What is Operating and Administrative Expenses?
1780 reads · Last updated: October 11, 2025
Operating and Administrative Expenses refer to expenses incurred by a company during its operations and management process, including business-related expenses and corporate management expenses. Business expenses typically include marketing expenses, production expenses, research and development expenses, etc., while management expenses typically include administrative expenses, salaries of management personnel, office expenses, etc. These expenses are necessary expenditures for the normal operation and management of a company.
Core Description
- SG&A (Selling, General, and Administrative expenses) covers essential business and management costs that are not linked to production but are necessary for organizational development.
- Accurate tracking and optimization of these expenses can significantly affect a company's profitability, operational efficiency, and strategic flexibility.
- Understanding, benchmarking, and managing SG&A is important for investors, managers, and analysts, requiring careful data analysis and continuous improvement.
Definition and Background
SG&A expenses, also known as business and management expenses, are the operating costs companies incur outside of the direct production process. These include expenses for sales staff, executive salaries, advertising, office rent, legal and accounting fees, travel, utilities, insurance, and support services. Unlike the Cost of Goods Sold (COGS), which relates to making products or delivering services, SG&A comprises the administrative, promotional, and management framework needed for the business to operate and expand.
Through the 20th century, as businesses increased in complexity, clear separation of these expenses became standard. With postwar economic growth, global accounting standards such as GAAP and IFRS required distinct SG&A reporting, helping firms to benchmark and investors to evaluate operational efficiency. SG&A structures and ratios differ significantly by industry, reflecting each sector's unique operational focus.
Modern SG&A management involves more than receipt tracking; it requires strategic resource allocation while responding to digital transformation, regulatory pressures, and scalability needs. Regardless of industry, understanding and controlling SG&A is foundational for sustainable performance.
Calculation Methods and Applications
SG&A is calculated by totaling all selling, general, and administrative expenses in a given period.
SG&A Formula:
SG&A = Selling Expenses + General Expenses + Administrative Expenses
- Selling Expenses: Advertising, promotional campaigns, sales commissions, marketing travel, and client entertainment.
- General Expenses: Office rent, utilities, insurance premiums, and shared company resources.
- Administrative Expenses: Executive compensation, accounting and audit services, IT support, and office supplies.
Example Calculation:
If a midsize international distributor reports selling expenses of USD 250,000, general expenses of USD 90,000, and administrative expenses of USD 60,000 in a quarter, the total SG&A is USD 250,000 + USD 90,000 + USD 60,000 = USD 400,000.
Application:
SG&A data is obtained from income statements and is reviewed by management for:
- Allocating operating budgets and analyzing variances
- Benchmarking cost efficiency versus industry peers
- Forecasting and scenario planning for mergers, expansion, or downturns
- Identifying opportunities for automation, outsourcing, or restructuring
Modern ERP systems enable real-time SG&A monitoring, supporting proactive management.
Comparison, Advantages, and Common Misconceptions
SG&A is often compared with Operating Expenses, a broader measure that may also include R&D and depreciation, while SG&A specifically excludes COGS.
Advantages:
- Reveals organizational inefficiencies and supports streamlining.
- Promotes budget discipline and regulatory adherence.
- Increases investor transparency and allows financial benchmarking.
Disadvantages:
- Excessively high SG&A can indicate inefficiency, especially if growth is not aligned.
- Aggressive cost cuts risk undermining essential business infrastructure and talent retention.
- Complex allocations in multi-entity organizations can make SG&A tracking and reporting challenging.
Common Misconceptions:
- SG&A is entirely fixed. In reality, it contains both fixed (office rent) and variable (sales commissions) components.
- Cutting all SG&A during downturns is always beneficial. Unselective cuts can impede future growth or compliance.
- SG&A is limited to office overhead. It also includes travel, legal, IT services, marketing, and in some cases, select R&D costs, depending on firm policy.
- All industries have similar SG&A ratios. In practice, sector and business model differences produce wide variations.
