Understanding SG&A Expenses for Startups and Growing Businesses

As a startup founder or business owner, you’ve likely encountered the term “SG&A expenses” in financial discussions, board meetings, or when reviewing your company’s financial statements. Standing for Selling, General, and Administrative expenses, SG&A represents a critical component of your business’s financial structure that directly impacts profitability and growth potential.

At Alajian Group, we’ve helped countless startups and businesses in Los Angeles and beyond navigate the complexities of financial management. Understanding SG&A expenses is fundamental to making informed decisions about your company’s operations, resource allocation, and strategic direction.

What Are SG&A Expenses?

SG&A expenses encompass all the costs associated with running your business that aren’t directly tied to producing your product or service. These are the operational backbone expenses that keep your company functioning day-to-day. While some refer to these as “overhead costs,” that term can be misleading – these expenses are often essential investments in your business’s success and sustainability.

Think of SG&A as the infrastructure that supports your core business operations. Just as a building needs a strong foundation, your business needs these supporting functions to operate effectively and scale sustainably.

Why SG&A Expenses Matter for Your Business

Many entrepreneurs focus heavily on production costs and revenue generation while viewing SG&A expenses as necessary evils to be minimized. However, this perspective can be counterproductive. Here’s why SG&A expenses are crucial for your business success:

Strategic Investment, Not Just Costs: SG&A expenses represent investments in your business’s operational capacity, market presence, and competitive advantage. Professional accounting services, for example, provide crucial financial insights that drive better decision-making and ensure compliance with tax regulations.

Foundation for Growth: As your business scales, robust SG&A functions become increasingly important. Strong administrative systems, effective marketing strategies, and professional management structures are essential for sustainable growth.

Investor Confidence: Investors and lenders carefully examine SG&A expenses to understand how efficiently you’re running your business. Well-managed SG&A expenses demonstrate operational maturity and financial discipline.

Breaking Down SG&A Components

Selling Expenses

Your selling expenses include all costs associated with marketing, promoting, and selling your products or services. These investments directly support revenue generation and market expansion:

Direct Selling Costs:

• Sales team salaries, commissions, and benefits
• Sales training and development programs
• Customer relationship management (CRM) systems
• Sales conferences and networking events

Marketing and Advertising:

• Digital marketing campaigns and advertising spend
• Content creation and marketing materials
• Trade shows and industry events
• Public relations and brand development
• Website development and maintenance

Distribution and Customer Service:

• Shipping and logistics (for applicable businesses)
• Customer support staff and systems
• Return processing and warranty services

General Expenses

General expenses are the foundational costs of operating your business, regardless of your industry or specific products. These typically include:

Facility Costs:

• Office rent and utilities
• Building maintenance and security
• Office furniture and equipment
• Communication systems (phone, internet, etc.)

Technology Infrastructure:

• Computer hardware and software licenses
• Cloud services and data storage
• Cybersecurity measures
• IT support and maintenance

Insurance and Risk Management:

• General liability insurance
• Professional liability coverage
• Property insurance
• Workers’ compensation insurance

Administrative Expenses

Administrative expenses cover the costs of managing and operating your business from an organizational perspective:

Professional Services:

• Accounting and bookkeeping services
• Legal counsel and contract review
• Tax preparation and compliance
• Business consulting and advisory services

Human Resources:

• HR staff salaries and benefits
• Recruitment and hiring costs
• Employee training and development
• Performance management systems

Corporate Governance:

• Board meeting expenses
• Regulatory compliance costs
• Corporate filing fees
• Investor relations activities

Calculating and Analyzing Your SG&A Expenses

Understanding your SG&A expenses requires more than just tracking costs – you need to analyze them strategically. Here’s how to approach this analysis:

Basic SG&A Calculation

Your SG&A expenses are typically calculated as follows:

Sales Revenue – Cost of Goods Sold (COGS) = Gross Profit Gross Profit – SG&A Expenses = Operating Income

SG&A as a Percentage of Revenue

Calculate your SG&A expenses as a percentage of total revenue to benchmark your operational efficiency:

SG&A Percentage = (Total SG&A Expenses ÷ Total Revenue) × 100

This metric helps you understand how much of each dollar earned goes toward supporting your business operations versus directly contributing to profit.

Industry Benchmarking

Compare your SG&A percentage to industry standards. While this varies significantly by sector, most healthy businesses maintain SG&A expenses between 15-25% of revenue. Technology companies often have higher percentages due to significant marketing and development costs, while manufacturing businesses typically have lower percentages.

