On a company’s income statement, you’ll see a line for selling, general, and administrative (SG&A) expenses. If sold by a commissioned salesperson, representative or partner, a sales commission may be due. For example, once a product is sold, it must be packed and shipped. Direct selling expenses are incurred when a unit of a product or service is sold. Fast-rising SG&A costs make it more difficult to sustain profitability, so if a company projects SG&A cost increases will outstrip revenue growth it may decide to prioritize cost-control measures for the relevant business areas. Still others, such as the costs of renting new retail locations or deploying a new website, are linked to business strategy, and accurate SG&A projections depend on researching the potential costs. Other SG&A costs, such as shipping costs or sales commissions, will vary. Indirect ExpensesIndirect expenses are the general costs incurred for running business operations and management in any enterprise. As sales vary each month, the costs follow accordingly, protecting the business and its shareholders in a down market. Think of a furniture importer that has only a warehouse and almost no other fixed expenses, just a 15% commission that they pay to independent road salesmen. A variable cost structure is one in which the SG&A expenses keep pace with sales. All else equal, businesses with low operating leverage might have more competition, but they can more easily survive painful declines in revenue and cash flow since the business doesn’t need to cover a fixed expense load each month. Companies with highly variable cost structures are said to have low operating leverage. Therefore the profitability increased, too, and offset those higher costs. It all depends on how the company wants to break out their operating expenses.Hence, SG & A include salaries,wages, and the associated taxes, utilities, marketing, advertising, promotion, sales, supplies, and insurance expenses, which are all reported on theincome statement.The SG&A to sales ratio (also sometimes called the percent-of-sales method) is what you get when you divide your total SG&A costs by your total sales revenue.Each line would absorb an equal amount of the costs on the assumption that these services were equally available to all divisions at any time.A temporary employee is employed for a finite period of time, to fulfill a time-limited role, or to fill the role of a permanent employee who is absent from work.Operating costs are expenses associated with normal day-to-day business operations. When SG&A expenses are “ordinary” and “necessary” to your type of business, the IRS typically allows you to deduct them for the tax year in which they were incurred. Let’s use Amazon as an example of what’s included in this income statement line item. Adjusted EBITDA, adjusted cost of services, adjusted SG&A expense and net debt should be considered in addition to, but not as a substitute for, the information presented in accordance with GAAP. Ask questions and participate in discussions as our trainers teach you how to read and understand your financial statements and financial position. Financial Intelligence takes you through all the financial statements and financial jargon giving you the confidence to understand what it all means and why it matters. We’ll do one month of your bookkeeping and prepare a set of financial statements for you to keep.
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