SG&A (“Selling, General and Administration expenses”)
Costs can be classified under 3 categories:
- If they depend on the production/units sold, these costs are considered as variable. IN the case they do not depend on the production output or units sold, they are called fixed costs. SG&A expenses are fixed costs from an operational point of view that comprises selling expenses (i.e. marketing budget, commissions of the sales team), general expenses (i.e. utilities, insurance premiums), and administration (i.e. salaries not related to manufacturing, social security of the salaries paid, external service providers).
- If they are directly related to the production/manufacturing process (direct costs). For example, the salary of the operator at a manufacturing site would be considered as direct cost but the salary of the CEO would be considered as indirect. Electricity cost of the manufacturing machinery would be consider as direct cost but the electricity cost of the headquarters would be indirect cost.
- A mix of variable/fixed costs and direct/indirect costs, obtaining a classification of: direct variable costs (raw materials of a product), direct fixed costs (salaries of the operators), indirect variable costs (sales team commissions per unit sold), indirect fixed costs (salaries of management staff excluding the operations management).
When we discuss about SG&A, this item of the Profit and Loss Account (“P&L”) is considered as an indirect cost (not related to production) and usually of fixed cost nature and recurring basis (they happen every month of company operations). The mot common items under the SG&A are (values excluding VAT):
- Wages and salaries paid to employees (excluding salaries of the operators or any other manufacturing business function. Let’s imagine the company has 10 employees that earn €2,000 gross monthly salary and get x14 payments. The yearly wages and salaries would be: 14*€2,000*10 employees= €240,000.
- Social security paid by the company. In Spain this tax is around 30% of the gross yearly salary. This tax rate depends on the country and is used to finance the welfare system (pension, unemployment, etc). In this case, the yearly expense would be 30%*€240,000=€72,000.
- Rentals paid by the company for any type of building, office rental, etc. Let’s assume a yearly expense of €18,000.
- Facilities: Electricity, telephone, water, utilities, etc. Les assume a yearly expense of €10,000.
- Insurance premiums paid. There are many types of business insurances, but most companies have a comprehensive business insurance. Let’s assume a yearly expense of €3,000.
- Software licenses. Under this category falls all the software licenses used by the company from 3rd party vendors, such as Windows licenses, SAP, Oracle, CS Project, etc. Please note that the software developed by the company would not be considered as a software licenses expense but a capex investment (it is not considered as an expense but a non-current intangible asset which is accounted in the P&L with the Depreciation and Amortization.Let’s assume a yearly expense of €7,000.
- External Service Providers (“ESP”). Expenses for any service outsourced to a third party such as legal advisory, tax services, consulting services, maintenance, IT support, etc. In this category outsources services of marketing and transportation nature are not included as they are accounted in the “Marketing budget” and “Distribution and Transportation” accounts. Let’s assume €50,000.
- Distribution and transportation expenses, such as petrol spent in the delivery of a product or service. This item is of variable nature but can be calculated on a yearly fixed basis. Outsources services for delivery services such as UPS, FedeX, Amazon Logistics is considered here too. Let’s assume a delivery expense of €5 per product sold and the number of products sold in the fiscal year is 10,000 units. The total yearly expense would be €50,000.
- Marketing budget. Any expense of marketing and promotion nature, including services outsource from 3rd party vendors (TV commercials, international fairs, customers discounts and rappels, radio commercial, public relations and brand image campaigns, online marketing and promotion, market research reports and surveys, etc). Let’s assume a yearly expense of €43,000.
- Taxes and fees paid by the company excluding corporate taxes (i.e. local taxes paid to city council). Let’s assume a yearly expense of €5,000.
- Other SG&A. A buffer for SG&A expenses of different nature. We are estimating other SG&A on a monthly basis of €1,000 (€12,000 on a yearly basis).
Taking into account all of these items the yearly SG&A expense would be €460,000. As it can be seen, excluding the delivery expenses, the SG&A expense is fixed and indirect, as it does not depend if the number of units of the product or service is 1 or 1 million, that is why SG&A is considered as a fixed cost of operational nature (related to the business and main activity of the company).
It should be noted that the SG&A expenses that happen in t=0 are called start-up expenses, they can be categorized in one of the 10 categories defined and these expenses are non-recurring as the only happen in t=0, but are included in the first fiscal year of company operations.
It should be highlighted that SG&A is updated on a yearly basis by inflation forecast when a P&L and SG&A projection of a financial plan is undertaken (for those items that makes sense to be updated by inflation). Historical inflation can vary among countries, but for developed economies the inflation average value range 2%-3% on a yearly basis. Please refer to “HCPI” (Harmonised Consumer Price Index) from Eurostat, International Monetary Fund (IMF), European Central Bank (ECB) or Instituto Nacional de Estadística (INE, Spain).