What Is SG&A in Accounting: A Detailed Guide

Importance of SG&A in Accounting Analysis

SG&A has a big impact on profitability. Let’s look at two key ideas:

Gross Profit vs. Operating Profit

• Gross Profit = Revenue – COGS
• Operating Profit = Gross Profit – SG&A

If SG&A is too high, it can reduce net income, even when sales are strong.

Operating Margin

Operating Margin = (Operating Income ÷ Revenue) × 100

A lower SG&A can boost your operating margin, which tells how well a company turns sales into gross profit. Investors often use this to measure financial health.

Case Study: SG&A Red Flags

A business with growing sales but shrinking profits may be spending too much on advertising or management salaries. High SG&A costs with little return can signal inefficiency or poor planning.

Strategies to Optimize SG&A Expenses

Smart businesses always look for ways to lower costs without hurting performance.

Cost-Cutting Measures

• Use automation tools for payroll, scheduling, and bookkeeping
• Outsource non-core jobs like IT support or tax services
• Negotiate better prices with vendors and suppliers

Efficiency Improvements

• Invest in expense tracking software
• Allow remote work to save on office space
• Focus your marketing budget on high-performing channels

Monitoring & Benchmarking

• Compare your SG&A to similar companies
• Set budgets and KPIs to manage costs
• Do regular financial audits to spot wasteful spending

Real-World Examples of SG&A Management

Here are some real-world examples:

1. Tech Startup Goes Digital

A startup saved thousands by using cloud-based tools instead of expensive office software. This move helped cut both IT costs and hardware maintenance.

2. Retail Company Optimizes Ads

A fashion brand lowered ad spending by focusing on social media and email marketing. Even with lower ad costs, their sales stayed strong.

3. Manufacturer Saves on Delivery

A manufacturing firm used better logistics software to find cheaper shipping routes. This cut freight transport costs while keeping customers happy.

Common Mistakes in Managing SG&A

Even big corporations make SG&A errors. Here are a few to avoid:

• Ignoring small, repeating expenses like unused software or paper supplies
• Cutting useful costs like marketing, which can harm growth
• Not updating SG&A plans when the economy changes

Proper budgeting, regular audits, and good financial management can prevent these problems.

Conclusion

SG&A in accounting may not create products, but it keeps the business alive. From payroll to advertising, these costs play a major role in net income, operating margin, and long-term growth.

Understanding and managing SG&A is key for smart business economics. Whether you’re a startup or a public company, staying on top of these expenses is vital.

Want expert help with your financial planning and SG&A strategy? Work with the Best CFO to make smarter money decisions today.

FAQs

1: Is SG&A the same as overhead?

Not exactly. Overhead is a broader term. SG&A is part of overhead but includes only sales, admin, and management costs.

2: Can SG&A be capitalized?

Usually not. SG&A is an operating cost and appears on the income statement, not the balance sheet. It’s treated as a period expense, not an asset.

3: How does SG&A affect net income?

SG&A is subtracted from gross income to calculate operating income. High SG&A can lower net income, even with strong sales.

4: What’s a good SG&A to revenue ratio?

It varies by industry, but 10–25% is common. Use benchmarking to compare your ratio to others in your market.

5: How can startups manage SG&A effectively?

Start small. Use free or low-cost software, avoid unnecessary office space, and track every dollar. Regular audits help keep spending in check.