![]() ![]() This leads to a combination of slightly increased prices combined with a reduction in expenses.” “In that case, you’ll have to mainly cut the fixed expenses, which is the SG&A. “Sometimes, you can’t cut the cost of sales or COGS because the price of supplies has risen, inflation has taken place, and you don’t want to substantially raise your prices,’’ Barros says. In that case, company managers have a choice: raise their prices or cut their operating expenses, or they can decrease the gross margin, which is not the best solution. ![]() Sometimes, companies see their cost of production or COGS increase due to a rise in the price of raw materials, transportation or other input costs that are beyond their control. Then all your profitability is gone.’’ How to control your cost of goods sold “Usually what happens is you lose control, keep going, unaware of your margins and end up spending 30% or more (of your revenues) on SG&A. “You have to determine how well you’re performing in terms of cost and expense to ensure you have control over both accounts.’’ “Every single month, you have to evaluate how much you’re allocating under each COGS and SGA account,” Barros says. “Generally speaking, SG&A should run from 15% to 25% (of revenues), depending on the industry or business you’re in.’’ “If you want to keep your pre-tax profit at 20%, and your cost of sales is too high, the first place you’re going to have to cut is SG&A,” Barros says. That means your SG&A have to be a maximum of 10% to 20% because you need to ideally have 10% as profit before taxes.’’īarros says companies with high COGS must be “lean and mean,’’ in order to keep pre-tax profit margins in the 10% range. “You’ll have 20% to 30%, respectively, left over. For example, if your cost of goods sold represents $700 for every $1,000 in revenues, then your gross profit margin will be $300 or 30% of revenues.ĬOGS of 80%, or even 70%, of revenues is generally too high, says Barros. Management payroll-the professional fees, accountants, lawyers-all fall under administrative expenses,” says Barros.Ī relatively high cost of sales or COGS will require attention if your company wants to remain profitable. “Administrative costs are for managing the business. These include the cost of a company’s accounting, marketing or HR personnel, as well as its administrative and management staff, including outside professionals, such as accountants or lawyers, who are not salaried employees. Examples of general expensesĪdministrative expenses are the costs of paying wages, salaries and providing benefits to non-sales personnel. General expenses are different from administrative costs in that they do not relate to the management of the business. Rent, insurance, utilities, office supplies-all of the costs associated with the day-to-day running of the business,” says Barros, adding that it’s also called overhead. “General expenses are directly related to the operation of the business. General expenses are the costs a business incurs as part of its daily operations, separate from administration expenses. selling costs such as wages, commissions and out-of-pocket expenses.marketing costs such as advertising, website maintenance and spending on social media.distribution costs such as logistics, shipping and insurance costs.While selling expenses are considered fixed costs, they may go up if management hires more salespeople and increases commissions or spends more on marketing and advertising. “Within the selling expense, there are some direct expenses.” “If you have to pay salaries, benefits, accommodation, commission, travel expenses- all the expenses related to sales-those are operating expenses,’’ Barros says. The salaries and commissions of sales staff, as well as advertising and promotion, travel and entertainment, are all considered selling expenses. Selling expenses are the costs associated with distributing, marketing and selling a product or service. The elements of selling, general and administrative (SG&A) expenses What are selling expenses? “It’s the cost that you have if you sell one unit or a thousand units,’’ Barros says. They are indirect because they are not directly associated with the production or sale of goods and services.īecause operating costs are fixed, they tend not to fluctuate with the volume of sales. Operating expenses are commonly referred to as overhead and represent indirect or fixed costs. “It’s the cost of running your business,’’ says Alex Barros, Business Advisor with BDC Advisory Services in Edmonton. They include rent and utilities, marketing and advertising, sales and accounting, management and administrative salaries. Operating expenses-also known as selling, general and administrative expenses (SG&A)-are the costs of doing business. Growth & Transition Capital financing solutions Kauffman Fellows Program Partial Scholarship Venture Capital Catalyst Initiative (VCCI) Industrial, Clean and Energy Technology (ICE) Venture Fund
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