Last Updated on August 5, 2023 by Ahmed Khan
Selling, General, and Administrative (SG&A) expenses are a critical component of any business, including small businesses. SG&A expenses include all the expenses incurred by a business that are not directly related to the production of goods or services. These expenses include sales and marketing expenses, salaries and wages, rent, utilities, and other overhead costs. Managing SG&A expenses effectively is crucial for the success of a small business. In this guide, we will explore the best practices for managing SG&A expenses in small businesses.
Understanding SG&A Expenses in Small Businesses
Selling, general and administrative expenses (SG&A) is the costs incurred by businesses that are not directly related to the production or delivery of goods or services. SG&A expenses are critical to the day-to-day operations of small businesses, as they include essential functions such as sales, marketing, human resources, and administrative tasks.
Examples of selling expenses include sales commissions, advertising, and promotional events. General expenses include rent, utilities, and insurance. Administrative expenses include salaries of non-production employees, legal and accounting fees, and office supplies.
It is essential to separate SG&A expenses from other expenses, such as cost of goods sold, to accurately track and analyze a business’s financial performance. Understanding SG&A expenses is particularly important for small businesses, as they often have limited resources and need to manage costs carefully.
Identifying and Analyzing SG&A Expenses
Small businesses can benefit from analyzing their SG&A expenses to identify areas for improvement and cost reduction. One effective method is to break down SG&A expenses into subcategories and analyze them individually. This allows businesses to identify the most significant expense categories and prioritize areas for cost reduction.
For example, a small business may discover that their advertising expenses are high relative to their sales revenue. In this case, the business may need to explore more cost-effective advertising methods or negotiate better rates with their advertising partners.
Another effective method is to benchmark SG&A expenses against industry peers or similar businesses. This provides a comparison for small businesses to determine whether their expenses are within a reasonable range and identify areas for improvement.
Best Practices for Controlling SG&A Expenses
Controlling SG&A expenses is critical for small businesses to maintain profitability and sustain growth. Several best practices can help small businesses manage their SG&A expenses effectively:
- Implement cost-saving measures: Small businesses can implement several cost-saving measures, such as reducing travel expenses, implementing energy-saving practices, and using open-source software.
- Negotiate contracts: Small businesses can negotiate better rates with their vendors and suppliers to reduce their expenses.
- Outsource non-core functions: Small businesses can outsource non-core functions such as payroll, bookkeeping, and human resources to external service providers. This can help reduce the costs of maintaining an in-house team.
- Invest in technology: Small businesses can invest in technology to automate tasks, streamline operations, and reduce administrative costs. For example, businesses can use customer relationship management (CRM) software to manage sales and marketing activities or cloud-based accounting software to manage financial transactions.
Developing an SG&A Budget
Developing an SG&A budget is critical for small businesses to manage their expenses effectively. A budget provides a framework for small businesses to allocate resources, track expenses, and identify areas for improvement.
To develop an SG&A budget, small businesses should consider the following factors
- Historical expenses: Small businesses should analyze their historical expenses to identify trends and patterns in their SG&A expenses.
- Growth plans: Small businesses should consider their growth plans and the associated costs of expanding their operations.
- Sales projections: Small businesses should project their sales revenue and allocate resources accordingly.
- Competitive landscape: Small businesses should consider the competitive landscape and the associated costs of staying competitive.
Measuring and Monitoring SG&A Performance
Measuring and monitoring SG&A performance is critical for small businesses to ensure they are staying on track with their budget, identifying areas for improvement, and making informed decisions to optimize their operations. In this section, we will discuss some key performance indicators (KPIs) that small businesses can use to measure and monitor their SG&A performance.
Sales growth is a key KPI for small businesses as it measures the rate at which their revenue is increasing over time. It is important to track sales growth as it provides insight into the effectiveness of a business’s sales and marketing strategies. By measuring sales growth, small businesses can identify which products or services are selling well and which are not, and adjust their sales and marketing efforts accordingly.
To calculate sales growth, small businesses can use the following formula:
(Sales for current period – Sales for previous period) / Sales for previous period x 100%
For example, if a small business had sales of $100,000 in Q1 and $120,000 in Q2, the sales growth for Q2 would be: ($120,000 – $100,000) / $100,000 x 100% = 20%
Managing SG&A expenses effectively is critical for the success of any small business. By understanding the types of SG&A expenses, identifying areas for cost reduction, implementing best practices for cost control, and leveraging technology, small businesses can optimize their SG&A expenses and drive profitability.