Budgeting is one of the most important financial management functions undertaken by a small business. The selling, general, and administrative budget is just one component of the firm's operating budget. The operating budget includes all the revenue the firm expects to receive during the next fiscal year and all the expenses it expects to make. It is a predicted, or forecasted, document based on historical, and other, information.
The operating budget is one of two budgets that make up the master budget, which is a financial planning document used by the firm as its overall plan for the next fiscal year. Forecasted expenses for the selling, general, and administrative budget are a vital part of the master plan for the firm and its operating budget.
What Are Selling, General, and Administrative Expenses?
The selling, general, and administrative expenses (SG&A) of a business firm compose the only non-manufacturing expenses in the firm's operating budget. This part of the operating budget excludes its direct costs of manufacturing. These costs are usually found in the line item "Cost of Goods Sold" on the firm's budgeted income statement. SG&A expenses typically have their own line item on the budgeted income statement and are broken down in the operating budget.
SG&A expenses are the costs associated with operating the overall business, except for the direct costs of manufacturing. Corporate expenses such as those associated with legal, sales, accounting, marketing, facilities, and other corporate activities are included in the SG&A budget.
For example, executive salaries are included along with paying outside sources for services such as outsourcing of accounting and bookkeeping services. Marketing campaigns and at least a portion of the salespeople's salaries are SG&A expenses as are facilities management costs. Clerical labor along with the expenses associated with office supplies are included. Business overhead costs are an SG&A expense.
Forecasting Fixed and Variable Expenses
A business has expenditures that can be classified in a number of ways. One way to classify expenditures is by whether they are fixed or variable. When a business develops its operating budget, it must classify its expenditures as either fixed or variable. This is important because how an expense is classified affects a firm's net income. For example, if the firm's salespeople work on commission, which is a variable cost because it changes month to month, and they are switched to a fixed salary, net income is changed. The amount of fixed and variable sales expenses have changed in proportion. Fixed and variable expenses must be forecast accordingly.
This includes the items that make up SG&A expenses:
- The variable portion of the sales staff's salaries may change month to month, but the fixed portion will not change.
- A portion of the marketing budget is usually devoted to advertising.
- Advertising is sometimes a variable cost because the amount of advertising a firm does depends on its sales volume or how many units of their product they sell per fiscal year.
Items like lease payments on a business's facilities or bank loan payments are typically fixed because they don't change month to month. A portion of utilities may be fixed and the rest may be variable. Most administrative costs have a fixed and variable portion. Some sales staff may be on salary which would be a fixed cost. If a company outsources its bookkeeping function or its tax preparation, those costs could be a fixed amount or they could vary depending on how the contractor charges. It is important to correctly classify these SG&A expenses or the forecasted budget will be wrong.
For expense items that stay unchanged over time, budgeting simply requires determining the annual amount, determined from the prior year, and adjusted for any projected changes.
When constructing a budget for variable expenses, it's important to use a process that addresses costs that could increase or decrease depending upon the level of sales in a given time period.
If a firm's business is cyclical, forecasted budgets may have to be adjusted for variable expenses in only a few months of the year.
How To Prepare an SG&A Budget
Here are the steps to prepare an SG&A budget:
- Determine the time period used for the entire forecasted budget; i.e., one year, and prepare the SG&A budget for the same time period.
- Look at last year's SG&A budget and determine which items should stay on the new forecasted budget and which are no longer relevant. You should use a growth rate based on past growth plus any new information you have to estimate fixed costs.
- Determine if there are new SG&A expenses that should be added to the new forecasted budget and include them along with a forecasted cost.
- Look at the fixed expense budget. Decide if all the items on it are still fixed expenses or if any portion is variable.
- Look at the variable expense budget. Decide if the variable expenses are likely to still be variable for the next year. If not, change them. If everything is the same, include them as is after checking on the cost. The variable expense budget must be driven by variable costs per unit forecasted to be sold.
- Remember that the SG&A budget is for non-manufacturing costs only and double-check this.
- Classify your expenses first into fixed and variable and next into selling, general, or administrative expenses.
- Finalize the SG&A budget to be included as part of the operating budget.
SG&A Budgeting Example
Masks and More, LLC produces facial coverings for illness protection. In order to develop the calculations for the SG&A budget for Masks and More, LLC, follow these five steps:
- Forecast the units of the product that you estimate will be sold in the next year, quarter by quarter.
- Forecast the variable SG&A expenses per unit based on last year and any changes you expect.
- Multiply the per-unit expense by units to be sold. This gives you total variable expenses.
- To develop the fixed portion of the budget, use historical information from last year plus any changes you expect for each fixed cost. Add them up and you have total fixed expenses.
- Add total variable and fixed expenses and you have the total SG&A forecasted budget.
|Masks and More, LLC|
|Units to Be Sold||1,000||1,200||1,500||2,000||5,700|
|Variable S&A Expenses Per Unit||x0.10||x0.10||x0.10||x0.10||x0.10|
|Total Variable Expenses||$100||$120||$150||$200||$570|
|Fixed Selling, General, and Administrative Expenses:|
|Total Fixed Expenses||$1,700||$1,800||$2,400||$2,100||$8,080|
|Total SG&A Expenses||$1,800||$1,920||$2,550||$2,300||$8,650|
The Bottom Line
When you look at a completed SG&A budget, it looks simple because it may not have as many line items in it as other sections of the operating budget, if your business is involved in manufacturing. However, you may now realize that is not necessarily true. Deciding on the fixed and variable portions of your costs is not always easy but can change your forecasted net income.