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. 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. 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:
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:
