Understanding selling general and administrative expenses

Definition

Selling, general, and administrative expenses are the overhead costs of finding clients, running the office, and managing the firm, grouped on one block of the Income Statement. On the books, this is a P&L grouping, not a single bill and not the direct cost of the legal work itself.

A professional firm puts business-development lunches, receptionist wages, office rent, and malpractice insurance here. Time spent on a billed matter sits above this block as the cost of the work.

People often write the name as SG&A. It is not a Balance Sheet account, though unpaid pieces of it can sit as liabilities until they are paid.

Accrual books put this month's office costs in this month, even if a vendor is paid later. Cash-basis books may wait until the check is sent.

Where it shows up

P&L: Located below gross profit as the overhead grouping.

Balance sheet: Related to accrued admin costs still unpaid.

Cash flow: Related to operating cash outflows when these costs are paid.

See also: Operating Expenses · Operating Income · Income Statement

When you look at your Income Statement, this block sits under the leftover after the cost of the work. Revenue from billed matters is above it; interest and tax sit further down.

When the block is high relative to fees, the firm spent more to find work and keep the office running. When it is low, rent, reception, or business development were light.

The Balance Sheet does not keep this period's total after the close. Unpaid pieces can sit in accounts payable or accrued liabilities until the vendor or the staff are paid.

On the Statement of Cash Flows, paying those office bills is the cash event. This grouping itself does not move cash.

A paid-ahead malpractice policy can sit in prepaid expenses and then move into this block as the months pass. Current liabilities hold the unpaid piece of rent or wages until payday or the due date.

How it works

Typically includes:

• Selling costs such as marketing and sales wages
• General office costs such as rent and utilities for admin space
• Administrative and management overhead

The firm first decides which costs belong to selling, which belong to running the office, and which belong to managing the partners. Those pieces are then added together as this grouping.

Selling costs are the spend that finds the next matter. Ads, a conference booth, and a lunch with a referral source usually sit in that slice.

General and administrative costs keep the office open and the firm in good order. Reception, rent, software, and insurance usually sit there.

Stay with the overhead grouping when you read this block. Do not fold in cost of services for hours charged to a client file.

Each bill is recorded on its own account, then rolled up. The grouping is a subtotal, not a journal you post by itself.

After the month closes, this block is part of the path from the leftover after work cost down to operating income. Next month starts the roll-up again from zero.

A partner who splits time between billed files and firm management should split that pay. The billed piece stays with the work; the management piece belongs here.

Do not treat a payment run as a new grouping. Paying reception and rent clears what was already owed; this block was built when the month used those costs.

Example

Harbor & Pike LLP bills $40,000 of matters this month. The lawyer time on those files costs $14,000.

Office rent is $4,000, the receptionist earns $3,500, business-development lunches and ads are $1,500, and malpractice insurance for the month is $500. Those four items add to $9,500 of this grouping.

The leftover after work cost is $26,000. After the $9,500 overhead block, operating income from the core practice is $16,500 before interest and tax.

Fees billed                      $40,000
Cost of legal work               $14,000
Leftover after work cost         $26,000
SG&A overhead block               $9,500
Operating income                 $16,500

The firm does not post one journal that says SG&A. It posts rent, wages, ads, and insurance; this block is the subtotal of those overhead accounts.

If a conference booth is prepaid for next quarter, that prepaid amount stays on the Balance Sheet for now. Only the slice that belongs to this month joins the grouping.

Common mix-ups

This grouping is not the same as the cost of the legal work. Hours on a billed file sit above this block; reception and rent sit inside it.

This grouping is not a single ledger account. It is a subtotal of selling, office, and management accounts.

This grouping is not the same as a departmental report. A departmental view can split the same costs by practice group; this block is the firm-wide overhead subtotal on the main statement.

Related terms

• Operating Expenses: The ongoing costs of running the business that are not direct costs of sale.
• Payroll Expense: The wage cost of employees recorded on the income statement.
• Marketing Expense: The cost of advertising, campaigns, and demand generation.
• Professional Fees: Payments to accountants, attorneys, and other outside advisors.
• Rent Expense: The periodic cost of occupying leased space.
• Operating Income: Profit from core operations before interest and taxes.
• Departmental P&L: An income statement split by department, location, or product line.
• Income Statement: A statement showing revenue earned and expenses incurred over a period, ending in net income.