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WIKI ANALYSIS| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
Selling, General & Administrative Expenses is the sum of all selling expenses and all general and administrative expenses
Selling, General & Administrative Expenses (alternately SG&A) is an income statement item that refers to a company's operating expenses outside of cost of sales.
Items commonly included in SG&A are not directly attributable to production. Examples of SG&A include employee salaries, commission bonuses, pension costs, marketing costs, insurance, rent and utilities, and maintenance.
While cost of sales are easily controlled, SG&A expenses are more difficult to manipulate. A company can keep its cost of sales down by limiting raw material purchase and adjusting its manufacture/service-production during a given accounting period. SG&A expenses are oftentimes fixed recurring expenses, and thus not as easily adjustable (i.e. payroll expense).
Investors look to SG&A as a measure of how efficiently a company is using its money. A company maintaining an SG&A that is a high percentage of revenue relative to other companies in its sub-industry would may indicate an inability to adapt to market downturns, as SG&A expenses are not easily changed in a short period of time (money being tied up in things like salary and office rent).
Unless a company is very research and development focused, SG&A expenses tend to be one of the largest of a company's operating expenses.
Example
- Company XYZ, a widget maker, reports net income of $2 million dollars with a $800 thousand cost of goods sold for a gross profit of $1.2 million. The company spends $200 thousand on research and development and $600 thousand on SG&A expenses. SG&A, then, is 30% of XYZ's total revenues (600 thousand / 2 million) and
- Company ABC, also in the widget industry, the same year reports net income of $5 million dollars with a $1.5 million cost of goods sold for a gross profit of $3.5 million. The company spends $500 thousand on research and development and $2 million on SG&A expenses. SG&A, then, is 40% of ABC's total revenues (2 million / 5 million).
- Despite XYZ's relatively higher cost of goods sold (40% of revenue vs 30%), all other things being equal an investor would likely view XYZ better suited to deal with a market downturn or other unforeseen negative stressor on the market, as it's relatively lower SG&A expenses equate to an easier reduction of total expenses should it be necessary, as it is harder for company to reduce SG&A expenses than others.
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