Selling, general & administrative

Selling, general and administrative expenses (SG&A) are the costs of running the business that are not directly tied to producing a product or service. Everything below the gross profit line that keeps the lights on and drives sales.

The selling portion covers the cost of getting the product to the customer: salaries of the sales force, commissions, advertising, marketing, and distribution. The general and administrative portion covers the cost of running the company itself: executive salaries, office rent, legal and accounting fees, HR, and IT infrastructure.

Unlike cost of goods sold, SG&A does not fluctuate directly with each unit sold. It is largely fixed in the short term, which means a company with high SG&A relative to gross profit has a fragile cost structure when revenue dips.

Revenue minus cost of goods sold minus SG&A gives you operating profit, making SG&A the second major test of financial discipline after gross profit. Analysts watch SG&A as a percentage of revenue over time. If it rises faster than revenue, the company is spending more to generate each dollar of sales, compressing operating margins and signalling either a scaling problem or a loss of commercial efficiency.