You may have heard someone in finance refer to something as either "top line" or "bottom" line. What does it mean? Well, for starters, the top line and the bottom line are two of the most important figures regarding a company's finances, and are definitions of profitability depending on which revenue and expense accounts are taken into consideration.
Particularly in the case of making the best investments for your business, or investing in another business, you will be best placed for success if you have a firm understanding of their definitions and differences between top line and bottom line, and accurately assess a company's financial performance.
What is the definition of the top line?
The top line refers to a company's revenues, also known as gross sales. That is, its total sales before any operating expenses have been deducted. It gets its name from its place on a company's income statement - you guessed it, the first line.
What is the definition of the bottom line?
The bottom line is a company's net income, also known as net profit. Unsurprisingly, the bottom line gets its name similarly - due to its position as the last line on the income statement.
Net income, or net earnings, lives on the bottom line, which is the profit a company has made after all of its expenses and direct costs have been paid out from the earnings generated from the gross sales (top line). These expense accounts include all operating costs that work to keep the business operational, including;
● Rent and utilities
● Interest on any debts
● Administrative costs
● Cost of goods sold, such as the purchase of materials
Essentially, the income statement can be dissected into a simple equation:
Revenue - total expenses = net income.
In other words, the business brings in sales revenue (top line), pays out all of the operating expenses, and then what's left on the bottom line is the net income that the company generates.
Unpacking the top line
Both the top line and bottom line figures are crucial in gauging how the business is performing, and is important to ensure a business's financial planning is done properly. The terminology used is significant for each figure in its way. For instance, the top line indicates the growth of the business. It clearly measures the company's success in marketing and selling its products against the competition.
The higher the revenue that is brought into the company, the better. A healthy revenue, in turn, results in a healthy budget to cover necessary expenses such as marketing and advertising, the development of new products, and increased staffing costs.
In what can only be described as a bit of a "chicken and an egg" scenario, one of the most impactful ways to increase your revenue is through investment in your marketing efforts. This hopefully leads to more customers, which in turn leads to more revenue.
Other than increased advertising, companies may turn to the following methods to attempt to beef up their top line;
Potential ways to improve net sales
● Adding exciting new product lines
● Making improvements to product quality to elevate the brand's reputation and reduce the costs incurred by returned orders
Delving into the bottom line
When you break it down, the bottom line of the income statement is the focus of the most profitable companies, and demonstrates how effectively a company can provide customers with goods and services. Business success is measured by whether the money generated from the sale of products or services has yielded enough gross profit to cover all overheads and being left with a reasonable profit.
Potential ways to improve A Company's net Income
● Improving the productivity of their manufacturing processes
● Reducing operational expenditure
● Lowering the cost of materials by finding more competitive suppliers
● Look into tax benefits that can be taken advantage of
Bottom line growth and top line growth
Top line growth
Companies experiencing high-quality growth typically report higher total revenue/sales growth. To improve top line revenue number, a company has a few options. The company could create new products that will generate revenue, or the company can raise prices. In some cases, the marketing team will launch a new ad that attracts and increases the customer base by 20% versus the previous quarter. Moreover, a company may enhance a company's top line by acquiring a different business. Strategic acquisitions increase market share and boost top line revenue. Top line indicates a company's ability to generate sales.
Bottom line growth
At the end of the day, most business want to make more money, and ensuring your earnings growth continues in a particular direction is the focus of most owners and investors. There are a number of ways that Management boost profitability.
Firstly, increasing the top line growth, or sales revenues, will filter down to the bottom line, as long as fixed costs remain stable. This could mean increased production, or increase of prices, as well as through product improvements, and expansion of product lines.
A company can also increase profits by the sale of assets, such as parts of the company that have weaker top line growth potential (a piece of the business that you don't think will do as well in the future), or a part of the company that is seeing lowering sales returns. The income generated from the sale can be redirected to other parts of the business that have more operating profit or higher potential top line growth figures.
The cost of reducing expenditures and lowering fixed costs, like general and administrative costs, or finding cheaper ways to produce your products, can play a big role in increasing a business's profit margin.
Top line vs. bottom line growth?
The bottom line and the top line can be useful figures when it comes to a company's economic growth and should not be ignored. Top line refers to a company's total sales revenue without the costs. In this way, the best-known statistics are the best way of proving the effectiveness of any company in the sales process. Bottomline, however, takes in different cost and expense details and gives analysts more point on operating efficiency during a specific period (i.e., it looks at net profits).
The relationship between the top line and bottom line
To stay focused on growth and manage business costs effectively, it is best practice for a small business owner to monitor the company's top and bottom lines a minimum of once a month.
When it comes to the top line and bottom line profit figures, there are a few key things to take away.
Increasing your top line (revenue growth) doesn't always guarantee an increase in the bottom line. It is essential to keep a close watch on your expenses and ensure they don't creep up and eat into your profits. As such, taking into consideration operating efficiencies is an important way to ensure the company's profitability.
On the flip side, it's also possible for a company to decrease the top line while seeing an increase in the bottom line. A company can generate profits through savvy savings, automation of processes, and restructuring throughout the business.
The financial performance and business operations are continuously improving. If you could paint a picture of the perfect income statement, it would progress in a way where the top line and bottom line were growing in sync. This situation would indicate that the business is moving in the right direction.
Knowing when to use the top line or the bottom line in your analysis
While both the top line and bottom line are always important, both will experience periods of higher significance throughout various stages in business life. For example, in the early days of a company, investing in growth will cut into the bottom line.
In this phase, it may be more pertinent to focus on tracking and improving the top line (generating sales). Well funded start ups will focus on aggressively increasing their top line growth to take market share, before shifting focus to profitability and monetization.
More established companies may experience sluggish sales (weaker top line growth). Analysis may therefore be emphasized on the bottom line (profit growth) to gauge the overall operating efficiencies of the business (i.e., you can introduce cost-cutting measures to combat this)
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