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Selling, General & Administrative (“SG&A”) and EBITDA3:16 with Michael Watson
Introducing the Selling, General & Administrative (“SG&A”) and EBITDA line items, and distinguishing them from COGS and Gross Profit.
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. 1:32 So after we subtract our SG&A expenses from our gross profit, 1:37 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. 2:25 We'll talk about what the ITDA are in the next video. 2:32 For now, 2:36 note that EBITDA margin is a margin that is often tracked and discussed. 2:37 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, 2:52 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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