What are SG&A expenses?

SG&A expenses, short for selling, general, and administrative expenses, are the cost of running your company outside of actually producing your product. They cover your sales team, office, accountants, lawyers, and executives. Everything that keeps the business operating but does not show up in cost of goods sold. For a venture-backed startup, SG&A is one of the biggest levers on your burn, so how you classify and control it directly shapes your runway.

The old habit of calling SG&A “overhead” and treating it as waste is a mistake. Accounting sits inside SG&A, and getting that wrong costs you far more than the line item itself. If you need help managing your startup’s expenses, Kruze Consulting provides expert accounting and bookkeeping services.

Why are SG&A expenses important?

Overhead expenses are often beneficial: One obvious example is accounting. Accounting is a crucial business function, and it’s captured within SG&A expenses. A comprehensive view of your finances (both non-operating and operating expenses) is essential to your success and to remain compliant with taxes and regulations. SG&A is also a component subtracted from revenue to arrive at EBITDA.

Consider another core overhead cost: executive salaries. Most companies have at least a CEO, an indirect expense that isn’t relevant to production but is still a necessity for business management and operations. What about marketing expenses? There’s more to a business’ success than production and sales, and understanding your company’s operating expenses can lead to stronger results across the board.

What’s included in SG&A expenses?

Selling, general, and administrative expenses refer to a startup’s non-production expenses and are reported in an income statement (one of your three financial statements) under gross profit. These expenses are not directly attributable to product production. The direct costs associated with producing your product are called the cost of goods sold (COGS) and don’t fall into SG&A expenses.

Under GAAP, SG&A sits on the income statement below gross profit and above operating income, separate from COGS. That placement is what lets you read operating efficiency straight off the statement.

Using your operating expenses to gauge overall operating income

SG&A gives you visibility into costs not directly tied to production. Measuring them as a percentage of total revenue shows how much of every dollar goes to running the business rather than making the product.

To calculate operating income: start with sales revenue, subtract COGS to get gross profit, then subtract operating expenses. What remains is your operating income. To put it simply:

Sales Revenue - COGS = Gross Profit
Gross Profit - Operating Expenses (including SG&A) = Operating Income

By cutting down operating expenses, you can maximize operating income. Let’s take a look at each part of SG&A.

This gives you a quick read on your startup’s profitability. It’s a good formula to know, and investors look closely at operating income.

Selling expenses

Your selling costs include different elements, some of which are direct selling expenses and others indirect selling expenses. These direct and indirect costs add up to the total cost of marketing, selling, and distributing your product, such as:

  • Sales commissions, transaction costs
  • Sales wages, salaries, payroll taxes, and benefits
  • Marketing, promotion, and advertising expenses
  • Travel, meals, and lodging for staff to sales calls, events like trade shows, and client meetings
  • The majority of delivery charges are G&A*

*This depends on the industry. Anything inventory-related will fall under COGS. Delivery accounting can get complicated (ask Macy’s!), so consult with a qualified CPA if you have shipping expenses for physical items.

General expenses

General expenses are incurred by your startup regardless of the industry or the products/services you produce (some considered fixed costs, some semi-variable). General expenses, typically recorded in your income statement, 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

Administrative expenses are the costs involved with having administrative personnel, both internal and external if the company outsources any functions. Administrative expenses are also recorded in your income statement and can include:

The key difference between general and administrative expenses

Understanding the different kinds of expenses is key to success. A great place to start is your operating expenses, the price of running your day-to-day operations. General and administrative expenses have distinct differences, but both qualify as operating expenses.

Neither administrative nor general expenses fall under the production of goods and services. Administrative costs deal with the mechanisms of managing a business, while general expenses deal with the cost of running a business.

Overlap can exist, and depending on how the company classifies these costs, some expenses may fall under both categories.

Is Research and Development included in SG&A?

The short answer? Usually not. Research and Development (R&D) is typically listed as an operating expense (as it is an investment in future production) but rarely qualifies as an SG&A expense because it’s not usually essential to daily operations.

Should you cut SG&A to boost profit?

Having a clear view of your SG&A expenses is a real advantage. Managing them is critical for profitability, but cuts that boost short-term margins can quietly erode long-term profitability. For example:

  • Reducing marketing and advertising costs could improve your bottom line in the short term, but you could lose 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.

     

How does SG&A fit into your overall profitability?

If you’re struggling with profitability, there may be something structurally wrong with your business model. You should analyze your income statement as a whole, looking at all the elements of your company — and not focus on a narrow area like operating expenses. It’s easy to slip into a mindset of emphasizing sales, research and development, or product manufacturing and shortchanging SG&A expenses.

That doesn’t mean it’s correct to overspend on SG&A. You should approach selling, general, and administrative expenses (like marketing costs) as an investment because it can be a competitive advantage. Without these functions, your company may never take off. Invest wisely, and get the right bang for your buck (in both operating expenses and production costs) so you can run your business efficiently and effectively.

Need a guide? We can help you navigate the startup tax landscape.

We work with companies every day to fix their accounting. If you have any other questions on SG&A expenses, startup investing, startup accounting, or taxes, please contact us. You can also follow the Kruze Consulting YouTube channel, and our blog for information about accounting, finance, HR, and taxes for startups!