Table: Comparison of SG&A and Related Terms
| Term | SG&A Inclusion | Nature | Statement Location | Example |
|---|---|---|---|---|
| SG&A Expenses | Fully | Operating | Income Statement | Salaries, rent, advertising |
| COGS | Never | Direct | Income Statement | Materials, production labor |
| Non-Operating | Never | Non-operating | Income Statement | Interest, investment losses |
| CAPEX | Never | Investing | Balance Sheet | Equipment purchases |
Practical Guide
Understanding and Recording SG&A
SG&A covers management salaries, HR, marketing and promotional expenses, admin wages, technology subscriptions, utilities, insurance, and travel. An accurate classification is essential—mixing COGS or capital expenses into SG&A can distort financial analysis.
Tracking and Benchmarking
Accounting software should be used to tag and monitor SG&A at detailed levels. Monthly reviews can uncover unexpected variances, such as sudden increases in advertising or consulting fees, and allow quick corrective action. Benchmark ratios by comparing SG&A to revenue, using company history or industry data. For example, a technology company in rapid expansion might have a 30 percent SG&A-to-sales ratio, while mature manufacturers may target 10–15 percent.
Budgeting and Forecasting
SG&A projections should reflect the business cycle, planned strategic initiatives (such as market launches), and inflation. Flexible budgets are recommended to adapt to changes, such as transitions to remote work or new regulations.
Case Study: Tech Company SG&A Optimization (Virtual Example)
A US-based SaaS provider noticed SG&A as a percentage of revenue increasing every year. After review, management found that marketing expenses for customer acquisition had outpaced sales growth. The company used ERP tools to monitor all SG&A categories in real time and introduced new KPIs. Redundant administrative activities were automated, and software contract terms were renegotiated, reducing SG&A by 8 percent the following year while maintaining sales momentum.
Avoiding Pitfalls
Common pitfalls include:
- Misclassifying production or capital costs as SG&A
- Overlooking the variable nature of certain SG&A items (for example, sales commissions)
- Unselectively eliminating marketing and support during slowdowns
Leveraging Data
Combine SG&A analytics with business intelligence dashboards to identify trends and direct resource allocation effectively.
Resources for Learning and Improvement
Textbooks:
- "Financial Statement Analysis" by Palepu & Healy
- "Intermediate Accounting" by Kieso, Weygandt & Warfield
Standards and Guidelines:
- IFRS Foundation: https://www.ifrs.org
- FASB: https://www.fasb.org
Industry Reports and Data Tools:
- McKinsey & Company: https://www.mckinsey.com/insights
- Deloitte benchmarking insights
- Bloomberg, Morningstar: Peer SG&A analytics
Courses and Webinars:
- Coursera, edX, LinkedIn Learning (Financial reporting, cost management)
- AICPA webinars on SG&A strategies
Case Studies and Research:
- Harvard Business Review: https://hbr.org
- Journal of Accounting Research (SG&A performance case studies)
FAQs
Q1: What are SG&A expenses and why are they important?
SG&A expenses include business and management costs that are not related to production. Monitoring these expenses is important for evaluating operational efficiency and overall financial health.
Q2: How do SG&A expenses differ from COGS?
COGS represents direct production costs, while SG&A covers overhead, administrative, and sales-related expenses.
Q3: What costs are included in SG&A?
Examples include salaries, office rent, marketing, travel, utilities, legal, and administrative fees.
Q4: Where do SG&A expenses appear on financial statements?
SG&A is listed on the income statement below gross profit and before operating income.
Q5: How do companies reduce high SG&A costs?
Key methods include process automation, contract renegotiation, centralization, and detailed audits.
Q6: Are SG&A ratios consistent across industries?
No. Each sector may have different typical SG&A ratios based on structural factors.
Q7: How can investors use SG&A data?
By analyzing trends, investors can assess management efficiency and make comparisons with peers.
Q8: Can you provide an example?
A listed SaaS company improved profitability by adopting digital tools to streamline SG&A and remove redundant processes.
Conclusion
Effective management of business and management expenses (SG&A) is essential for any company attempting to balance cost control with ongoing development. Accurate SG&A measurement helps uncover inefficiencies, supports clear financial reporting, and provides actionable insights for both managers and investors. While optimizing SG&A can benefit margins and build resilience, unselective cost reductions may weaken core capabilities. Sustainable SG&A management aligns expenses with long-term strategy, industry benchmarks, and ongoing improvement. By incorporating technology, carefully tracking expenses, and following industry best practices, organizations can better respond to market changes, use resources effectively, and enhance their competitive position.
