Selling, general and administrative expenses (SG&A) include all of the costs of operating the business other than the costs of readying the product for sale.
SG&A is deducted from the Adjusted Gross Profit, which is the difference between the selling price net or discounts and the cost of readying the product for sale.
If competition forces the selling price down, then successively the costs of manufacture must be reduced and a balancing act unfolds between quality and price. Notwithstanding, a company must operate on a certain gross profit percentage.
Companies often overlook SG&A expenses or allow then to remain in a secondary or possibly tertiary position because selling expenses are a necessity in terms of operating a business.
SG&A includes rent, insurance, electric, office supplies, telephone, salaries and benefits, interest, travel, entertainment, advertising, legal and accounting, licenses and permits, dues and subscriptions, maintenance and repairs, postage, insurance and credit card services.
However, a failure to control operating costs or overhead directly affects the bottom line. It is easier to proceed with an austerity program cutting the Selling, General and Administrative costs to a bare-bones level by establishing greater productivity levels or expectation levels of the supporting staff.
It is true that the reduction of SG&A might reduce sales. However, as F.L. Mintz of Arthur Andersen LLP, stated in a magazine article, "reduction in sales is generally more than offset by a far greater percentage reduction in SG&A and accordingly an increase in the bottom line." The key is to be efficient.
Look for small improvements wherever they can be observed. If positions don't warrant full-time workers, hire part-timers or temporary employees. Also consider outsourcing wherever possible.
Initiate savings on benefits enjoyed by full-time employee to get benefit costs to go down. Also, the amount of down-time is reduced. Generally, the savings from less down-time is far greater than the premium paid for the part-time worker.
Modern technology allows employees to work at home with the aid of modems, fax machines and cellular phones. This cuts the need for office space and often allows for travel time to be converted to productive time.
A careful look at SG&A will allow an executive to pare down managerial salaries, promotional expenses, legal fees, office supplies and many other costs and allows the company to be more competitive.
Unfortunately, it is difficult to compare SG&A between companies because of the inconsistencies in categories and the differences in accounting classifications.
It would not be cost-effective to establish benchmarks for comparisons. The key is for each company to carefully review its Selling General and Administrative expenses and maintain an ongoing review to further improve the bottom line.
In summary, there is not a hard and fast measurement of SG&A, but a good executive maintains a watchful eye on his overhead.
The good manager not only has a tight control over his overhead, but also makes it a policy to reduce overhead whenever possible. Reducing overhead allows a company to be more competitive, rarely causes a ignificant drop in sales and usually increases the bottom line.
Although there is no sure measure of results, tighter control over SG&A will prove to increase efficiency, productivity, and profits.