What are SG&A expenses?
SG&A expenses, or Selling, General and Administrative expenses, are operating costs required to run your business that cannot be directly tied to producing a product or delivering a service.
Common SG&A expenses include:
[Table:1]
Unlike direct production costs, selling, general, and administrative expenses support broader business operations. These expenses appear below gross profit on the income statement and directly affect operating income.
SG&A expenses are also one of the clearest indicators of a company’s operational efficiency.
Why SG&A expenses become more important as businesses scale
SG&A expenses may seem manageable during the early stages of a business. However, as operations grow, companies usually add more tools, systems, employees, and operational layers to support growth.
For example‚ a business that generates USD $50‚000 per month will often not have as many formalized processes and may have fewer employees․ A business generating USD $2 million in annual revenue will likely need more formalized processes․
That growth often introduces additional costs such as:
- Software subscriptions
- Finance and HR systems
- Sales and marketing teams
- Accounting and legal support
- Compliance requirements
- Cross-border payment operations
- Vendor management workflows
Well-run companies try to create operating leverage where revenue grows faster than overhead costs. But without visibility into SG&A spending, operational expenses can gradually reduce margins as the business expands.
This is why revenue growth alone is not enough. Companies also need visibility into how efficiently revenue converts into sustainable operating profit.
SG&A expenses vs COGS: what’s the difference?
Founders may also confuse SG&A expenses with Cost of Goods Sold (COGS); both describe expenses found on financial statements‚ but they describe different parts of the business․
[Table:2]
If you are learning how to calculate the cost of goods sold, remember that COGS only includes expenses directly tied to producing or delivering a product or service.
For example:
[Table:3]
Understanding this distinction is important when analyzing gross profit, operating margins, and overall business profitability.
What costs are included in SG&A expenses?
SG&A expenses vary depending on the business model, but most companies track similar operational cost categories.
1. Selling expenses
Selling expenses are tied directly to customer acquisition and revenue generation.
Examples include:
- Paid advertising
- Sales commissions
- Marketing software
- Trade shows and events
- Content marketing
- Customer acquisition campaigns
If you are trying to improve how to calculate profit margin, selling expenses are often one of the biggest operational factors affecting profitability.
2. General expenses
General expenses support day-to-day business operations across the company.
Examples include:
- Office rent
- Utilities
- Internet costs
- Business insurance
- Software subscriptions
- Equipment leases
Many of these are treated as fixed or semi-fixed costs because they continue regardless of monthly sales volume.
3. Administrative expenses
Administrative expenses support internal management and operational oversight.
Many businesses manage administrative SG&A costs more efficiently using corporate cards with built-in spend controls and approval workflows.
Examples include:
- HR salaries
- Accounting and bookkeeping fees
- Legal costs
- Executive compensation
- Compliance software
- IT support
Businesses managing international operations often see administrative costs increase faster as finance workflows become more complex across teams, entities, and currencies.
How to calculate SG&A expenses
Calculating SG&A expenses involves adding together all selling, general, and administrative operating costs over a specific period.
The standard formula is:
Total SG&A Expenses = Selling Expenses + General Expenses + Administrative Expenses
When calculating SG&A, businesses usually exclude:
- Cost of goods sold (COGS)
- Income taxes
- Interest expenses
- Non-operating costs
However, classifications can vary depending on the company’s accounting policies and reporting structure.
For example, a business might calculate monthly SG&A expenses like this:
[Table:4]
In this example, total monthly SG&A expenses would equal USD $42,000.
Most businesses track SG&A expenses monthly, quarterly, and annually to monitor operating efficiency, control overhead growth, and improve profitability forecasting.
How to calculate the SG&A ratio
The SG&A ratio measures how much of your revenue is spent on operational overhead.
SG&A Ratio = (Total SG&A Expenses / Total Revenue) × 100
Example:
[Table:5]
In this example‚ operational costs represent 30% of the company's revenue․
In general‚ a decreasing SG&A ratio indicates that the company is operating more efficiently‚ and that its overhead costs make up a smaller portion of revenue․
If this ratio falls while revenue is rising‚ the business is likely benefiting from operating leverage or scaling revenues faster than it is incurring operational costs․
This metric helps founders decide if their growth is translating into more profits or if they are becoming more efficient as a business․
Where SG&A expenses appear on the income statement
SG&A expenses appear on the income statement below gross profit and above operating income.
