The two sections of the income statement, or profit & loss (P&L) statement, of a company
Understanding the difference between a company’s bottom line and top line is crucial for anyone interested in investing running a business or just generally understanding corporate finances. While these two terms may sound similar on the surface, they actually refer to very different aspects of a company’s financial performance.
In this comprehensive guide, we’ll provide a plain English explanation of bottom line vs top line and why both metrics matter.
What is the Top Line?
A company’s top line refers to its total revenues or gross sales. In other words, this metric looks at the total amount of money a business takes in before factoring in any expenses.
The top line is also commonly known as
- Gross revenue
- Gross sales
- Gross income
On a company’s income statement, the top line is the very first line item listed. It includes all revenues generated from the company’s core business operations.
For example, if a software company sells $2 million worth of software licenses and subscription fees in a quarter, its top line revenue for that quarter would be $2 million.
The top line shows a company’s ability to sell its products or services and gives investors and analysts a sense of sales performance. However, it doesn’t account for the costs involved in running the business.
What is the Bottom Line?
In contrast to the top line, the bottom line refers to a company’s net income or profits. This metric looks at revenues after deducting all expenses, interest, taxes and other costs incurred during a specific time period.
The bottom line is also known as:
- Net income
- Net profit
- Net earnings
On the income statement, the bottom line is literally the last line, which reports net income after subtracting total expenses from total revenues.
Using the software company example above, let’s say the $2 million in revenue came at a cost of $1.5 million. After deducting the $1.5 million in expenses, the company’s bottom line or net income would be $500,000.
The bottom line gives a clear picture of actual profitability after accounting for all costs. It shows the company’s financial health and ability to generate income for shareholders.
Key Differences Between Top Line vs Bottom Line
While the top line and bottom line are related, there are some notable differences between the two:
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The top line focuses on revenues and sales growth, while the bottom line represents profitability after expenses.
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The top line comes before costs are accounted for, but the bottom line comes after costs are deducted.
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The top line demonstrates sales efficiency, whereas the bottom line reflects operational efficiency.
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The top line can be increased by boosting sales volume or prices. The bottom line can be increased by raising revenues or decreasing costs.
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The top line emphasizes marketing and sales efforts. The bottom line emphasizes financial controls and cost management.
- Top line = total revenues
- Bottom line = net income after expenses
Why Both Top Line and Bottom Line Matter
When analyzing a company’s finances, it’s important to look at both the top line and bottom line, not just one or the other. Here’s why:
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The top line shows the company’s ability to generate sales and grow. Investors want to see steady or increasing revenues over time.
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But revenue growth alone doesn’t guarantee profits. The bottom line determines actual profitability after costs.
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A rising top line paired with a rising bottom line indicates sustainable growth. But if costs are rising faster than revenues, bottom line profits may shrink even as the top line expands.
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Companies need sales, but they also need operational efficiency to translate those sales into shareholder profits. You need both healthy top line growth and bottom line profits over the long term.
So optimally, investors want to see both metrics trending upwards in a balanced fashion. The top line feeds the bottom line, which feeds shareholder returns.
Real World Examples
To better illustrate these concepts, let’s look at a real world example using Starbucks’ financials:
Starbucks Top Line
In fiscal Q2 2022, Starbucks generated $7.6 billion in total revenues. This $7.6 billion is Starbucks’ top line revenue for that quarter.
Starbucks Bottom Line
In Q2 2022, after deducting all operating costs, interest, taxes and other expenses, Starbucks was left with $674 million in net income. This $674 million net profit represents Starbucks’ bottom line for that quarter.
So in this case:
- Top line revenue = $7.6 billion
- Bottom line net income = $674 million
Starbucks needs both solid top line growth to drive the business forward, as well as bottom line profits to reward shareholders. Management focuses on growing both metrics consistently over the long run.
