Selling, General, and Administrative (SG&A) costs are generally referred to as overhead or the operating costs of a business. Carefully evaluating these costs can help companies improve their bottom lines or, at least, be more effective in the overall utilization of their capital.
The “Great Recession” offered a silver lining: it forced business owners to find ways to reduce costs and be more productive with fewer resources. Companies cut costs in every area, including SG&A expenses, and many remained profitable in the face of reduced demand for their products and services.
As companies found ways to do more with less people, one unfortunate effect was the high unemployment that we still see today. However, there was also a significant rise in innovation and productivity.
As business has gradually returned to pre-recession levels, there has been a natural tendency for companies to pay less attention to controlling their SG&A costs. However, this could be a missed opportunity. One could argue that some SG&A costs should really be considered investments instead of overhead. Evaluate each cost carefully to determine whether it is an investment or overhead that does not add value. Then, focus on eliminating or minimizing as much of the overhead as possible.
Companies may reach different conclusions about what is an investment versus what is overhead. For example, office space needs for some service businesses are diminishing thanks to technological advances that allow more employees to work from home. For a manufacturing business, though, building space and the efficient use of that space would likely be viewed as an investment.
Here are five more SG&A expense categories to evaluate.
When business slows, selling costs are often one area that is cut when, perhaps, the opposite should be the case.
Sales are the lifeblood of all businesses and cutting back in this area can be a mistake. However, sales costs are often not thoroughly evaluated to measure their effectiveness. The same ads are purchased, the same trade shows are attended, and the same customers are called without evaluating whether these strategies are leading to increased or new sales.
While selling activities for many companies can be considered an investment, there are many selling costs that are really overhead and should be measured, evaluated, and in some cases eliminated. For example, websites and social media may be better investments than elaborate magazine ads for some companies.
Insurance is a significant investment decision for most businesses. While it may be difficult to view insurance as an investment, companies need to take risk management more seriously in an increasingly complex and litigious business environment. There are many types of insurance coverage available and it seems as though you can insure just about every business risk imaginable. Evaluate cost vs. benefit carefully and do not take this decision lightly.
Information technology costs are clearly investments. Most businesses cannot operate efficiently or effectively without solid information technology solutions. Investments in email, website development and maintenance, social networking, accounting, contact management, and enterprise resource planning are critical to success in today’s business environment. Carefully evaluate your needs and solutions to ensure you are spending wisely. Missteps can be extremely costly.
Professional fees are one area that will likely be viewed differently by each company. Attorneys, accountants, and other professional consultants should be considered investments. These professionals can offer considerable expertise and value for your business. Smaller, less complex businesses may find they do not need sophisticated professional advice. However, beware of being penny wise and pound foolish. Think carefully about what advice or services you truly need and do not shy away from making a sound investment.
Travel and Supplies
Items such as office stationary and supplies, travel and entertainment, telephone, and utilities are usually necessities but, for the most part, are also non-value added costs for most companies. These costs should be closely evaluated and monitored for ways to reduce, minimize, or eliminate them. If these costs are neither a necessity nor adding value, give serious consideration to eliminating them.
Do not let your SG&A costs get out of control when times are good. Do an investment vs. overhead analysis of these costs and reduce or eliminate those that are not adding value in your business.
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