A simplified income statement looks like this:
[Table:6]
This placement is important because SG&A expenses directly reduce operating income after gross profit is calculated.
If revenue grows while the SG&A ratio declines, it usually indicates the business is improving operational efficiency and creating stronger operating leverage over time.
Understanding this structure is also important when learning how to find net income, since higher operating overhead can reduce profitability even when revenue is increasing.
Real-world example of SG&A expenses in a SaaS business
Imagine a SaaS company with 25 employees generating USD $200,000 in monthly subscription revenue.
Its operational SG&A costs include:
[Table:7]
Total SG&A expenses = USD $100,000
In this case, the company had to spend 50% of its monthly revenues on servicing its operational overheads‚ before tax‚ interest‚ etc․
That is‚ profitability is actually constrained when income is increasing but at a slower pace than selling‚ general‚ and administrative costs․
In growing companies‚ SG&A is important because uncontrolled overhead can erode margins during times when businesses are expanding․
How to reduce SG&A expenses without slowing growth
In many cases‚ the bigger upside from reducing SG&A costs comes not from cutting costs deeply but from making processes more efficient and protecting long-term growth․
Consolidate software systems
As a result‚ companies end up with duplicate tools across finance‚ HR‚ sales‚ and ops․
System standardization can reduce duplicate purchasing‚ streamline processes‚ and make operational costs more visible․ As companies have grown larger‚ some have adopted enterprise software‚ known as enterprise resource planning (ERP) systems‚ which unify previously disparate activities and systems․
Automate finance operations
Finance processes such as approvals‚ expense payment‚ invoice tracking‚ and transaction reconciliation become harder to manage as transaction volumes grow․
Automation helps businesses:
- Reduce manual errors
- Speed up approvals and reporting
- Improve expense visibility
- Strengthen financial controls
- Save operational time across teams
Many growing companies use expense management software for businesses to automate spend tracking, reimbursements, approvals, and operational finance workflows as complexity increases.
Improve vendor management
Recurring vendor contracts should be reviewed regularly to avoid unnecessary spending.
Common inefficiencies include:
- Duplicate subscriptions
- Unused licenses
- Overpriced contracts
- Legacy tools that are no longer needed
Track operational efficiency metrics
Revenue growth alone does not reflect operational health.
Founders should also monitor:
- SG&A ratio
- Burn rate
- Profit margin
- Customer acquisition cost
- Operating cash flow
These metrics help businesses understand whether growth is improving profitability or increasing operational inefficiency.
Common mistakes businesses make with SG&A expenses
Many of the SG&A costs in a company are not a single massive expenditure‚ but rather result from small inefficiencies that build up over time․
Ignoring software sprawl
Startups also frequently use sales‚ HR‚ finance‚ marketing‚ and operations software without evaluating existing options․
Over time‚ companies may end up having to pay for multiple duplicate tools‚ unused subscriptions‚ and overlapping platforms‚ burdening the overhead․
Scaling headcount too early
Hiring before the revenue comes in quickly causes the SG&A to inflate․
This is especially difficult when payroll and operating costs are fixed‚ but sales fluctuate at different times of year․
Weak expense approval systems
Poor approval workflows can lead to unnecessary spending across software, travel, vendor contracts, and team purchases.
This risk often increases in remote or distributed teams where spending visibility is harder to monitor consistently.
Treating all SG&A cuts as positive
Its downside may be that one pursues the strategy of cost-cutting aggressively․
Some SG&A expenses directly support growth‚ the customer experience‚ legal compliance‚ or operational stability․ Excessive pruning of necessary tools‚ support functions‚ and other revenue generating functions can hurt long term performance․
Not reviewing SaaS renewals regularly
Many organizations continue to pay for software subscriptions that their employees no longer fully use․
Failure to periodically review their subscriptions can lead to build-up of SaaS costs of continuous subscriptions․
Approving spend without clear owner accountability
Operational expenses can be difficult to manage due to a lack of ownership over vendor contracts‚ subscriptions‚ or purchases․
The assignment of accountability for budgets and approvals may provide incentives for spending discipline․
Poor accounts receivable management
Accounts receivable are money owed to a company for goods or services already delivered or used‚ but not yet paid for․
Moreover‚ collection cycles are often slow‚ resulting in cash flow issues‚ despite reasonable revenue figures․ Late collections and rising SG&A expenses can considerably impact operational flexibility․
Many growing businesses use invoicing and accounts receivable management systems to improve payment visibility, automate collections, reduce reconciliation delays, and maintain healthier cash flow as operations scale.
