Selling, General, and Administrative expenses (SG&A) represent the fixed overhead costs of a business that are not directly tied to product or service production, requiring sufficient gross profit to cover them to avoid draining cash reserves.
Primary Implication
Over-investment in fixed assets and overhead creates unnecessary cash pressures. Financially, overextending your business creates the same challenge of doing business on a tightrope, in high winds, without a safety net.
The smallest thing at the wrong time not to go as it should will put you out of business when you have too much cash tied up in non-revenue producing assets.
Overview
Selling, General, and Administrative, also called SG&A Expenses, represent the overhead of the business—fixed expenses that can’t be directly assigned to a job, product, or service bought by a customer.
Because these expenses don’t fluctuate with sales, production, or the market, they should be relatively consistent in their amount from month-to-month and year-to-year.
If you are accounting for an expense involving an item on which a sale depends, and which is necessary to complete an order, then you have a direct expense. Account for a direct expense here, you will overstate your SG&A expenses and understate your COGS.
The most common SG&A expenses for small businesses include office salaries, rent, professional fees, insurance, and the like.
The most important consideration involving every dollar spent on SG&A is how it is a dollar of overhead that you must cover out of your Gross Profits. Fail to earn sufficient Gross Profit to cover it, and you will have to pull cash from reserves to cover an expense that doesn’t vary with Net Sales.