Formulas for Calculating Top Line and Bottom Line
If you want to calculate these metrics yourself for any company, here are the formulas:
Top line revenue formula:
Total Revenue = Sales of Product A + Sales of Product B + Sales of Product C + Other Income
Bottom line net income formula:
Net Income = Total Revenue – Total Expenses
So in the Starbucks example:
Total Revenue (Top Line) = $7.6 billion
Net Income (Bottom Line) = Total Revenue of $7.6 billion – Total Expenses of $6.926 billion = $674 million
Strategies for Improving Top Line and Bottom Line
For companies looking to boost their top and bottom lines, here are some growth strategies:
Top line growth strategies
- Gain new customers
- Sell more to existing customers
- Introduce new products
- Expand into new markets
- Run sales promotions
- Ramp up advertising
Bottom line growth strategies
- Reduce operating expenses
- Negotiate discounts from suppliers
- Improve efficiency and productivity
- Automate processes to cut labor costs
- Cut unnecessary overhead costs
- Optimize pricing and profit margins
Bottom Line vs. EBITDA
One other profit metric you may come across is EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation and Amortization.
EBITDA is similar to net income but doesn’t account for some major costs like taxes and interest expenses. It’s a profitability metric, but does not equal true bottom line net profit.
So don’t confuse EBITDA with the actual bottom line net income, which deducts all costs to reach a company’s definitive profit figure for a set time period.
Key Takeaways: Bottom Line vs. Top Line
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The top line (gross revenue) demonstrates sales performance and growth.
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The bottom line (net profit) demonstrates profitability after costs.
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Successful companies aim to grow both metrics steadily over time.
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Analyzing both the top and bottom lines provides a more complete picture of financial health.
Understanding the difference between top line vs. bottom line remains vitally important for anyone looking to invest wisely or manage a thriving, profitable business. Both metrics provide invaluable, but different, insights into a company’s financial trajectory.
Understanding the Top Line and Bottom Line Figures
Top-line and bottom-line figures are useful in determining the financial strength of a company; however, they are not interchangeable. While the bottom line describes how efficient a company is with its spending and operating costs, the top line does not take into consideration operating efficiencies and only indicates how effective a company is at generating sales.
Companies can increase their top line through engaging in aggressive advertising to gain new customers, adding new product lines, lowering sales returns through product improvement, or increasing prices.
Conversely, they can increase their bottom line through cost reduction – lowering the cost of materials, operating out of less expensive facilities, utilizing tax benefits, limiting the cost of capital, etc.
The most profitable companies typically experience both top-line and bottom-line growth simultaneously by earning more revenues (top line) and reducing their operating costs (bottom line). However, established companies might have flat sales or revenue during a particular period but are still able to boost their bottom line through cost-cutting measures.
For example, in 2019, Apple Inc. recorded lower-than-expected iPhone sales and posted a top-line revenue number of $260.2 billion – down from the previous year’s revenues of $265.6 billion. In the same year, its bottom-line number was $55.3 billion, which was smaller than the $59.5 billion it recorded in 2018.
A company like Apple might experience sluggish sales and, consequently, weaker top-line growth due to maturing products, lack of new products, and supply constraints. A fall in the top line will often feed through to the bottom line, leading to a smaller net profit.
Divergence Between Top Line Growth and Bottom Line Growth
The divergence between earnings growth and revenue growth is quite common in companies, particularly mature companies, at least over short periods. Due to a sharp decline in input prices or strict cost control measures undertaken by companies, profits can grow much faster than revenues.
However, only a few companies are in the position that they can go on getting price increases over and above the inflation rate in their revenues year after year. There’s always a limit to how much profit even the most efficient company can squeeze out of any fixed amount of revenue.
Therefore, if a company’s revenue growth has been consistently falling behind its profit growth, its capacity to generate future profit growth will be in deep decay.
The same remains true if the profit growth is slower than the sales growth year after year. To put it differently, if the ratio of the company’s earnings growth to revenue growth diverges a long way from “1” for a prolonged (say five to seven years), it should be a warning sign as its strategy to generate future profit growth is probably decaying and looks doubtful. The value potential of the company’s strategies is just about spent, and there are problems around the corner if the ratio consistently diverges by a large margin.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA®) certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
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