” as one of the income statement captions. Companies reporting under IFRS present expenses either by function or by nature (IAS 1). Under the function method, the equivalent costs often appear as “distribution costs” and “administrative expenses” instead of one SG&A line.

The SG&A-to-sales ratio

The most common way to analyze SG&A is to express it as a share of revenue:

SG&A-to-sales ratio = SG&A ÷ Net sales × 100

A ratio of 15% means the company spends 15 cents on selling and overhead for every dollar of revenue. A falling ratio over time can mean the company is spreading fixed overhead across more sales. A rising ratio can signal overhead growing faster than revenue, heavier marketing spending, or a revenue decline that fixed costs have not adjusted to.

Comparisons work best like-for-like: the same quarter year over year to remove seasonality, and companies within the same industry. A software firm with almost no COGS can run a very high SG&A ratio, while a grocery chain or contract manufacturer runs a far smaller one. Service businesses with minimal cost of sales often find that SG&A is their largest operating cost.

Example of SG&A

The following company and figures are hypothetical and chosen to show the mechanics.

Year 1. A manufacturer reports:

SG&A-to-sales = 9.0 ÷ 50.0 = 18%.

Assume the SG&A total consists of $7.0 million of fixed costs (rent, executive pay, insurance, corporate IT) and variable selling costs equal to 4% of sales ($2.0 million of commissions and shipping).

Year 2. Sales grow 10% to $55.0 million. Assume COGS stays at 60% of sales and R&D stays flat:

• COGS: $33.0 million, so gross profit is $22.0 million
• SG&A: $7.0 million fixed + 4% × $55.0 million = $9.2 million
• R&D: $3.0 million
• Operating income: 22.0 − 9.2 − 3.0 = $9.8 million

Revenue rose 10%, but operating income rose 22.5% (from $8.0 million to $9.8 million), and the SG&A ratio fell to 9.2 ÷ 55.0 ≈ 16.7%. The fixed portion of overhead did not grow with sales, so more of each new dollar reached operating income. Under the same assumptions, a 10% drop in sales would cut operating income by more than 10%.

How SG&A is used

Cost control. SG&A is usually the first place management looks to reduce spending, because overhead can be cut without changing the product. Budget reviews, office consolidation, hiring freezes and renegotiated vendor contracts all show up in this line.

Balance against R&D. Comparing R&D with SG&A shows how a company splits spending between developing new products and selling existing ones. Far more SG&A than R&D suggests reliance on marketing and distribution; the reverse suggests a product-development emphasis.

Forecasting and valuation. Financial models often project SG&A as a percentage of revenue, sometimes with a fixed component that grows with inflation. Those projections feed operating income and free cash flow in a discounted cash flow (DCF) model, so a small change in the assumed SG&A ratio can move a valuation noticeably.

What SG&A is often confused with

SG&A vs. operating expenses. Operating expenses are the broader category. SG&A is one component, alongside R&D and sometimes separately reported depreciation, amortization or restructuring charges. Every SG&A cost is an operating expense, but not every operating expense is SG&A. Some definitions of “operating costs” go further and include COGS, which makes SG&A an even smaller subset.

SG&A vs. COGS. COGS holds the direct costs of making goods or delivering services: materials, direct labor and production overhead. SG&A holds the indirect costs of running the business.

SG&A vs. R&D. Research and development is frequently shown on its own line, especially at technology and pharmaceutical companies, but some smaller companies fold it into SG&A.

Depreciation. Depreciation of production equipment and factory buildings flows through COGS. Depreciation of office buildings, sales staff cars and corporate computers is either included in SG&A or reported on a separate depreciation and amortization line.

Customer support. Many companies record support staff in SG&A. Software and subscription businesses that treat support as part of delivering the service may place it in cost of revenue instead.

Limitations of SG&A

Inconsistent classification. No rule forces every company to sort the same costs into the same line. Shipping, customer support, depreciation, R&D and stock-based compensation can land in different lines at different companies, so two companies with identical economics can report different gross margins and SG&A ratios. Check the notes to the financial statements for what a company includes in SG&A before comparing.

Aggregation hides the mix. One SG&A line combines marketing, headcount, legal and other costs, so the total alone cannot explain a change. A rising ratio driven by advertising for a product launch means something different from one driven by litigation expenses.

Cutting is not automatically good. Slashing marketing, sales staff or IT support lowers the ratio but can hurt future revenue and operations. The useful question is whether the spending produces sales, customer retention or capabilities that justify it.

Adjusted figures. Non-GAAP measures that exclude items such as stock-based compensation or restructuring costs are defined by the company, so compare them with the GAAP line and the reconciliation in the filing.

The Bottom Line

SG&A matters to investors and analysts judging how efficiently a company turns revenue into operating income. Track the SG&A-to-sales ratio over the same quarter year over year and against peers in the same industry, and remember that mostly fixed overhead magnifies profit swings in both directions. Before comparing companies, check the notes to the financial statements, because costs like shipping, support and depreciation are classified differently.