Understand SG&A Costs and Learn Where Your Money Really Goes
You hear a lot about costs, profits, revenues, and margins when you run a business, especially when you first start out. But people often get SG&A expenses wrong, which is an important type of business expense. These costs don’t help you make the product directly, but they are very important for keeping your business going.
Let’s break it all down into simple terms so you can understand what SG&A costs are, why they are important, how to keep track of them, and how they affect your profits.
What does SG&A mean?
SG&A means:
- The act of selling
- Overall
- And costs of running the business
These are the costs that aren’t directly related to making your product or service. They include everything else that goes into running a business.
What do SG&A costs cover?
SG&A costs include a lot of things that help a business run, sell, and do its daily tasks. Here’s a list:
1. Costs of selling
These are costs that come up when you sell your goods or services, like:
- Pay and bonuses for the sales team
- Ads and marketing
- Costs of advertising
- Fairs and trade shows
- Help for customers
- Costs of distribution (not shipping, which may be COGS)
2. General Costs
These are costs of doing business in general, like:
- Rent for the office
- Electricity, water, and the internet are all utilities
- Things for the office
- Insurance
- Office equipment losing value
3. Costs of running the business
These are costs related to management, such as:
- Pay for executives and administrative staff
- Fees for accounting and the law
- Tools for software, such as CRM or accounting software
- Management’s travel costs
What’s the difference between SG&A and COGS?
A lot of people get confused here.
COGS, or Cost of Goods Sold, is the money it costs to make a product, like the cost of raw materials or labor.
SG&A includes the costs of running the business and selling the product that aren’t direct.
If you’re making cakes:
- COGS = flour, eggs, and the baker’s pay
- SG&A is the cost of the salesperson’s salary, the store’s rent, and the ads
Why are SG&A costs important?
SG&A can give you a lot of information about how well your business is doing financially. This is why they are important:
1. They have an effect on your profit margins
If you spend more on SG&A, you might not keep as much profit. Cutting down on unnecessary SG&A costs can help you make more money.
2. They show how well your business runs
If your SG&A costs are too high, it means you’re losing money running the business. But if they are too low, it could mean that you are not putting enough money into sales or growth.
3. They Affect What Investors Do
A lot of the time, investors look at SG&A trends over time. If your SG&A keeps going up but your income doesn’t, that could be a sign that something is wrong.
Examples of SG&A Costs
Let’s look at some real-life examples of SG&A costs for different kinds of businesses to make it even clearer.
- Store manager’s pay for a retail stor
- Salaries for cashiers
- Rent for the store
- Commercials on TV
- Software for loyalty programs
- Salaries for the CEO and CTO of a tech startup
- Wi-Fi in the office
- Ads on Google
- Subscriptions for SaaS
- Costs for PR agencies
- Budget for Facebook ads for an online store
- Tools for email marketing
- Pay for a virtual assistant
- Subscription to Shopify
- Designing the packaging for a product (if it’s not part of production)
How Are Expenses for SG&A Reported?
On a company’s income statement, SG&A costs are usually listed right after gross profit.
The formula is:
Gross Profit = Revenue – COGS
Operating Income = Gross Profit – SG&A
People call these costs “operating expenses,” which means they are necessary for running the business, even if they don’t have anything to do with the product.
How to Figure Out SG&A Costs
Let’s say your business brought in $500,000 in sales and had these expenses:
- COGS: $200,000
- $50,000 in pay for sales and administrative work
- $20,000 for rent
- $15,000 for ads
- $10,000 worth of office supplies and software
Next:
SG&A = $50,000 + $20,000 + $15,000 + $10,000 = $95,000
To find gross profit, subtract $200,000 from $500,000.
Operating Income = $300,000 – $95,000 = $205,000
This shows you how much SG&A hurts your profits.
Fixed versus variable Costs for SG&A
Not all SG&A costs act the same way. Some of them change with your sales, and some don’t.
Costs of SG&A that don’t change
These don’t change, no matter how much you sell:
- Rent for an office
- Salaries for full-time admins
- Subscriptions for software
Costs of SG&A that change
These change based on how much you sell:
- Commissions on sales
- Money spent on marketing
- Costs of shipping and delivery
Knowing the difference helps you plan for times when business is slow or busy and better manage your cash flow.
Managing and lowering SG&A costs
Cutting SG&A costs can help when money is tight or profits are low. But be careful not to cut the wrong things.
Smart ways to cut SG&A costs:
- Use less expensive software tools
- Outsource tasks that aren’t your main business (like bookkeeping)
- For marketing, hire freelancers instead of full-time employees
- Go remote or move to a smaller office
- Use AI tools to do tasks automatically
The trick is to cut down on waste without hurting your growth.
How SG&A impacts the growth of a startup
SG&A is one of the first big problems that new businesses face. You still have to pay for things even though you’re not making a lot of money yet:
- Promoting
- Things to do as an admin
- Filing taxes and legal papers
If your SG&A costs too much, your runway gets shorter, and you might run out of money before you make a profit.
To make sure your money lasts, you need to keep an eye on and manage SG&A.
Budgeting and SG&A
All businesses should make a budget for SG&A. It’s usually a part of the money made. For instance:
- A new online store that doesn’t have a lot of money might spend 20–25% of its sales on SG&A.
- If a SaaS company is focused on growing its sales and marketing, it could go up to 40–50%.
Check to see that your SG&A ratio is in line with your goals, stage, and industry.
Advice on how to handle SG&A costs
Follow these tips to handle SG&A correctly:
- Don’t wait until the end of the year to track SG&A every month
- Put categories in your accounting software (like QuickBooks or Xero)
- Watch out for expense creep, which is when costs slowly go up
- Look at how SG&A has changed from year to year (YoY)
- Make it clear how you will approve spending
What Happens When SG&A Is Too High?
If your SG&A costs are going up faster than your sales, you might:
- Start to lose money
- Have a hard time getting money
- Not able to make a profit
- Have to fire workers
- Lose the trust of investors or banks
That’s why it’s so important to keep SG&A in check.
What Happens if SG&A Is Too Low?
You might be cutting too much if you:
- Lower the quality of customer service
- Miss chances to grow
- Burn out your group
- Hurt your brand
Sometimes, spending more on SG&A, especially sales and marketing, helps the business grow faster.
Frequently Asked Questions About SG&A Expenses
Are SG&A costs part of operating costs?
Yes. SG&A is a big part of the income statement’s operating expenses.
Can you add SG&A costs to your capital?
No. SG&A costs are not added to the value of the company. They are written down in the time they happen.
Are salaries part of SG&A costs?
Yes. SG&A includes salaries for salespeople, administrators, and executives.
Is depreciation included in SG&A?
Only if the depreciation is for office equipment or other administrative assets. COGS includes depreciation on production machinery.
How can I cut SG&A without hurting growth?
Pay close attention to automation, outsourcing, and tight budgets. Don’t cut back on important sales or marketing work.
What do you do with rent in accounting?
The head office’s rent is part of SG&A. COGS includes rent for a factory or warehouse.
What’s a good ratio of SG&A to revenue?
It depends on the business, but in general:
Healthy is less than 30%
You should carefully review anything over 40–50% (unless you’re in the early stages of growth).
Final Thoughts
SG&A costs may not sound exciting, but they are very important for your financial success. They help you run your business, get in touch with customers, and stay organized. But they also cut into your profits, so you need to keep an eye on them, manage them, and make them work better on a regular basis.
If you’re a small business owner, a startup founder, or just learning how to read income statements, knowing SG&A can help you run a business that is smarter and more profitable.