Are you trying to grow your business revenue? Have you noticed that your break-even point is harder to reach than intended? Are you interested in a better understanding of the costs associated with running your business by reviewing financial statements?
Calculating your SG&A expenses (also known as selling, general, and administrative expenses) can help.
What Are SG&A Expenses?
SG&A expenses are the non-production expenses associated with running a company. These expenses include all the elements necessary to keep the business running, but not necessarily involved in the production process.
Costs might include obvious expenses like rent, managerial salaries, and marketing as well as less-obvious ones like travel, meals, and bonuses.
The Difference Between SG&A and Operating Expenses
Operating expenses include all the expenses that go into keeping a company running: expenses that need to happen even if the company makes no sales or has no products to offer.
SG&A includes costs related to selling, general, and administrative expenses. These fall into a specific category of operating expenses, and may not include all those involved in your operating budget or cost of goods sold.
Breaking Down SG&A Expenses
In order to understand these expenses, start by breaking them down.
Selling expenses include both direct and indirect expenses associated with selling a product. Direct selling expenses are the factors necessary to complete a sale: shipping costs for online stores or a salesperson’s salary, for example.
Indirect expenses include all the expenses necessary to help bring in a sale, but that do not necessarily contribute to a sale directly: advertising or telephone bills, perhaps.
General and Administrative Expenses
General and administrative expenses, or administrative costs, are the costs your company pays in order to open the doors each day. This might include:
The company cannot function without these services and thus cannot operate without paying out their associated costs.
How to Calculate SG&A Expenses
Ready to start calculating your SG&A expenses? Follow these steps to help you better understand your cash flow on those factors as well as your net income statement.
1. Determine How Your Business Spends Money
Take a look at where your business is spending its money and how much you spend on those categories. Many SG&A expenses, like your rent and utilities, are fixed items in your budget. You should also consider:
2. Determine How Much You’re Spending
Some SG&A expenses — utilities, insurance, and rent — are fairly fixed. You may also have relatively consistent salaries for sales, marketing, and administrative employees, making payroll fairly stable. Other expenses incurred may prove more variable on a balance sheet. You may base your marketing budget on your current needs, for example.
While you may not be able to adapt the cost of your office supplies much, you can put off purchasing new equipment and technology for a time, especially if you need to cut costs during a difficult period for your business’s income statement.
3. Calculate Your SG&A Sales Ratio
In order to determine how well you’re managing your budget and your overall expenses, you may want to take a look at your SG&A sales ratio. You can find your sales ratio by dividing your total SG&A costs incurred by your total sales.
Imagine, for example, that your company has $5,000 in SG&A costs, and a total of $20,000 in sales. Your SG&A ratio would be 1:4. According to that ratio, 1/4 of the money you make in sales goes back into selling, general, and administrative expenses.
Why It’s Important to Get SG&A Expense Calculations Right
Correctly calculating your selling, general, and administrative expenses can offer several key advantages to your business and to you, as a business owner.
It Can Help You Manage Your Business Taxes
You want to make sure you’re including the right factors in your business expenses to ensure you can file accurate tax records. Claiming your expenses are too low could prevent you from receiving much-needed tax breaks, but claiming too much could mean you find yourself ultimately owing more than you expected.
It Can Help You Make Vital Business Decisions
An accurate look at your SG&A expenses can help you make many vital decisions about your business. For example:
For many businesses, SG&A expenses are one of the first places you can look to start to trim down your budget and develop a more effective plan when sales drop. If your selling, general, and administrative expenses exceed a reasonable ratio, you’ll know it’s time to cut back — and an accurate look at those expenses can make it easier to see what cuts you need to make.
It Can Help You Determine Your Business’s Overall Profitability
How much profit is your business actually making? Looking at your company’s income statement and comparing it to your overall sales can give you a better idea of exactly how well your business is performing at any given time.
Silver Tax Group Can Help With Your SG&A Expense Calculations
Selling, General, and Administrative calculations can quickly turn complicated, especially if you have a complex company dynamic or need to look through your records to get a full idea of your expenses. The expert tax consultants at Silver Tax Group can help!
Contact us today to discuss your SG&A expenses and operating costs questions or to speak with an expert about other tax-related questions you might have.
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