SG&A Expenses: What's Included, What's Not and the SG&A Ratio

SG&A (selling, general and administrative) expense is the total of all costs of selling your products and running the business that are not part of making or buying what you sell. It sits on the income statement below gross profit and above operating profit, and it covers things like sales salaries, advertising, office rent, finance staff, legal fees and software. The SG&A ratio, SG&A ÷ revenue, tells you how much of each unit of sales goes on overhead.

The two halves of SG&A

Selling expenses

Costs of finding customers, winning orders and getting goods to them:

• Salaries, commissions and bonuses of sales staff
• Advertising, digital marketing, trade shows and promotional material
• Sales travel and client entertainment
• Showroom or store costs, where they are not treated as cost of sales
• Outbound shipping and delivery to customers, under many companies' policies
• Card and payment processing fees on sales

General and administrative expenses

Costs of running the business as a whole, regardless of how much is sold:

• Executive, finance, HR and IT salaries
• Head-office rent, utilities and insurance
• Accounting, audit, legal and consulting fees
• Software subscriptions and office supplies
• Depreciation on office equipment and furniture
• Bank charges and general business licences

What does not belong in SG&A

• Cost of goods sold or cost of services. Materials, purchased inventory, direct production labour, factory overhead and usually inbound freight go above gross profit. The US SEC's Regulation S-X, for example, lists costs applicable to sales and revenues as a caption separate from selling, general and administrative expenses.
• Research and development. Many companies, especially in technology and pharmaceuticals, show R&D as its own operating line.
• Interest expense and income tax. These come after operating profit.
• Unusual items. Impairments, restructuring charges and gains or losses on selling assets are often presented separately so they do not distort the run-rate of overhead.

The grey areas are real. Outbound shipping, depreciation on a warehouse, and the salaries of staff who both make and sell can reasonably go either way. The rule is to choose a policy, disclose it if it is material, and apply it the same way every period, so that your ratios are comparable year to year.

Worked example: an online outdoor gear retailer

Ridgeback Outdoor Gear sells tents, packs and camping equipment through its own website. Last year's income statement:

• Revenue — $4,800,000
• Cost of goods sold (product cost plus inbound freight) — $2,640,000
• Gross profit — $2,160,000 (45%)

Its SG&A, split into the two halves:

• Online advertising and marketing — $432,000
• Sales and customer-service salaries and commissions — $210,000
• Outbound shipping to customers — $288,000
• Payment processing fees — $96,000
• Selling expenses — $1,026,000
• Management, finance and admin salaries — $360,000
• Office rent — $84,000
• Software and subscriptions — $60,000
• Insurance — $30,000
• Accounting and legal fees — $48,000
• Depreciation of office equipment — $18,000
• General and administrative expenses — $600,000
• Total SG&A — $1,626,000

Operating profit is $2,160,000 − $1,626,000 = $534,000, an operating margin of about 11.1%.

Calculating the ratios

• SG&A ratio: $1,626,000 ÷ $4,800,000 = 33.9%
• Selling expense ratio: $1,026,000 ÷ $4,800,000 = 21.4%
• G&A ratio: $600,000 ÷ $4,800,000 = 12.5%

For every dollar of sales, about 34 cents goes on selling and running the business. Ridgeback keeps 45 cents as gross profit, so roughly 11 cents is left as operating profit.

What happens as the business grows

This year Ridgeback expects revenue of $5,600,000. Advertising, shipping and payment fees rise roughly with sales, but the finance team, office and software barely change. Its forecast SG&A is $1,820,000, which gives an SG&A ratio of 32.5%. Revenue grows by about 16.7% while SG&A grows by about 11.9%, so operating margin widens. Fixed overhead spread over more sales is how scale shows up in the accounts, and the SG&A ratio is the simplest place to see it.

It works in reverse too. If sales fall, much of G&A does not fall with them, and the ratio jumps. That is why it pays to know which SG&A lines are fixed and which are variable.

One classification choice, two different stories

Suppose Ridgeback instead classified its $288,000 of outbound shipping in cost of goods sold. Gross margin would fall from 45% to 39%, the SG&A ratio would fall to 27.9%, and operating profit would not change at all. Anyone comparing Ridgeback's ratios with another retailer's needs to know which policy each uses.

How to read the SG&A ratio

• Compare with yourself first. A rising ratio over several periods, without a deliberate investment behind it, means overhead is growing faster than sales.
• Compare peers carefully. Healthy ratios vary enormously by industry. A software company with high gross margins can afford a much higher SG&A ratio than a grocery distributor with thin ones. Compare businesses with similar models and similar classification policies.
• Split selling from G&A. A high selling ratio may be a deliberate growth push; a high G&A ratio usually signals administrative overhead that has not scaled.
• Read it with gross margin. The question is never just whether SG&A is high, but whether gross profit covers it with enough left over.

New disclosure rules for larger companies

Two standards will make SG&A lines more transparent for listed companies. Under US GAAP, ASU 2024-03 requires public business entities, for annual periods beginning after 15 December 2026, to disaggregate certain expense captions in the notes, showing amounts such as employee compensation, depreciation and inventory purchases within them, and to disclose total selling expenses along with how the company defines them. Under IFRS, IFRS 18 replaces IAS 1 for annual periods beginning on or after 1 January 2027. Companies that present expenses by function, as SG&A is, must disclose by-nature amounts, such as depreciation and employee benefits, included in each function line.

Small private businesses are not directly affected, but the direction is clear: analysts and lenders increasingly want to see what sits inside SG&A, and a clean chart of accounts makes that easy to answer.

Common mistakes

• Putting direct costs in SG&A. It inflates gross margin and makes products look more profitable than they are.
• One giant general expenses account. You cannot manage what you cannot see; split SG&A into accounts someone will actually review.
• Changing classifications without restating. Moving shipping from SG&A to COGS mid-year breaks every trend line.
• Cutting SG&A blindly. Marketing that brings in profitable customers is not the same as unused software licences. Look at what each line produces before you cut it.
• Ignoring owner costs. In owner-managed businesses, the owner's pay and personal-use items can make SG&A look very different from what an outside manager would cost.

hellobooks< / a > -helps-you-track-and-manage-sga">How HelloBooks helps you track and manage SG&A

HelloBooks lets you build a chart of accounts with separate ranges for cost of sales, selling expenses and G&A, so your profit and loss report shows gross profit, the two halves of SG&A and operating profit without manual regrouping. Tracking by class, location or project shows SG&A by department or channel, and the budget-versus-actual report and CFO dashboard flag lines growing faster than revenue.

Day to day, bills move through approval before payment, expense claims with receipt OCR route travel and entertainment through a reviewer, and AI auto-categorisation proposes the account for each bank transaction for a person to approve. The result is an SG&A figure you can trust, and the detail behind it when a lender or investor asks what is inside.

This is general information as of November 2026, not tax, legal or accounting advice; check the official standard or a qualified CA/CPA for your situation.