Cash accounting vs accrual accounting for SG&A tracking
How SG&A is recorded in your financial statements depends on the accounting method your business uses․
This is important because SG&A expense items like software subscriptions‚ payroll‚ vendor invoices‚ and marketing expenses are often incurred before or after cash is spent․ If these amounts are recognized differently they make it difficult to measure operating efficiency using revenue or expense measures.
[Table:8]
For example, a yearly software contract paid upfront may appear differently under cash vs accrual accounting, even though the operational cost relates to multiple months.
As businesses scale, accrual accounting often provides better visibility into SG&A trends because expenses are matched more accurately against the revenue they support. This helps founders improve budgeting, forecasting, and profitability analysis.
Why finance infrastructure matters as SG&A grows
As SG&A expenses increase, finance operations often become harder to manage manually. Payments, reimbursements, approvals, subscriptions, and vendor invoices spread across teams can quickly create visibility gaps and inconsistent spending controls.
This is where Aspire¹ functions as an operational finance layer for growing businesses rather than just a standalone finance tool.
Instead of managing disconnected workflows separately, businesses can centralize:
- Expense management to reduce reimbursement delays and manual tracking
- Approval workflows to help control uncontrolled administrative spend
- Corporate cards² to improve department-level spending visibility
- Business accounts¹ to centralize operational payments and cash flow
- Accounting integrations to reduce reconciliation work across systems
- Real-time spend tracking so budget owners can identify overspending earlier
As transaction volume and team complexity grow, stronger operational visibility becomes increasingly important for controlling SG&A expenses efficiently.
Final thoughts on SG&A expenses
SG&A expenses help businesses measure how efficiently they operate beyond revenue growth alone. As companies scale, tracking operational costs, controlling overhead, and improving financial visibility become increasingly important for protecting margins and maintaining sustainable growth.
Understanding SG&A expenses early helps founders make better budgeting, hiring, and operational decisions as the business grows.
SG&A expenses: FAQs
Q1. What are SG&A expenses?
SG&A expenses are Selling, General, and Administrative expenses. These are indirect operational costs required to run a business, including marketing, payroll, office rent, software, and administrative overhead.
They are separate from direct production costs and are not part of how to calculate cost of goods sold.
Q2. Are SG&A expenses fixed or variable?
SG&A expenses can be both fixed costs and variable costs.
- Fixed costs include office rent and salaries
- Variable costs include advertising spend and sales commissions
Understanding this mix is important when analyzing how SG&A expenses impact how to calculate profit margin and overall profitability.
Q3. Are SG&A expenses included in COGS?
No. SG&A expenses are separate from Cost of Goods Sold.
COGS includes direct production costs, while SG&A covers operational overhead.
This distinction is important when calculating gross profit, operating income, and finding net income in accounting.
Q4. Why are SG&A expenses important?
SG&A expenses help measure operational efficiency and cost control.
High SG&A expenses can reduce profitability even when revenue is growing strongly.
They also play a role in evaluating liabilities, cash flow pressure, and long-term financial stability.
Q5. How do you calculate SG&A expenses?
SG&A expenses are calculated by adding all Selling, General, and Administrative costs incurred during a specific period.
They are recorded differently depending on the accounting method, cash vs accrual, since accrued expenses may be recorded before cash is actually paid.
Q6. What is a good SG&A ratio?
There is no universal benchmark because the SG&A ratio varies by industry.
For example:
- SaaS companies may have higher SG&A expenses due to sales and marketing investment
- Mature businesses often maintain lower operational overhead
The SG&A ratio is especially useful when analyzing revenue meaning, cost efficiency, and overall margin health.
Q7. Where do SG&A expenses appear on financial statements?
SG&A expenses appear on the income statement below gross profit and above operating income.
This positioning helps businesses understand how operating costs affect net income after revenue and COGS are accounted for.
It is also useful when reviewing accrued expenses and reconciling financial statements in tools like ERP software systems.
