Founders will hear the term “SG&A expenses” thrown around in board meetings a lot. SG&A stands for selling, general, and administrative expenses. One way to think of SG&A expenses is that it’s the cost of running your company.
Some people refer to this as “overhead,” but that term has become somewhat synonymous with “unnecessary.” Sometimes CEOs and founders will be told they need to cut “overhead” but that phrase makes it seem like overhead expenses are unimportant. And that’s not necessarily true – one example is accounting. That gets captured in SG&A expenses, but accounting is a crucial business function. You need to understand your finances and you want to remain compliant with taxes and regulations. We work with companies every day who need help fixing their accounting.
What’s included in SG&A expenses?
Selling, general, and administrative expenses essentially refer to the non-production costs of a startup. These expenses are not directly attributable to the production of your product. The direct costs associated with producing your product are called the cost of goods sold (COGS), and don’t fall into SG&A expenses. Let’s look at each part of SG&A.
Selling expenses
Your sales expenses include a lot of different elements, such as:
- Sales wages, salaries, and commissions along with payroll taxes and benefits
- Packing and shipping product
- Marketing, advertising, and promotion
- Travel, meals, and lodging for staff to sales calls, events like trade shows, and client meetings
General expenses
General expenses are incurred by your startup regardless of the industry or the products/services you produce. General expenses can include:
- Rent for office space that can’t be attributed to your production process
- Utilities, including electricity, water, or sewer expenses, which aren’t part of your manufacturing process
- Office equipment like computers, servers, printers, or telephones that aren’t part of production
- Office supplies that are used for administrative functions
- Insurance
Administrative expenses
These expenses are the costs involved in having administrative personnel, both internal or external if the company outsources any functions. These costs can include:
- Accounting payroll or fees for outsourcing
- Information technology payroll or fees for outsourcing
- Human resources personnel
- Legal counsel
- Any consulting fees
SG&A costs cover a lot of essential functions
Managing your SG&A expenses is critical for your startup’s profitability, but you need to be careful. Cutting SG&A costs can give your profits a quick boost, but that could be at the expenses of your long-term profitability. So cutting marketing and advertising costs could improve your bottom line in the short term, but you could be losing sales further down the road. Not hiring a professional accountant could cost you later if you don’t get the right tax credits, like the R&D tax credit, or if you end up paying fines and penalties because you’re not paying the right taxes in states where you do business. Not hiring an attorney to review legal contracts could mean you’re not getting the best deal.
If you’re struggling with profitability, there may be something structurally wrong with your business model. You should look at all the elements of your company, and not focus on a narrow area. It’s easy to slip into a mindset of emphasizing sales, or research and development, or product manufacturing, and short-change SG&A expenses.
That doesn’t mean overspend on SG&A. You should approach SG&A expenses as an investment, because it can be a competitive advantage. Without these functions, your company may never take off. So invest wisely, and get the right bang for your buck so you can actually run your business.
As an aside, if you’re trying to get a quick read on your startup’s profitability, you can take your sales revenue, subtract the cost of goods sold, and you’ll get gross profit. Subtract SG&A expenses from gross profit, and you’ll get your operating income. That’s a good process to know, and investors look closely at operating income.
If you have any other questions on SG&A expenses, startup investing, startup accounting, or taxes, please contact us. You can also follow our YouTube channel and our blog for information about accounting, finance, HR, and taxes for startups!
