SG&A Expenses: What They Are, How to Calculate Them, and Why They Matter

If you have ever looked at an income statement and wondered where all the money goes after you subtract the cost of making your product, the answer is usually three letters: SG&A. Selling, General & Administrative expenses are the everyday costs of running a business that do not directly touch production, yet they can quietly consume 15% to 60% of your revenue depending on your industry.

Understanding SG&A is not just an accounting exercise. It is one of the clearest windows into how efficiently a company operates and where there is room to improve margins without sacrificing growth.

What Does SG&A Stand For?

SG&A stands for Selling, General & Administrative expenses. It is an umbrella category on the income statement that captures all operating costs not classified as cost of goods sold (COGS). In other words, SG&A covers everything it takes to run the business side of your business: finding customers, keeping the lights on, and managing the organization.

You will sometimes see SG&A referred to simply as "operating expenses," though technically operating expenses can also include items like research and development (R&D) at larger companies. For most small and mid-sized businesses, SG&A and operating expenses are effectively the same thing.

The Three Components of SG&A

SG&A breaks down into three distinct buckets, each reflecting a different part of your operations.

Selling Expenses

Selling expenses are the costs associated with generating revenue and getting your product or service into customers' hands. These include both direct and indirect costs:

• Sales commissions and bonuses paid to your sales team
• Advertising and marketing spend, including digital ads, print campaigns, and content creation
• Trade shows and events where you promote your business
• Shipping and delivery costs for outbound orders (when not included in COGS)
• Travel and entertainment for sales meetings and client visits
• Sales software and CRM tools like Salesforce or HubSpot subscriptions
• Demo products and free samples used to win new business

Selling expenses tend to be the most variable component of SG&A because they often scale with revenue. When sales are up, commissions and advertising spend typically increase too.

General Expenses

General expenses are the baseline costs of maintaining your physical and digital infrastructure:

• Office rent or lease payments
• Utilities such as electricity, water, internet, and phone service
• Office supplies and furniture
• Insurance premiums for property, liability, and general business coverage
• Technology subscriptions for email, cloud storage, and collaboration tools
• Maintenance and repairs for office space and equipment

These costs tend to be relatively fixed. Your rent does not change much whether you have a great sales month or a slow one.

Administrative Expenses

Administrative expenses cover the people and services that keep the organization functioning:

• Executive salaries and benefits for leadership and management
• Accounting and bookkeeping fees whether in-house or outsourced
• Legal fees for contracts, compliance, and general counsel
• Human resources costs including recruiting, payroll processing, and training
• IT support and cybersecurity
• Consulting fees for specialized projects
• Depreciation on office equipment and furniture

Administrative costs are often the most scrutinized during cost-cutting exercises because they do not directly generate revenue, yet they are critical for keeping the business running smoothly.

Where SG&A Appears on the Income Statement

SG&A sits in a very specific spot on your income statement. Here is the basic flow:

Revenue (Sales)
- Cost of Goods Sold (COGS)
= Gross Profit
- SG&A Expenses
= Operating Income (EBIT)
- Interest and Taxes
= Net Income

Gross profit tells you how much money you make after covering direct production costs. SG&A is then subtracted from gross profit to arrive at operating income, which reveals how profitable your core business operations are before financing costs and taxes come into play.

This placement makes SG&A a critical lever. Two companies can have identical gross margins, but the one with lower SG&A will report higher operating income and stronger overall profitability.

How to Calculate the SG&A Ratio

The most useful way to analyze SG&A is as a percentage of revenue. This ratio tells you how many cents out of every dollar in sales go toward overhead.

SG&A Ratio = Total SG&A Expenses / Total Revenue x 100

For example, if your business generated $500,000 in revenue last year and your total SG&A was $125,000:

$125,000 / $500,000 x 100 = 25%

This means 25 cents of every dollar you earned went to selling, general, and administrative costs. Whether that is good or bad depends on your industry.

SG&A Benchmarks by Industry

SG&A ratios vary dramatically across industries because different business models have fundamentally different cost structures. Here are typical ranges:

Industry	Typical SG&A Ratio
Manufacturing	10% - 25%
Wholesale Trade	5% - 15%
Retail	20% - 30%
Professional Services	25% - 40%
Software / SaaS	40% - 60%
Healthcare	15% - 30%

Why the wide range? Manufacturing companies spend most of their money on raw materials and production (COGS), so SG&A is a smaller share. Software companies, on the other hand, have minimal COGS since their product is digital. Instead, they invest heavily in sales teams, marketing, and customer success, which all fall under SG&A.

According to recent research, the average SG&A across U.S. enterprises has climbed to 14.3% of revenue, the highest level in five years, as companies grapple with rising labor costs and technology investments.

SG&A vs. COGS: What Is the Difference?

One of the most common points of confusion is distinguishing SG&A from COGS. The dividing line is direct involvement in production.

