Selling, general and administrative (SG&A) costs are expenses not directly attributable to sales of a product or service. SG&A costs are also known as operating expenses or overheads, which are not directly related to production. These might include rent & rates, utilities, some salaries, training, travel & subsistence, advertising, legal, insurance and other fees. In general, the majority of SG&A costs are ‘fixed’ and largely independent of what you sell. With geo-political uncertainty, conflict in Europe and economic headwinds, lowering SG&A costs is rapidly becoming a business imperative.
Lowering SG&A costs
So, your top-line is beginning to decline. Sales, revenue, turnover or whatever you like to call it is falling. Worse still, your most profitable channels, products or services may be slowing the fastest. Even worse still, the cash may not be rolling into the coffers as timely as it once was. Sadly, excluding the costs of production, your SG&A costs stay stubbornly the same. The ‘stickiness’ of many SG&A costs means that they are not always easy to force lower. For example, it takes time to downsize your headquarters once the lease is up for renewal. Equally, employment law protects employees and reducing the workforce quickly can be costly and require short-term cash that you are not collecting from customers.
A business with a high ratio of SG&A costs to revenue faces higher risks in a global economic slowdown like the one we are experiencing. So, let’s take a further look at what is happening in the UK and globally.
A rapidly emerging business imperative
The OECD forecasts a modest 3% growth in global GDP in 2022 slowing to 2.2% in 2023. They also predict stagnation for the UK in 2023, which is bad news for pension funds, investors, public expenditure and living standards. Additionally, interest rates in the UK could peak at 5% by the end of March 2023, threatening the liquidity of highly-leveraged businesses, those that rely on trade finance facilities or with mortgages.
If you factor in inflation, mainly driven by energy prices (and some commodities), prices at the factory gates are higher than ever. With reducing business and individual spending power, firms face a grim decision to absorb increasing Cost of Sales (CoS) or increase prices. The outlook looks certain to reduce margins and profitability, requiring a release valve to ease the financial pressure. It is little wonder why many businesses are turning their attention back to SG&A costs.
Lower overheads easier said than done
Given that SG&A costs are not directly attributable to production or revenue numbers, they don’t flex up and down with sales. The major elements of SG&A tend to be payroll, property, utilities and in some industries, advertising. The smaller elements include training, travel expenses, mobile costs and software. Most boards start with control over ‘discretionary’ expenditure, such as curtailing travel and postponing any scheduled training costs. They then move onto larger items such as advertising budgets, software subscriptions and saving energy. Eventually, they turn to property and payroll, neither of which are quick fixes.
Just ask Made.com who in February 2022 exhorted their investors to stay, insisting that their model was sound and a deep understanding of their customers gave them competitive advantage. Fast-forward to October 2022 and news broke that they were looking for a buyer. On 9th November 2022, they appointed PwC as administrators after failing to find a buyer and failing to ‘pivot fast enough’ following a slowdown. More recently, high-street and online retailer Joules, who only last year upgraded their earnings forecast, is appointing administrators. Some suggest that they failed to pivot online fast enough but they were also caught out by rising costs.
Processes and transformation
In many cases, there is no quick fix to lowering SG&A costs. We also know that diversity breeds innovation, so a mono-culture or limited perspectives stifle change and transformation. However, when the easy cuts are gone, the real hard work begins. How do we pivot and where are the opportunities? How do we work more efficiently and effectively to make us a better business? Are our cash collection processes adequate during fiscal and monetary tightening? Many businesses have inefficient processes and waste that prevents their people from innovation and change.
There are 3 types of business change and only operating model or strategic change is sufficient to prevent decline.
Looking at growth opportunities
Armed with answers and the understanding of where growth opportunities are, it is possible to realign the organisation to capitalise on them. Contrary to management instincts, now might be the time to increase your knowledge of what is happening in your market, with customers and competitors. That way, you can confidently make decisions, even in the most challenging circumstances. We have previously discussed the importance of making informed decisions when things are unclear. The last thing that anyone wants to see is calling in the administrators, knowing that there may have been other options beforehand.
Market sizing, industry profiling, competitor analysis, customer research and benchmarking can all support decision-making. Before we get into organisational design, at least in the short-term, we need to know how to deploy our resources differently and profitability as fast as possible. We should continue to shave off those precious thousands each month by lowering SG&A costs, but you need something above this if your downturn is abrupt.
Making life easier for boards
Although it may sound like a simple premise, we serve boards and support them so that decisions are easier. We source the answers you need, provide independent and impartial advice, give you assurance over processes and assist you with change and insights. With a leaning towards finance and marketing, we are positioned to help you save money, work more efficiently, identify opportunities and grow more profitably.
If you would like support with lowering SG&A costs or finding growth opportunities, why not call and book an introduction. Alternatively, add a few details to our online form or send an email to our capable and friendly team and we will call you.
Finally, why not check out a related article on business troubleshooting.