SG&A

Selling, General & Administrative (SG&A) → This is a category of expenses that are incurred for all normal day-to-day operating expenses associated with running a business that aren’t related to producing a good or service; essentially all the costs you will incur from normal business operations that don’t fall under COGS. You might also hear SG&A expenses referred to as Operating Expenses or Period Costs. SG&A, Operating Expenses, Period Costs...toe-may-toe, toe-mah-toe…in most cases, they’re all one in the same and can be referred to interchangeably.

Where this get's a little bit tricky is that SG&A expenses exclude your COGS (Cost of Goods Sold) expenses.

Cost of Goods Sold (COGS) → This is a category of expenses incurred in the direct production and delivery of a company’s products or services.

Why does it matter, an expense is an expense, right? Well, sort of...the biggest difference is that SG&A and COGS are listed as separate categories on an Income Statement.

The other important thing to note is that when pitching to investors, the Gross Margin of your company (Total Revenue minus COGS) is an extremely important indicator of how profitable and scalable the business is and ultimately drives the type of valuation you might receive. Typically, a good Software-as-a-Service (SaaS) business should have a gross margin of about 80-90%. This means that the Cost of Goods Sold should be around 10-20% of the total Revenue.

Unfortunately for founders, accounting rules are very specific on some things, and surprisingly unhelpful in other areas. There are actually no Generally Accepted Accounting Principles (GAAP) rules on the type of costs that are included in the Cost of Goods Sold (COGS).

That being said, here’s some recommendations around what to include in your COGS and SG&A expenses if your company is in the software space.

Costs we recommend including in COGS:

  • Hosting costs & domain registry costs
  • Employee costs related to keeping the production environment running
  • Employee costs for customer support/success of the application, but excluding any sales costs for up-sells, or cross-sells
  • Cost of any third-party software or data that is included in your delivered product
  • Any other direct employee costs required to deliver the ongoing service

Things we advice against including in COGS:

  • Sales commissions
  • Allocated overhead charges
  • Customer success costs associated with cross-seling/up-selling
  • Product development costs
  • Third-party software use in-house for operations, but not packaged in your product (think Slack, Microsoft Office, Zoom, etc.)

It may help to think about SG&A as four key categories of expenses – marketing, sales, development and overheads. Depending on your business, you could refine and subdivide the categories further to get more detailed insight in your costs…but if your company is still relatively immature, we suggest keeping things simple.

Costs we recommend including in SG&A:

  • Salaries, wages and benefits for executives and staff not directly involved in manufacturing or other production tasks
  • Rent
  • Utilities
  • Insurance payments
  • Marketing, advertising and promotional expenses
  • Accounting costs
  • Legal costs
  • Office supplies
  • Equipment not associated with manufacturing/delivering the product or services (laptops, cellphones, etc.)

Here’s a helpful table that can help you understand what expenses go where for SG&A:

Selling ExpensesGeneral ExpensesAdministrative Expenses
AdvertisingEquipment (not related to production)Administrative staff compensation
MarketingFacilities repair/maintenance (not related to production)Compensation for other non-salespeople
Sales professionals’ base salariesInsuranceExecutive compensation
Sales professionals’ commissionsInternet and communication servicesHR services
Sales-related travel and entertainmentOffice supplies
Product shippingProfessional services (accounting, legal, consulting)
Social media/website costs (non-hosting)Rent
UntitledUtilities (not related to production)