SG&A expenses are selling, general and administrative expenses: the costs of running a company that are not directly tied to making its product. They include sales commissions, advertising, head office salaries, rent, legal and audit fees, and IT. SG&A as a share of revenue shows how lean a company is. A business with Rs 1,200 crore of revenue and Rs 150 crore of SG&A spends 12.5% of sales on overheads.
Every company has two kinds of operating cost. The first is the direct cost of producing what it sells, such as raw materials and factory labour. The second is everything else needed to keep the business running and to get the product to customers. That second group is SG&A. It is the overhead, and how a company manages it often separates the profitable ones from the rest.
What goes into SG&A
Selling expenses are the costs of winning and serving customers: sales team salaries and commissions, advertising and marketing, dealer incentives, distribution and freight to customers, and showroom or branch costs. General and administrative expenses are the costs of the company as an organisation: senior management and head office salaries, rent and utilities for offices, insurance, legal and audit fees, IT systems, and the finance and HR functions. Research and development is usually shown separately, as is depreciation.
Indian companies do not report a single SG&A line. Under Schedule III the costs are spread across employee benefit expense and other expenses, with the detail in the notes. Building an SG&A figure means pulling the relevant items out of those notes, which is why analysts' numbers for the same company can differ a little.
The ratio that matters
SG&A divided by revenue is the number to track. A company with revenue of Rs 1,200 crore and SG&A of Rs 150 crore has an SG&A ratio of 12.5%. On its own that means nothing. Against the company's own history and its peers it means a great deal. A ratio that falls as revenue grows shows the company is scaling: overheads are being spread over more sales. A ratio that rises means costs are growing faster than the business, which eats operating margin.
What is normal
The range is wide. Consumer goods companies spend heavily on advertising and distribution and can run SG&A at 25% to 35% of revenue. Pharmaceutical companies with large sales forces sit around 25% to 30%. Software companies cluster at 15% to 25%. Commodity producers such as steel, cement and oil run under 10%, since their customers are few and their product sells itself. A retailer's store costs are mostly SG&A and the ratio can exceed 30%. Comparing a soap maker with a steel maker on this ratio is pointless. Comparing two soap makers is revealing.
Why investors watch it
SG&A is where management discipline shows. Raw material costs are set by markets. Overheads are set by choices. A sudden rise in SG&A can mean a new product launch, an expansion into new regions or simple bloat, and the annual report usually says which. A sharp cut can mean efficiency or it can mean the company has stopped advertising to flatter this year's profit at the cost of next year's sales. The trend over five years, alongside the other expense lines, is more telling than any single year.
SG&A also drives operating leverage. Most of it is fixed in the short run. When revenue rises 10%, SG&A might rise 3%, so operating profit rises much faster than sales. When revenue falls, the reverse happens. Companies with high fixed SG&A see the biggest swings in profit through a cycle, which matters for anyone valuing them on peer multiples or on earnings.
FAQs
Is SG&A the same as operating expenses?
SG&A is part of operating expenses. Operating expenses also include cost of goods sold, research and development and depreciation.
Is salary an SG&A expense?
Office, sales and management salaries are. Factory worker wages go into cost of goods sold.
Where is SG&A on an Indian income statement?
Spread between employee benefit expense and other expenses, with the breakdown in the notes to the accounts.
What is a good SG&A ratio?
Lower than peers, and falling as revenue grows. The absolute level depends entirely on the industry.