Costs associated with business operations excluding cost of goods sold and research and development expenditure
In the business world, managing costs is a crucial factor in ensuring profitability. One area that warrants particular attention is Selling, General, and Administrative (SG&A) expenses. These costs, which include selling expenses, general expenses, and administrative expenses, are operational costs unrelated to the production of goods or services.
SG&A expenses are a key focus for management, especially during mergers or acquisitions, as they play a significant role in operational efficiency and increasing profits. To reduce these expenses, companies can employ various strategies.
Firstly, establishing and enforcing clear spending policies is essential. This involves creating comprehensive expense guidelines for employees, including spending limits and vendor controls, and ensuring employees acknowledge these policies to prevent unauthorized or excessive expenses.
Secondly, automating expense tracking can provide real-time visibility and control over SG&A costs. Modern accounting and expense management software can categorise and monitor spending effectively.
Thirdly, reviewing and eliminating redundant software subscriptions can help reduce unnecessary recurring expenses. Conducting an inventory of all SaaS and software tools, assessing their usage and overlap, and cancelling those that are redundant or underused is a practical approach.
Fourthly, implementing zero-based budgeting (ZBB) or zero-based operating (ZBO) approaches can enable targeted and sustainable cost reductions. By analysing every expense from the ground up, companies can distinguish low-value costs from strategic investments.
Fifthly, restructuring organisational operating models can boost productivity and speed decision-making, helping to reduce SG&A inefficiencies and costs. Redesigning processes, technology use, and organisational structures can lead to significant savings.
Regularly auditing recurring expenses is another effective strategy. Periodic reviews of subscriptions, contracts, and recurring payments can help identify opportunities to consolidate services, renegotiate terms, or cancel unnecessary costs.
Cutting less important travel and entertainment expenses is another way to reduce SG&A expenses. These costs, while often necessary for business development, can sometimes be reduced without compromising the company's strategic priorities or growth capabilities.
Selling expenses cover various costs related to marketing, distribution, and product sales that do not contribute directly to the production of products or the provision of services. Examples of selling expenses include logistics costs, shipping expenses, marketing expenses, website maintenance costs, and salesforce salaries and commissions.
General expenses, such as rental expenses, utilities, and computer equipment in offices, are categorised as fixed costs because the company must pay them regardless of production or sales volume. Outsourcing non-main administrative activities can also help reduce SG&A expenses.
The ratio of SG&A expenses to revenue is an important factor in analyzing a company's profitability. If this ratio rises over time, it indicates increased pressure on the company's profitability. Management usually maintains strict controls over SG&A expenses due to the need to pay them even when sales are falling.
In conclusion, by improving spending discipline, leveraging technology, eliminating waste, and ensuring that cost reductions do not compromise strategic priorities or growth capabilities, companies can effectively reduce SG&A expenses. This, in turn, can lead to increased profitability and operational efficiency.
Investing in strategies to reduce SG&A expenses is crucial for businesses seeking to increase profitability, especially during mergers or acquisitions. These strategies could involve implementing clear spending policies, automating expense tracking, reviewing and eliminating redundant software subscriptions, implementing zero-based budgeting, restructuring organizational operating models, regularly auditing recurring expenses, cutting less important travel and entertainment expenses, and reducing selling expenses unrelated to the production of goods or services.
