Definition
Say you run a pancake stand. The money you spend on flour and batter is the cost of making the food. The banner you hang to attract customers and the monthly rent on your stall are the cost of selling it. Selling, General and Administrative expenses (SG&A) cover the money spent on selling products and running the company day to day, leaving out the direct cost of production. Costs that come from outside the core business, like interest on borrowed money or corporate income tax, are recorded separately and are not part of SG&A.
Money spent at the factory vs. money spent at headquarters
A fried chicken shop makes this easy to picture. The money spent on chicken, cooking oil, and batter to fry the food is the cost of making the product, which accounting calls cost of goods sold (COGS).
But perfectly fried chicken doesn't sell itself. You pay commissions to a delivery app, hand out flyers around the neighborhood, and cover the delivery fee for the rider who brings the food to the door. That money, spent to get the product sold, is selling expense.
Then add the costs of keeping the shop alive: monthly rent, the phone bill for talking with the head office, and the software fee for the point-of-sale system that tracks orders. That is administrative expense, the cost of running the company. Accounting bundles the two together and calls them selling, general and administrative expenses, or SG&A.
What exactly counts as SG&A?
If you open a company's financial statements, the report card of its business, you'll find many kinds of spending bundled into SG&A. The most common item is the salaries and bonuses of people who work at the head office, such as the marketing, planning, HR, and finance teams.
Advertising on TV and social media, launch-event costs, shipping fees for getting goods to customers, and warehouse storage fees all count as SG&A too. So do the rent on the head office and the rental fees for the computers employees use.
To be more precise, research and development (R&D) spending on future technology is often counted in SG&A when it is treated as an expense for that year. But development costs that meet certain requirements are recorded as an intangible asset instead, and R&D tied directly to manufacturing is sometimes moved into cost of goods sold. In the end, SG&A is the bundle of all the operating costs a company needs to keep breathing every day and to make its brand known to the world.
The big diet target behind operating profit
Take a company's total sales revenue and subtract the cost of producing the goods, and you get the first level of profit, called gross profit. Subtract SG&A from that, and what's left is operating profit, which shows how strong the company's core business really is.
Even if products fly off the shelves and revenue grows, a company can still end up with an operating loss if it overspends on ads with famous celebrities or lets head office costs leak away. It looks like the company sold a lot, but inside, no money is left over.
That's why companies often go on an SG&A diet when the economy turns bad. They cut marketing budgets, unnecessary business trips, and office supplies to protect their profit. Smart investors always watch how carefully a company manages its SG&A without waste.
Common misconceptions
All the salaries a company pays its employees are part of SG&A.
The pay of production workers who directly make the product in the factory goes into cost of goods sold (the cost of making things). Only the pay of employees who aren't directly involved in production, such as head office staff and salespeople, is classified as SG&A.
Where you meet it
The cost of running celebrity ads on TV and the internet to promote a new smartphone (selling expense)
Salaries for the head office planning and HR teams, plus the head office rent (administrative expense)
Shipping fees and packaging box costs for sending clothes ordered from an online store to the customer's door (selling expense)
In one sentence
SG&A is the cost of selling products and running the company, the core business activities, leaving out the cost of manufacturing in the factory.