SG&A vs COGS: Which Costs Are Draining Your Profits?

SG&A vs COGS are essential in running a company and determining its financial health. These costs are often separately listed in a company’s financial statement.

According to an official study, 82% of businesses fail due to poor cash flow management. Hence, you should accurately understand the difference between SG&A (Selling, General, Administrative) and COGS (Cost of Goods Sold), as it will help you manage your finances better. 

In this blog, we’ll discuss definitions, components, formulas, and more regarding SG&A and COGS. We will also answer several frequently asked questions, so there’s no doubt left behind. However, first things first: 

What is COGS?

Cost of Goods Sold (COGS) is a direct cost for the production of goods sold by a company. It includes material, labor, packaging, shipping expenses, etc. COGS helps companies determine their per unit cost of products or services, defining the business’s gross profit. 

In accounting, COGS is listed as a standard expense in the company’s P&L statement, right after the sales revenue.

You can mark the costs as an expense in the P&L statement, only when the goods have been sold and its revenue has been reported in the profit and loss statement. 

Recommended Read: COGS vs OPEX – What’s The Difference

What is SG&A?

SG&A (Selling, General, and Administrative) expenses refer to daily operational expenses associated with running a business.

It is not directly related to the production of goods and services. SG&A involves expenses like salary, rent, marketing expenses, utilities, legal fees, and varied other administrative costs.

Recommended Read: How to Categorize Expenses

What is SG&A vs COGS? 

The difference between SG&A and COGS is that COGS refers to the costs directly associated with the production of goods and services, while SG&A only encompasses the cost required to support the production of goods and services.

In simple terms, expenses involved under SG&A are required for smooth business functioning but have no direct role in producing goods and services.   

The core difference between SG&A and COGS is the type of expenses they encompass and their true contribution to the respective segment. Look at the simple chart below to understand the difference better. 

Recommended Read: How to Calculate Operating Expenses

Components of COGS & SG&A

Here’s the breakdown of SG&A vs COGS components in brief to better understand both the terms.

Components of COGS

• Raw material
• Wages and salary of the workers directly involved in the production process
• Manufacturing overheads including
  • Utilities
  • Depreciation of manufacturing equipment
  • Factory supplies
• Freight-in costs such as shipping expenses
• Inventory costs 
• Purchased finished goods for resale

Components of SG&A 

When comparing SG&A vs COGS, SG&A expenses are typically categorized into three forms:

1. Selling Expenses

• Marketing expenses for the company’s product line, services, brand, or image
• Your company’s advertising costs
• Salaries and wages of salespeople in the form of commissions, payroll taxes, and benefits 
• Any traveling expenses required to attend trade shows or client meetings

Recommended Read: Is Advertising A Fixed Cost?

2. General Expenses

• Expenses required to rent or purchase the office equipment 
• Costs related to utilities such as electricity, water, sewer, or garbage. These don’t have any direct contribution to the manufacturing process 
• General office supplies essential for the administrative personnel
• The cost of renting an office space also takes the side of SG&A in the fight of SG&A vs COGS 

Recommended Read: Difference between Overhead Costs vs G&A Costs

3. Administrative Expenses 

• Payroll expenses related to accounting, information technology, and human resources 
• Any in-house salaries or payments raised for external forms may also be included in the SG&A expenses 
• Consultation fees to external parties for administrative purposes

Recommended Read: A Comprehensive Guide On How to Categorize Expenses

Formula for COGS & SG&A

The respective formulas for the SG&A vs. COGS ratio and normal are below. 

Calculating Cost of Goods Sold

Here,

• Beginning Inventory: The amount of leftover inventory from the last period. 
• Purchases in Current Period: Cost of purchase made during the current period.
• Close Inventory: Inventory not sold during the current period. 

Calculating Selling, General and Administrative 

How to Conduct SG&A vs COGS Analysis? 

Conducting SG&A vs COGS analysis is essential for all businesses to increase and sustain profitability. Below, we have mentioned the SG&A versus COGS profitability measures to implement in your company.

