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What is Selling, General & Administrative Expense (SG&A)?

When you start a business in Canada, there's a lot to learn, especially about money. One important thing to understand is SG&A. These are costs that every business has, but they're not the same as the costs of making your product or service. Think of SG&A like the behind-the-scenes costs of running your business.

Why should you care about SG&A?

Because knowing these costs can help you plan better, make smarter business choices, and earn more money. This guide is here to help you use these costs to make your business, big or small, more successful.

What is SG&A?

SG&A stands for selling, general, and administrative expenses. These are the costs not directly tied to the production of goods or services but still essential for running a business.

In the context of Canadian business, SG&A encompasses a wide range of expenses, from employee salaries to marketing and office supplies. Understanding these costs is vital for budgeting and strategic planning.

Components of SG&A expenses

SG&A is an umbrella term that includes several types of expenses. How do you know to which letter of SG&A your expenses should be sorted? Here's a closer look at each of the components.

Selling expenses: These are costs associated with the sales process. In Canada, this might include advertising, sales staff salaries, and travel expenses for client meetings. Any expense incurred as a result of selling and marketing a product or service fits under selling expenses.

General expenses: These are day-to-day operational costs, such as rent for office space, utilities, and office supplies.

Administrative expenses: These are costs related to the general management of the business, including salaries of executive staff, accounting services, and legal fees.

Calculating SG&A for your business

Calculating SG&A expenses starts with understanding the SG&A meaning. It's about categorizing the indirect costs of running your business into selling, general, and administrative expenses. This clarity not only aids in accurate financial reporting, but also in strategic decision-making.

Remember, direct costs are different from SG&A expenses in how they relate to your business operations. Direct costs are tied directly to the production of goods or services. For instance, the cost of raw materials used in manufacturing a product, or the labor costs directly involved in service provision, are direct costs and don't belong in the S,G, or A categories.

In contrast, SG&A expenses are not directly tied to the production process. They are part of the overall operations and management of your business. Understanding this distinction will help you accurately categorize your expenses and gain a clear picture of your business's financial health.

This insight leads to effective budgeting, forecasting, and strategic decision-making, ensuring you maintain a balanced approach to managing both direct and indirect costs.

Managing SG&A effectively

Optimizing SG&A expenses can have a big impact your business's profitability. Imagine a small Canadian retail company, Maple Boutique, which sells eco-friendly clothing. In its early stages, Maple Boutique has various SG&A expenses: the salary of its sales staff, rent for its store in a trendy neighborhood, marketing costs, and administrative expenses like accounting and legal fees.

Initially, the company doesn't closely monitor these costs, leading to a situation where its SG&A expenses amount to 40% of its total revenue. This high percentage eats significantly into the company's profitability.

Maple Boutique can take the following steps to manage SG&A expenses more effectively:

  1. Review and sort: Maple Boutique starts by conducting a detailed review of all its SG&A expenses, making sure they are in the proper category.
  2. Identify areas for reduction: The company realizes that its rental costs are high. To reduce this expense, they move to a less expensive location that still aligns with their brand image.
  3. Reduce spending: They also notice that a large portion of their marketing budget isn’t achieving the desired results. By shifting their strategy to more cost-effective digital marketing and leveraging social media, they reduce marketing costs while maintaining reach.
  4. Streamline administrative tasks: This reduces the time and cost associated with these administrative tasks.

After putting these changes in place, Maple Boutique's SG&A expenses drop from 40% to 28% of total revenue. This reduction increases their profit margin, something that wouldn't have happened if they hadn't been monitoring SG&A expenses separate from their direct expenses. 

SG&A in financial statements

SG&A expenses play a critical role in financial statements, impacting net income. Segregating SG&A expenses from direct costs leads to a more accurate picture of what is happening in the company financially.

For Canadian business owners, understanding how these expenses affect the bottom line is important for financial decision-making and reporting.

Grasping SG&A is a key part of achieving financial success in Canada. QuickBooks offers intuitive solutions to help you track and optimize your SG&A expenses effortlessly. Embrace financial clarity and business growth with QuickBooks today.


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