1 00:00:01,290 --> 00:00:05,980 Selling, general, and administrative or SG&A for short, 2 00:00:05,980 --> 00:00:08,595 is the next major category you'll see on the P&L. 3 00:00:08,595 --> 00:00:13,477 It inlcudes what you might think from the name, marketing and sales cost, your 4 00:00:13,477 --> 00:00:18,940 accounting team, your rent for your head office, and pretty much everything else. 5 00:00:18,940 --> 00:00:22,440 Sometimes these are referred to as operating expenses. 6 00:00:23,640 --> 00:00:28,355 Some businesses will split out components of SG&A as different line items on their 7 00:00:28,355 --> 00:00:31,810 P&L, depending on the nature of their business. 8 00:00:31,810 --> 00:00:35,850 A technology company will likely call out a section for research and 9 00:00:35,850 --> 00:00:40,910 development costs, for example, as that is a major business driver. 10 00:00:40,910 --> 00:00:46,260 So, as with any aspect of the financials, the line items that companies present 11 00:00:46,260 --> 00:00:51,120 might fluctuate a bit depending on the industry, market, or geography. 12 00:00:52,310 --> 00:00:57,220 I think the main thing to understand with SG&A is that these costs usually 13 00:00:57,220 --> 00:01:01,290 won't directly fluctuate with sales volume like one would expect cogs to. 14 00:01:02,400 --> 00:01:06,980 It's common to hear people refer to direct and indirect costs, with 15 00:01:06,980 --> 00:01:11,980 cogs being direct costs that fluctuate more directly with sales or revenue. 16 00:01:11,980 --> 00:01:17,316 Whereas indirect costs, or SG&A would not directly fluctuate, so 17 00:01:17,316 --> 00:01:23,238 stakeholders would typically like to see that their SG&A margin, 18 00:01:23,238 --> 00:01:28,350 or SG&A divided by revenue, is shrinking over time. 19 00:01:28,350 --> 00:01:32,420 That is an intrinsic indicator of increased productivity. 20 00:01:32,420 --> 00:01:36,340 Expanding profit margins or reduced cost margins. 21 00:01:37,550 --> 00:01:42,609 So after we subtract our SG&A expenses from our gross profit, 22 00:01:42,609 --> 00:01:49,297 we arrive at earnings before interest, tax, depreciation, and amortization. 23 00:01:49,297 --> 00:01:54,491 I usually call this EBITDA, but some people will 24 00:01:54,491 --> 00:01:59,311 say EBIT DA or EBIT-DA or E-BIT-DA, etc. 25 00:01:59,311 --> 00:02:02,734 It basically depends on your location, when I lived in Australia, 26 00:02:02,734 --> 00:02:06,756 I heard the most variations of how people say it because there's a fair amount of 27 00:02:06,756 --> 00:02:08,110 expats there. 28 00:02:08,110 --> 00:02:10,990 In the states I typically hear EBITDA. 29 00:02:12,080 --> 00:02:16,370 So, EBITDA is another measure of business profitability, but 30 00:02:16,370 --> 00:02:20,120 it's not a complete one as there are other costs. 31 00:02:20,120 --> 00:02:25,095 That's explicit in the name, Earnings Before Interest, or 32 00:02:25,095 --> 00:02:30,720 I, Tax, or T, Depreciation, or D, and Amortization, A. 33 00:02:32,010 --> 00:02:36,740 We'll talk about what the ITDA are in the next video. 34 00:02:36,740 --> 00:02:37,730 For now, 35 00:02:37,730 --> 00:02:44,185 note that EBITDA margin is a margin that is often tracked and discussed. 36 00:02:44,185 --> 00:02:47,235 Think about how monitoring your gross margin and 37 00:02:47,235 --> 00:02:50,975 EBITDA margins separately will show you different pieces of information. 38 00:02:52,175 --> 00:02:57,245 If your gross margin is improving, but your EBITDA margin is flat or declining, 39 00:02:57,245 --> 00:03:02,275 generally speaking, that means you have some issues with fixed costs inflating or 40 00:03:02,275 --> 00:03:03,896 inefficiencies with your overheads. 41 00:03:03,896 --> 00:03:08,240 We'll revisit EBITDA in the final stage of this course 42 00:03:08,240 --> 00:03:11,480 as it is a term that investors tend to focus on. 43 00:03:11,480 --> 00:03:15,310 We'll talk about why then, but maybe you can figure it out yourself before then.