Selling, General and Administrative Expense (SG&A)

Where SG&A sits

A simplified income statement can look like:

Revenue − cost of sales = gross profit − SG&A − R&D − other operating expenses = operating income

SG&A therefore sits below gross profit and directly affects operating margin.

Selling costs

Selling expenses can include:

• sales commissions
• marketing
• advertising
• trade shows
• sales travel
• customer acquisition costs

A growing company can intentionally increase selling expense to support future revenue.

The key question is whether the spending produces attractive growth.

General and administrative costs

G&A can include:

• executive compensation
• finance
• legal
• HR
• office expense
• insurance
• audit
• investor relations
• public-company costs

These costs keep the organization functioning.

Some scale with revenue.

Others are relatively fixed.

Real 2026 example

A 2026 SEC filing said SG&A decreased partly because of lower stock-based compensation and reduced marketing activity, while public-company expenses such as:

• directors’ and officers’ insurance
• investor relations
• transfer-agent fees

increased.^[2]

That example shows how different economic drivers can sit inside one SG&A line.

SG&A leverage

If revenue grows faster than SG&A:

SG&A as a percentage of revenue falls.

Operating margin can expand.

This is often called operating leverage.

Example:

Year 1: - revenue: $500 million - SG&A: $100 million - SG&A ratio: 20%

Year 2: - revenue: $650 million - SG&A: $110 million - ratio: about 16.9%

SG&A increased in dollars but became more efficient relative to sales.

Lower SG&A is not automatically better

Management can cut:

• sales headcount
• marketing
• customer support
• corporate systems

Operating income may improve immediately.

Future growth can weaken.

Efficiency means removing low-value cost, not indiscriminately minimizing expense.

Higher SG&A can be investment

SG&A can rise during:

• geographic expansion
• salesforce buildout
• public-company transition
• systems implementation
• acquisition integration

The spending can be rational if it creates durable revenue or lowers future cost.

The return on the spending matters.

Stock-based compensation can distort comparison

Technology and growth companies can report substantial SBC inside SG&A.

A company that excludes SBC from adjusted operating results can show much lower adjusted SG&A.

That can help isolate cash expense.

It can also obscure recurring employee compensation cost.

Acquisition-related expenses

Acquisitions can add:

• advisory fees
• integration costs
• new corporate overhead

to SG&A.

A serial acquirer can label repeated transaction expenses as adjusted items.

Frequency matters.

Public-company costs

A newly public company can see SG&A rise because of:

• audit
• legal
• compliance
• investor relations
• D&O insurance
• listing costs

Those expenses can be structural rather than one-time.

Comparisons with pre-IPO periods should account for the changed cost base.

SG&A vs. cost of revenue

Classification determines gross margin.

If one company puts customer-support costs in cost of revenue and another puts similar costs in SG&A:

their gross margins are not perfectly comparable.

Operating margin can be more comparable if both capture the cost somewhere in operations.

SG&A and cash flow

Most SG&A expenses eventually require cash.

Timing can differ through:

• accrued compensation
• prepaid insurance
• stock-based compensation

A reported SG&A expense is therefore not identical to current-period cash paid.

Common-size analysis

A useful ratio is:

SG&A ÷ Revenue

Tracking the percentage over several years can reveal:

• scale benefits
• cost creep
• restructuring effects
• sales investment

The absolute expense alone is less informative.

Common mistakes

"SG&A is overhead that should always be cut."

No.

"Rising SG&A means efficiency is worsening."

Not if revenue grows faster or the spending builds future growth.

"SG&A is entirely fixed."

No.

"Adjusted SG&A is always superior."

Only if exclusions are economically justified.

Break SG&A into selling and administrative drivers where disclosure permits. Track the ratio to revenue, but distinguish productive sales investment from corporate cost creep. Pay special attention to SBC, acquisition costs and public-company expenses that can make peer comparisons look cleaner or worse than the underlying economics.