What is SG&A Margin? Formula + Calculator

what is a good sg&a ratio

Changes to your SG&A expenses should always tie back to specific business objectives. Since SG&A expenses are the cost of doing business, plan your budget accordingly to continue to meet your business goals. This list isn’t complete, but it gives you an idea of what falls under SG&A expenses. Generally, if the expense isn’t related to COGS, interest, or income tax, it’s probably an SG&A expense. SG&A Benchmarks provides SG&A spending information for 407 publicly traded companies within eight industries in the transportation, communications, and utilities sector.

Each line would absorb an equal amount of the costs on the assumption that these services were equally available to all divisions at any time. Confronted with intensifying foreign and domestic competition, the senior management of an electronics company decided to review its manufacturing and nonmanufacturing costs. As part of that review, it looked at how the company’s accountants were calculating SG&A expenses for each of the corporation’s major product lines. To achieve better control over nonmanufacturing costs, manufacturing executives are developing more precise measures of their SG&A expenses. Many manufacturing companies, however, continue to make the mistake of relying on “one size fits all” methods of allocating SG&A costs.

what is a good sg&a ratio

Especially as your company grows, tracking expenses can be a time intensive process and prone to error if done manually. Even small businesses and startups can benefit from accounting software that can unify your financial data, including expenses, sales and even payroll. Selling, General & Administrative (SG&A) expenses are the costs a company incurs to promote, sell and deliver its products and services, as well as to manage day-to-day operations. Understanding and controlling SG&A can help companies manage their overhead, reduce costs and sustain profitability.

SG&A, or Selling, General and Administrative Expenses

Depreciation is typically reported as a separate line item within operating expenses, too. Both operating expenses and SG&A are key components of tracking net income, or what’s left over after subtracting expenses and taxes from revenue. As the controller explained to the CEO, the erratic profit performance of the comb line resulted from the magnified impact of the sharp change in sunglasses sales on the comb line’s percentage of revenue. More sales effort was required to sell sunglasses; advertising, promotion, and packaging costs were also much higher for sunglasses. The comb line’s low share of total revenues led to erratic fluctuations in its profit performance.

Typically you’ll calculate SG&A when putting together an income statement, which you can do easily with the help of our handy income statement template. Your COGS are the direct costs related to making, packaging and shipping the soaps—raw materials, the wages you pay your soap maker Cheryl, the fancy packaging paper you use, shipping costs, etc. Order by SG&A to Sales ratio showcases the ‘leaner and meaner’ firms in each industry. Customer billing costs would be allocated according to the number of invoices or invoice lines for each division.

What Is the Difference Between COGS and SG&A?

Because demand for sunglasses is seasonal, he had excess capacity on his plastic-molding machines. He would incur no additional selling costs because his salespeople could easily sell the comb line when calling on their sunglasses accounts. The president of a sewing notions company I know of had been puzzled by the profit performance of his woolen goods line. Although his woolen goods sales had been steadily increasing, the line showed a loss.

  • For our revenue assumptions, we’ll assume that the growth rate will decline to 4.0% by the end of 2027, while the gross margin remains fixed at 60% throughout the entirety of the forecast.
  • The SG&A margin ratio can be informative in terms of understanding a company’s cost structure.
  • When a company’s raw materials costs vary greatly among its product lines, severe distortions in SG&A costs can result if accountants use conventional percent-of-sales or cost-of-sales methods of allocation.
  • Customer billing costs would be allocated according to the number of invoices or invoice lines for each division.

SG&A Benchmarks provides SG&A spending information for 1162 publicly traded companies within eleven industries in the services sector. The series of PDF reports SG&A Benchmarks is the source for the above data. They serve as a convenient source of information for professional managers seeking benchmark information on the Selling, General & Administrative spending practices of major public corporations within a specific industry sector. Internal auditing expenses would be charged to each product line by multiplying the number of auditor days spent in each division by the auditor’s per diem fee.

What Are Some SG&A Typical Expenses?

Even though Excel is more familiar for most people, this procedure is way simpler when using accounting software which automatically categorizes expenses based on the initial setup. The following pictures reflect how payment processing fees are changing over time. Unlike a company’s COGS, the incurred SG&A expense is not directly tied to its revenue generation. Instead, SG&A represents the indirect costs that stem from day-to-day operations, such as purchasing office supplies, overhead costs, and rent.

Of this, $6.797 billion was research and development, while $6.012 billion was selling, general, and administrative. Although the company does state that increases to SG&A from prior periods relates to headcount, advertising, and professional services, there is little more transparency beyond these notes. Net revenue is always reported at the top, then COGS is deducted to arrive at the gross margin. The most important thing in SG&A calculation is to define which costs are to be added into the category.