1. Analyze the Cost of Goods Sold (COGS) 

COGS helps companies determine the per-unit and overall production cost. You can also calculate your gross profit by simply subtracting COGS from your company’s overall revenue.

Hence, analyzing the COGS is essential for every company to understand its financial wellness at a glance. 

Technically, the COGS should be in the range of 50% to 65% of sales. If it is not, you might be facing challenges like misallocated expenses, rising costs, operational efficiency, or poor pricing strategy. 

COGS can help you determine various financial metrics that are mentioned below: 

Gross-to-revenue ratio = COGS ÷ Revenue 

Gross Profit = Revenue – COGS 

Gross Profit Margin = Gross Profit ÷ Revenue 

CrossVal suggests you create a monthly report tracking your company’s COGS, as it will allow you to understand your gross margins early, and make the necessary changes. Otherwise, if you create a yearly COGS report, you’ll end up with losses.

Recommended Read: A Detailed Guide To Calculate Gross Profit

2. Analyze the Sales, General, Administrative (SG&A)

SG&A expenses play a vital role in the company’s finances, and understanding them can help you control costs and increase overall profitability.

Hence, every company focuses on reducing the SG&A to sales revenue over time, as it will directly lower the costs. 

SG&A-to-revenue ratio = SG&A Expenses / total revenue × 100

Calculating the SG&A to revenue ratio can help you assess the company’s ability to control and optimize its operational expenses.

You should do an SG&A analysis multiple times a year to get better insights into your company’s cost management practices. 

It may also help you know the reason behind any decrease in profitability. Consistently monitoring SG&A may also help you anticipate any financial challenges that you’re facing so you can make informed decisions. 

Financial Management Considerations

Effective financial management hinges on a few core principles that guide businesses toward growth and sustainability. Understanding how to forecast accurately, control costs, evaluate opportunities, and analyze trends can significantly enhance a company’s financial health.

1. Forecasting: Predicting future financial outcomes is essential for strategic planning. By using historical data and market trends, businesses can create reliable forecasts that help in setting budgets, allocating resources, and planning for various scenarios. Accurate forecasting allows companies to prepare for potential challenges and capitalize on growth opportunities.
2. Controlling Costs: Cost control is a cornerstone of sound financial management. Implementing strict oversight on spending ensures that resources are used efficiently, preventing waste and enhancing profitability. Businesses need to regularly review their expenses, identify cost drivers, and optimize operations to minimize overhead without compromising quality or productivity.
3. Evaluating Opportunities: Not all business opportunities are worth pursuing. A thorough evaluation involves assessing potential investments or projects for their profitability, alignment with business goals, and associated risks. This process helps in prioritizing initiatives that offer the best return on investment and support long-term success.
4. Analyzing Trends: Staying ahead in a competitive market requires constant analysis of industry trends. By examining market shifts, customer behavior, and economic indicators, businesses can make informed decisions that keep them agile and adaptable. Trend analysis aids in identifying emerging opportunities and threats, allowing for proactive adjustments to strategies.

Together, these considerations form a holistic approach to financial management that can guide businesses in achieving sustainable growth and resilience in ever-changing markets.

Frequently Asked Questions

Where are SG&A & COGS recorded in Financial Statements? 

In the company’s financial statement, revenues are always reported at the top; then, COGS is deducted from the revenue to calculate gross margin. SG&A is always recorded below the Gross margin. 

Are SG&A expenses tax deductible? 

Yes, SG&A expenses, ordinary and necessary within your business type, are tax deductible in the year they were incurred. 

SG&A vs COGS represent different types of costs required for running a business. When you accurately understand the difference between COGS and SG&A, you can better control the unnecessarily increasing costs and boost profitability. 

Conclusion

Moreover, properly analyzing these essential expenses will allow you to make informed financial decisions and ensure long-term business success.

If you’re not sure about trusting any software to manage your company’s financial statement, give CrossVal a fair chance. Create your free account now and try it free for 14 days.