COGS includes:

• Raw materials used to build your product
• Direct labor on the production line or service delivery
• Manufacturing overhead like factory rent and equipment
• Freight costs for inbound materials

SG&A includes:

• Everything else needed to run the business
• Office rent (not factory or warehouse rent allocated to production)
• Sales and marketing
• Back-office functions

A helpful test: if you stopped selling tomorrow but kept producing, would you still incur the cost? If yes, it is likely COGS. If you stopped producing but kept the business open, the costs you would still pay are SG&A.

SG&A and Taxes: What You Can Deduct

Most SG&A expenses are tax-deductible in the year they are incurred, provided they meet the IRS standard of being "ordinary and necessary" business expenses under Section 162 of the Internal Revenue Code.

• "Ordinary" means the expense is common and accepted in your industry
• "Necessary" means it is helpful and appropriate for your trade or business

Here is what you need to know about specific categories:

Fully deductible in the year incurred:

• Office rent
• Employee salaries and wages
• Advertising and marketing costs
• Professional fees (accounting, legal)
• Office supplies
• Insurance premiums
• Software subscriptions

Partially deductible:

• Business meals with clients or employees: 50% deductible
• Business use of a personal vehicle: deductible based on business-use percentage

Not deductible:

• Entertainment expenses (sporting events, concerts, golf outings) — eliminated as a deduction under the Tax Cuts and Jobs Act
• Capital expenditures — these must be depreciated over time rather than expensed immediately (for example, a $15,000 server would be depreciated over several years)

Accurate categorization of your SG&A expenses is essential at tax time. Misclassifying a capital expense as an SG&A deduction can trigger an audit.

How to Reduce SG&A Without Hurting Growth

Cutting SG&A is one of the fastest paths to improving profitability, but slashing costs carelessly can cripple your ability to grow. Here are strategies that reduce waste without starving the business.

1. Audit Every Line Item

Start with a complete review of your SG&A spending. For each expense, ask two questions: Does this directly support revenue generation or essential operations? Could we achieve the same result for less money?

You may find subscriptions no one uses, services you have outgrown, or duplicate tools across teams. These are easy wins.

2. Automate Administrative Tasks

Manual processes for invoicing, payroll, data entry, and expense reporting consume time and increase error rates. Investing in automation tools often pays for itself within months by reducing the headcount needed for routine tasks and freeing your team to focus on higher-value work.

3. Renegotiate Contracts and Leases

Many businesses set and forget their vendor contracts. Review your lease, insurance policies, software subscriptions, and service agreements at least annually. Vendors are often willing to offer discounts for longer terms, upfront payment, or simply to retain your business.

4. Embrace Remote and Hybrid Work

Office rent is typically one of the largest line items in SG&A. If your team can work effectively in a remote or hybrid model, downsizing your office space can deliver significant savings on rent, utilities, and office supplies.

5. Use Fractional and Outsourced Expertise

Instead of hiring full-time specialists for accounting, legal, HR, or IT, consider fractional professionals or outsourced providers. You get the expertise you need at a fraction of the cost of a full-time salary plus benefits.

6. Implement Zero-Based Budgeting

Rather than adjusting last year's budget by a percentage, start each budgeting period from zero. Every expense must be justified from scratch. This approach forces managers to think critically about whether each cost still makes sense and prevents budget creep.

7. Track and Benchmark Regularly

Monitor your SG&A ratio monthly, not just at year-end. Compare it to industry benchmarks and your own historical performance. If the ratio is climbing, investigate why before it becomes a problem.

Common Mistakes When Managing SG&A

Even experienced business owners make errors when it comes to SG&A management. Here are pitfalls to watch for.

Cutting sales and marketing during a downturn. It is tempting to slash advertising when revenue dips, but this can create a vicious cycle. Less marketing leads to fewer leads, which leads to less revenue, which leads to more cuts. Protect the investments that drive future growth.

Ignoring the ratio in favor of absolute numbers. Your SG&A might increase year over year, but if revenue grew faster, your ratio actually improved. Always evaluate SG&A relative to revenue, not in isolation.

Lumping everything into "miscellaneous." Vague expense categories make it impossible to identify savings opportunities. Maintain a detailed chart of accounts so you can see exactly where money is going.

Failing to separate fixed and variable SG&A. Understanding which costs are fixed (rent, salaries) versus variable (commissions, shipping) helps you forecast more accurately and identify which costs you can actually control in the short term.

SG&A in Business Valuation and Investor Analysis

If you are seeking investment or considering selling your business, investors and acquirers will scrutinize your SG&A closely.

What investors look for:

• Declining SG&A ratio over time signals improving operational efficiency and scalability
• SG&A ratio below industry average suggests the company is well-managed
• Sudden spikes in SG&A raise red flags about cost control or one-time expenses that need explanation

For startups, a high SG&A ratio is expected and even welcomed if it reflects aggressive investment in sales and marketing to capture market share. But as a company matures, investors expect SG&A to grow slower than revenue, demonstrating that the business model can scale.

Keep Your Finances Organized from Day One

Managing SG&A effectively starts with clean, detailed financial records. When you can see exactly where every dollar goes, you are in a much stronger position to control costs, improve margins, and make informed decisions about where to invest. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.