  • This org chart template outlines the structure of a typical Finance Department, including Accounts Payable, Payroll, Accounting & Reporting and more.
  • It tells you what percent of every dollar your company earned gets sucked up by SG&A costs.
  • Selling, general, and administrative (SG&A) expenses are often called overhead costs, or the indirect cost of doing business.

Freight, packing, and warehousing costs, for example, were much lower for the OEM market than for the other two markets. The reason, the controller learned, was that OEMs typically order in bulk. Packing and freight costs for the replacement market were much higher because orders placed by hardware stores and other retailers are usually smaller and more varied. The cost of selling to the OEM market was also lower because the company’s salespeople didn’t have to call on OEM accounts as frequently as on accounts in the other two markets. What top management learned was that the OEM market was more profitable than had been assumed. The controller requested managers in the different departments to calculate advertising, warehousing, selling, and other nonmanufacturing costs for the three market segments.

SG&A Expense as a Percentage of Revenue

This indicator shows what percentage of a dollar earned is spent on SG&A expenses. In financial modeling SG&A and COGS represent different categories of expenses. NetSuite has packaged the experience gained from tens of thousands of worldwide deployments over two decades into a set of leading practices that pave a clear path to success and are proven to deliver rapid business value. With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. For each forecast period, we’ll multiply our SG&A margin assumption by the projected revenue in the same period, which results in our projected SG&A expense amounts. For purposes of forecasting, the most common method is to project SG&A expense as a percentage of revenue.

what is a good sg&a ratio

Are you being as efficient with your electricity and heating costs as you could be? Look through each of your business’ monthly expenses and make sure you aren’t overpaying for them. For example, manufacturers range anywhere from 10% to 25% of sales, while in health care it isn’t unusual for SG&A costs to approach 50% of sales. It’s a broad “catch-all” category that basically includes anything you spend money on that isn’t a production cost, also known as cost of goods sold (COGS). Bookkeeping software like Lendio’s software can help you to track and categorize your expenses properly. Understanding where you’re spending money is the first step in making strategic decisions (e.g., should you spend more on social media advertising next month?).

A business has many expenses that are not directly related to making or selling a product. Departments like human resources and information technology support the business but do not take a direct role in product creation. There are also a few specific accounts that may warrant specific accounting treatment that exclude them from SG&A.

While companies typically seek to streamline operations and employee positions to reduce SG&A expenses, great care should be taken when doing so as too many layoffs can have a negative impact on company morale. When companies rely on undifferentiated, “one size fits all” cost accounting methods without regard to important differences among product lines and markets, measures of profitability can become distorted. Since SG& A costs can vary widely among a company’s products or markets, more precise methods for allocating SG&A will give management a more accurate reading of each product line’s profit. Indirect selling expenses occur throughout the manufacturing process and after the product is finished.

If we take an example of a company with $3 million in SG&A and $15 million in total revenue, we would get SG&A ratio of 20%, which means that every dollar of revenue gives $0.20 on SG&A expenses. But sometimes this line of division becomes so thin that it’s hard to decide. What do we do with the salary of managers of a company or quality supervisors? GAAP doesn’t say “yes” to one and “no” to the other unfortunately and companies use GAAP guidelines, a logical approach to apply them according to their particular situations.

This org chart template outlines the structure of a typical Finance Department, including Accounts Payable, Payroll, Accounting & Reporting and more. Click on the sector of interest below for more details, including a sample page, table of contents, and ordering information. Cutting SG&A costs should be systematic and based on opportunity assessment. After a merger, for example, businesses often focus on reducing SG&A by consolidating duplicative functions and reducing headcount. Some firms also manage SG&A by outsourcing functions or relying more on temporary workers.

General and Administrative (G&A) expenses are the day-to-day costs a business must pay to operate, whether or not it manufactures products or generates revenue. Typical G&A expenses include rent, utilities, insurance payments, and wages and salaries for administrative and management staff other than salespeople. Other costs may include ongoing information technology infrastructure costs, accounting and legal costs, human resources services and the purchase or rental of equipment that’s not used for manufacturing or sales. SG&A Expense as a Percentage of Revenue measures the SG&A expense that is incurred relative to the dollar amount of revenue the company generated over the same period of time.

Selling, general & administrative costs (SG&A)—also sometimes referred to as operating expenses—are any costs your business pays that aren’t directly tied to making or delivering your product or service. The percent-of-sales method for allocating SG&A costs can be especially troublesome when sales of one product line constitute a very small percentage of total sales. The CEO of a sunglasses manufacturing company decided to add a line of hair combs.