Common SG&A Management Mistakes to Avoid

Over-Cutting During Growth Phases

Many businesses make the mistake of aggressively cutting SG&A expenses during challenging periods or when trying to improve short-term profitability. While cost management is important, eliminating essential functions can harm long-term growth:

• Reducing marketing spend may improve immediate cash flow but can significantly impact future revenue
• Cutting accounting services may save money initially but can lead to costly compliance issues and missed tax opportunities
• Eliminating legal review of contracts may seem cost-effective but can result in unfavorable terms and future disputes

Inadequate Investment in Growth Infrastructure

On the flip side, some businesses under-invest in SG&A functions, which can limit their ability to scale effectively:

• Insufficient accounting systems can lead to poor financial visibility and decision-making
• Inadequate marketing investment may result in slower customer acquisition and market penetration
• Weak administrative systems can create operational bottlenecks as the business grows

Strategic Approaches to SG&A Management

Invest in High-Impact Areas

Focus your SG&A investments on functions that directly support your business objectives:

Revenue Generation: Invest in marketing and sales functions that demonstrably drive customer acquisition and retention.

Operational Efficiency: Implement systems and processes that improve productivity and reduce long-term costs.

Risk Management: Ensure adequate investment in legal, accounting, and compliance functions to protect your business.

Leverage Technology and Outsourcing

Modern businesses can optimize SG&A expenses through strategic use of technology and outsourcing:

Technology Solutions: Implement software and automation tools that improve efficiency and reduce manual work.

Professional Services: Consider outsourcing specialized functions like accounting, HR, or legal services to access expertise without the overhead of full-time staff.

Flexible Staffing: Use contractors and part-time professionals for variable workloads while maintaining core full-time team members.

The Role of Professional Accounting in SG&A Management

Effective SG&A management requires accurate financial tracking, analysis, and strategic planning. Professional accounting services provide several key benefits:

Accurate Financial Reporting: Proper categorization and tracking of SG&A expenses ensures you have reliable data for decision-making.

Tax Optimization: Professional accountants can identify opportunities to reduce tax liability through proper expense categorization and timing.

Financial Analysis: Regular analysis of SG&A trends helps identify areas for improvement and optimization.

Compliance Management: Ensuring proper documentation and reporting of SG&A expenses helps maintain regulatory compliance and reduces audit risk.

SG&A Planning for Different Business Stages

Startup Stage

In the early stages, SG&A expenses often represent a high percentage of revenue as you build foundational systems and invest in growth:

• Focus on essential functions: basic accounting, legal structure, and minimal marketing
• Leverage technology and outsourcing to minimize fixed costs
• Prioritize investments that directly support customer acquisition and product development

Growth Stage

As your business scales, SG&A expenses should become more sophisticated and strategic:

• Invest in robust financial systems and reporting capabilities
• Expand marketing and sales functions to support increased revenue targets
• Develop administrative systems that can handle increased complexity and volume

Maturity Stage

Established businesses should focus on optimizing SG&A efficiency while maintaining competitive advantages:

• Regularly review and optimize all SG&A functions for efficiency
• Invest in advanced analytics and business intelligence capabilities
• Maintain strong professional services relationships for strategic guidance

Key Takeaways for Effective SG&A Management

Managing SG&A expenses effectively requires a balanced approach that considers both current profitability and long-term growth potential. Here are the essential principles to remember:

View SG&A as Strategic Investment: Rather than seeing these expenses as costs to minimize, view them as investments in your business’s operational capacity and competitive position.

Maintain Proper Balance: Avoid both under-investing in critical functions and over-spending on non-essential activities. Regular analysis and benchmarking help maintain this balance.

Focus on ROI: Evaluate each SG&A expense category based on its return on investment and contribution to business objectives.

Plan for Scale: Design SG&A systems and processes that can grow with your business without requiring complete overhauls.

Leverage Professional Expertise: Work with qualified professionals who can provide strategic guidance and ensure compliance while optimizing efficiency.

Moving Forward with Confidence

Understanding and managing SG&A expenses is crucial for building a sustainable, profitable business. These expenses represent the foundation that supports your core operations and enables long-term growth. By taking a strategic approach to SG&A management, you can optimize your operational efficiency while maintaining the capabilities needed for success.

Whether you’re a startup founder looking to establish proper financial foundations or an established business owner seeking to optimize operations, professional guidance can make a significant difference in your SG&A management effectiveness. The right accounting and advisory services provide not just compliance and record-keeping, but strategic insights that drive better business decisions and improved profitability.

Remember, successful SG&A management isn’t about spending the least amount possible – it’s about investing wisely in the functions that support your business objectives and drive sustainable growth. With proper planning, analysis, and professional support, your SG&A expenses can become a competitive advantage that propels your business forward.