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

Every business has costs that go beyond making or delivering its products. The sales team's commissions, the office rent, the CEO's salary, the accounting software subscription—these are all SG&A expenses, and understanding them is essential for managing profitability.

SG&A (Selling, General & Administrative) expenses often represent the second-largest cost category on a company's income statement, right after cost of goods sold. Yet many business owners lump them together without analyzing what's driving the number up—or how to bring it down.

This guide breaks down what SG&A expenses include, how to calculate them, what benchmarks to aim for, and practical strategies for keeping them under control.

What Are SG&A Expenses?

SG&A expenses are the costs a business incurs to support its day-to-day operations that aren't directly tied to producing goods or delivering services. They cover everything from marketing and sales activities to office administration and executive management.

On the income statement, SG&A appears below the gross profit line and above operating income. The formula looks like this:

Revenue - COGS = Gross Profit - SG&A = Operating Income

This placement matters because SG&A directly affects your operating margin—the metric investors and lenders use to evaluate how efficiently you run your business.

The Three Components of SG&A

SG&A is made up of three distinct categories, each covering a different aspect of business operations.

Selling Expenses

Selling expenses are the costs associated with finding customers and closing deals. They can be further divided into direct and indirect selling costs.

Direct selling expenses occur only when a sale is made:

• Sales commissions
• Shipping and delivery costs
• Transaction processing fees

Indirect selling expenses are incurred regardless of individual sales:

• Sales team salaries and benefits
• Advertising and digital marketing
• Trade shows and promotional materials
• CRM software subscriptions
• Travel and entertainment for client meetings

General Expenses

General expenses keep your business physically operational. These are the costs of maintaining your workspace and infrastructure:

• Office or facility rent
• Utilities (electricity, water, internet, phone)
• Office supplies and equipment
• Property and liability insurance
• Equipment maintenance and repairs
• Depreciation on non-production assets

Administrative Expenses

Administrative expenses cover the management and back-office functions that keep your organization running:

• Executive salaries and bonuses
• Accounting and legal fees
• Human resources costs
• IT support and software licenses
• Professional development and training
• Regulatory compliance costs

What SG&A Does Not Include

It's equally important to understand what falls outside SG&A:

• Cost of goods sold (COGS): Raw materials, direct labor, and manufacturing overhead
• Interest expense: Financing costs on debt
• Income taxes: Tax obligations
• Research and development (R&D): Some companies report R&D separately, though practices vary
• One-time charges: Restructuring costs, asset write-downs, and other non-recurring items

The line between COGS and SG&A can sometimes blur. A factory floor supervisor's salary is COGS, but the HR manager who processes their payroll is SG&A. The rule of thumb: if the cost is directly tied to production, it's COGS. If it supports the broader business, it's SG&A.

How to Calculate SG&A Expenses

Calculating total SG&A is straightforward—add up all selling, general, and administrative costs:

SG&A = Selling Expenses + General Expenses + Administrative Expenses

For example, suppose a consulting firm tallies the following quarterly costs:

Category	Item	Amount
Selling	Sales salaries & commissions	$45,000
Selling	Digital advertising	$12,000
Selling	Client travel & entertainment	$8,000
Selling	CRM software	$3,000
General	Office rent	$18,000
General	Utilities	$2,400
General	Office supplies	$1,800
General	Insurance	$3,600
General	Legal fees	$5,000
Administrative	Executive salaries	$60,000
Administrative	Accounting services	$6,000
Administrative	IT support	$4,200
Total SG&A		$169,000

The SG&A Ratio: Measuring Efficiency

The raw SG&A number is less useful on its own. To gauge efficiency, calculate the SG&A ratio:

SG&A Ratio = (Total SG&A ÷ Total Revenue) × 100

If this consulting firm earned $650,000 in revenue that quarter:

$169,000 ÷ $650,000 = 26%

This means 26 cents of every dollar earned goes toward SG&A. Tracking this ratio over time reveals whether your overhead is growing faster than your revenue—a warning sign of inefficiency.

Industry Benchmarks

SG&A ratios vary significantly by industry. Here are typical ranges:

Industry	Typical SG&A as % of Revenue
Construction	5–15%
Manufacturing	10–25%
Transportation & Utilities	10–20%
Wholesale Trade	10–20%
Retail Trade	20–30%
Technology / Software	15–30%
Financial Services	20–35%
Professional Services	30–45%
Healthcare	35–50%

According to a 2025 study by The Hackett Group, U.S. enterprises' SG&A costs have risen to 14.3% of revenue—the highest level in five years. This trend underscores why actively managing these expenses matters more than ever.

