Clues to Reports: FinListics Newsletter March/April '09 Edition

Exactly what's in Cost of Goods Sold and SG&A Expenses?

By Becca Sundal, Director of Client Services at FinListics Solutions

At FinListics we’re often asked “Exactly what’s in Cost of Goods Sold or Selling, General & Administrative (SG&A) expenses?” While the expense categories are never identical from company to company, several generalizations hold true in most cases. Cost of Goods Sold represents expenses related to the direct sale of products or services.

Here are some examples: Manufacturers—raw materials, packaging, manufacturing conversion costs and logistics; Wholesale Distribution and Retail—product and merchandise purchase costs and logistics; Telecommunications—network repair and maintenance, materials and supplies, customer acquisition costs and activation; Service Companies—salaries and wages. Note that for service companies, Cost of Goods Sold is often referred to as Cost of Services. SG&A typically contains indirect expenses like benefits and salaries for administrative functions (human resources, finance and accounting, etc.), facilities expenses and IT expenses.

However, be sure to research the notes to the financial statements in a company’s reports to discover exactly what’s included. For instance, Abercrombie & Fitch reports only the direct cost of merchandise in its COGS and has created a separate reportable expense line item called store & distribution expenses. This is where you’ll find their freight and distribution costs. 

In some cases, companies may also report their expenses in much more detail, which allows you to gain more insight into their cost structure and management of expenses.  For example, 1-800-FLOWERS regularly reports its SG&A expenses into three much more specific areas: Marketing & Sales, Technology & Development, and General & Administrative.  Armed with this information, you can develop much better estimates—and be more specific in cost savings.

Example: In 2008, 1-800-FLOWERS reported that its Technology & Development expense was $21.5 million.  You know that your IT solution typically helps companies improve their IT expense by 1%.  By multiplying $21.5 million by 1%, we find that your solution could potentially reduce its IT expense—and improve cash flow—by an impressive $2.15 million annually. 

Example:  Also in 2008, 1-800-FLOWERS reported that its Marketing and Sales expense was $256.6 million.  On average, your solution helps companies reduce their marketing spend by 0.25% with better targeting and segmentation of customers.  Translation: $256.6 million X 0.25% = $641,500 in cost savings and improved cash flow.

Granted, all this sounds like a lot of accounting—and something you’d only do if you were extremely bored. But it’s essential to have this information. Why? Part of the variance in different companies’ Cost of Goods Sold and SG&A as a percentage of revenue is due to where they book individual expense items.