Some of your clients’ costs are specifically related to making their products. They also have certain expenses such as rent and utilities that are necessary but not directly tied to what they make. These additional expenses are called selling, general, and administrative (SG&A) costs and are reported on the profit and loss statement. These types of costs are generally unavoidable and related to supporting the development and sale of your clients’ goods.
As your client makes different product lines, it wants to know which products are doing well and which are struggling. The root of this answer is to calculate the gross profit per product. To figure this out, it’s important to distinguish which of the costs are SG&A. Gross profit is revenue minus manufacturing costs such as materials, labour, and some allocated overhead. If you accidentally include SG&A costs in the calculation of gross profit, some of the product lines will seem to have done better or worse than they actually did.
Selling costs includes the salaries and commission of salespeople, advertising expenses, and shipping expenses. Administrative expenses are typically related to salaries of executives and general support staff. General operating expenses are other costs your client has to incur to run its business that don’t fit into either of the other two categories.
Another important reason to identify SG&A costs is for general business strategy. If your client’s small business isn’t doing as well as it hoped but it doesn’t want to change its manufacturing process, the first place to turn is improving SG&A spending. Also, if your client is thinking of acquiring another small business or merging, a lot of these SG&A costs can be eliminated. Many administrative positions become redundant, and operations can be merged and streamlined.
As your client’s business takes off and it looks for your help for ways to continually get even better, take the time to look into SG&A costs. Although selling, general, and administrative costs seem less important to direct manufacturing costs, they can still add up and leave your client with less profits.