Why SG&A Matters for Your Business

Profitability

SG&A directly affects your operating profit. Two companies with identical revenue and gross margins can have very different bottom lines based on how well they control SG&A. A 5-percentage-point reduction in SG&A ratio can mean the difference between a slim profit and a healthy one.

Investor and Lender Confidence

Lenders and investors scrutinize SG&A trends closely. A rising SG&A ratio can signal poor cost discipline, while a declining ratio suggests the business is scaling efficiently. For startups seeking funding, demonstrating a clear path to SG&A efficiency is often critical.

Competitive Advantage

Companies that maintain lean SG&A have more room to invest in growth, weather downturns, or compete on price. When revenue dips, businesses with high fixed SG&A costs are the first to feel the squeeze.

Tax Deductions

Most SG&A expenses are tax-deductible in the year they're incurred, as long as they qualify as "ordinary and necessary" for your business. Properly categorizing and documenting SG&A helps maximize deductions. Note that capital expenditures (like purchasing equipment) must be depreciated over time rather than deducted immediately.

How to Reduce SG&A Without Hurting Growth

Cutting SG&A isn't about slashing costs indiscriminately. The goal is to eliminate waste while preserving the spending that drives revenue and supports operations.

1. Conduct a Line-by-Line Expense Audit

Review every SG&A expense and ask three questions:

• Does this expense directly support revenue generation or essential operations?
• Do we know the ROI on this expense?
• Could we achieve the same result for less?

Many businesses discover they're paying for software licenses nobody uses, services that overlap, or contracts that haven't been renegotiated in years.

2. Automate Repetitive Tasks

Manual processes for invoicing, payroll, data entry, and expense reporting consume staff time and introduce errors. Automating these tasks can reduce administrative headcount needs while improving accuracy. Even small businesses can see significant savings from automating routine bookkeeping and financial workflows.

3. Renegotiate Contracts and Leases

Vendor contracts, insurance policies, and office leases are rarely set at the best possible terms. Approach renewals as negotiations:

• Request volume discounts from suppliers
• Shop competing quotes before renewing insurance
• Negotiate flexible lease terms, especially if remote work has reduced your space needs

4. Embrace Flexible Work Models

Office rent is often one of the largest SG&A line items. A hybrid or remote work model can dramatically reduce rent, utilities, and office supply costs. Even downsizing to a smaller space can free up thousands per month.

5. Outsource Non-Core Functions

Hiring full-time employees for every function isn't always the most cost-effective approach. Functions like bookkeeping, IT support, HR administration, and legal review can often be outsourced at a fraction of the cost of full-time hires—with the added benefit of accessing specialized expertise.

6. Review Subscriptions Quarterly

SaaS sprawl is a growing problem. Conduct quarterly audits of all software subscriptions and cancel anything that's underused. Consolidate tools where possible—a single platform that handles multiple functions often costs less than several point solutions.

A Word of Caution

Be careful about cutting selling expenses too aggressively. Reducing your sales team or advertising budget might boost short-term profitability, but it can erode revenue over time. The best SG&A reductions target waste and inefficiency, not the activities that bring in customers.

Fixed vs. Variable SG&A

Understanding which SG&A costs are fixed and which are variable helps with budgeting and forecasting.

Fixed SG&A stays roughly the same regardless of sales volume:

• Office rent
• Executive salaries
• Insurance premiums
• Software subscriptions

Variable SG&A fluctuates with business activity:

• Sales commissions
• Shipping costs
• Advertising spend (when tied to campaigns)
• Transaction fees

A high proportion of fixed SG&A means less flexibility during downturns but more predictable costs. Shifting some fixed costs to variable (for example, using commission-based compensation instead of high base salaries) can provide more resilience.

How to Track and Report SG&A

Accurate SG&A tracking starts with a well-organized chart of accounts. Here are best practices:

1. Separate selling, general, and administrative categories in your accounting system rather than using a single "SG&A" bucket
2. Categorize expenses consistently month over month so trends are meaningful
3. Compare actuals to budget monthly to catch spending overruns early
4. Track the SG&A ratio quarterly and compare it to industry benchmarks
5. Analyze trends over time rather than fixating on a single period—one high quarter may reflect seasonal advertising spend, not a structural problem

Keep Your Overhead Under Control

Understanding and managing SG&A expenses is one of the most impactful things you can do for your bottom line. By knowing what goes into your SG&A, benchmarking it against your industry, and systematically eliminating waste, you position your business to grow profitably.

Clear, well-organized financial records make SG&A analysis far easier. Beancount.io provides plain-text accounting that gives you full transparency into every expense category—no black boxes, no vendor lock-in. Your data stays version-controlled and ready for analysis, whether you're reviewing it yourself or working with a CPA. Get started for free and take control of your financial data.