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Introducing the Selling, General & Administrative (“SG&A”) and EBITDA line items, and distinguishing them from COGS and Gross Profit.
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Selling, general, and
administrative or SG&A for short,
0:01
is the next major category
you'll see on the P&L.
0:05
It inlcudes what you might think from
the name, marketing and sales cost, your
0:08
accounting team, your rent for your head
office, and pretty much everything else.
0:13
Sometimes these are referred
to as operating expenses.
0:18
Some businesses will split out components
of SG&A as different line items on their
0:23
P&L, depending on the nature
of their business.
0:28
A technology company will likely
call out a section for research and
0:31
development costs, for example,
as that is a major business driver.
0:35
So, as with any aspect of the financials,
the line items that companies present
0:40
might fluctuate a bit depending on
the industry, market, or geography.
0:46
I think the main thing to understand
with SG&A is that these costs usually
0:52
won't directly fluctuate with sales
volume like one would expect cogs to.
0:57
It's common to hear people refer
to direct and indirect costs, with
1:02
cogs being direct costs that fluctuate
more directly with sales or revenue.
1:06
Whereas indirect costs, or
SG&A would not directly fluctuate, so
1:11
stakeholders would typically like
to see that their SG&A margin,
1:17
or SG&A divided by revenue,
is shrinking over time.
1:23
That is an intrinsic indicator
of increased productivity.
1:28
Expanding profit margins or
reduced cost margins.
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So after we subtract our SG&A
expenses from our gross profit,
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we arrive at earnings before interest,
tax, depreciation, and amortization.
1:42
I usually call this EBITDA,
but some people will
1:49
say EBIT DA or EBIT-DA or E-BIT-DA, etc.
1:54
It basically depends on your location,
when I lived in Australia,
1:59
I heard the most variations of how people
say it because there's a fair amount of
2:02
expats there.
2:06
In the states I typically hear EBITDA.
2:08
So, EBITDA is another measure
of business profitability, but
2:12
it's not a complete one
as there are other costs.
2:16
That's explicit in the name,
Earnings Before Interest, or
2:20
I, Tax, or T, Depreciation,
or D, and Amortization, A.
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We'll talk about what the ITDA
are in the next video.
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For now,
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note that EBITDA margin is a margin
that is often tracked and discussed.
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Think about how monitoring
your gross margin and
2:44
EBITDA margins separately will show
you different pieces of information.
2:47
If your gross margin is improving, but
your EBITDA margin is flat or declining,
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generally speaking, that means you have
some issues with fixed costs inflating or
2:57
inefficiencies with your overheads.
3:02
We'll revisit EBITDA in
the final stage of this course
3:03
as it is a term that
investors tend to focus on.
3:08
We'll talk about why then, but maybe you
can figure it out yourself before then.
3:11
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