Estimating Selling, general, and administrative (SG&A) costs

Selling, general, and administrative (SG&A) costs are additional costs beyond those cost which directly associated with producing a product or service.

SG&A can include costs related to:

  • Research and development
  • Product design
  • Marketing
  • Distribution
  • Customer service
  • Commissions
  • Administrative processes
  • Overhead

To estimate SG&A costs, some companies consider how much they can afford: for example, “How much are we willing or able to spend on marketing, R&D, and so forth?” and also taking into account on current government tax policy on these spending to make sure whether the money budgeted shall be pre-tax money of post-tax money.

SG&A is also where companies tend to make spending cuts during tough economic times. A business might cut SG&A in the first or second quarter of the forthcoming budget period; for instance, by outsourcing marketing work or reducing the number of television advertisements it airs. It may then make up the cuts in a later quarter if business revives.

SG&A costs can vary depending on a company’s growth stage. For a startup, spending on marketing is more of a priority than it is for a mature well known company.

Still, there are some recognizable patterns that can help you estimate SG&A. For example, R&D as a percentage of SG&A cost tends to vary less than marketing or advertising expenditures do. That’s because R&D work is often done over a long time horizon and remains a stable percentage of a company’s sales. By contrast, decisions about how much to spend on marketing and advertising tend to change more quickly in response to changes in market opportunities and availability of technology such as social media. For example, cost per quality lead in Facebook ads are reported to be so much lower than traditional marketing media such as television and newspaper.

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