Reporting on the final top-line and bottom-line growth figures is insufficient. You have to drill into the “why” behind them. And the way to reach these “whys” is to comprehend where each line starts and how to use each one to inform more strategic business decisions.
TOP LINE vs BOTTOM LINE
Bottom-line growth vs. top-line growth
When determining the financial success of a business, both the top and bottom lines are useful metrics. However, it’s important to keep in mind that just because the top line increases does not guarantee that the bottom line will follow suit.
The top line of a business only refers to total sales or revenue, excluding costs and expenses. Top-line data can thus only provide analysts with information about how effective a company is at generating sales. The bottom line, however, considers various costs and expenses and can provide analysts with a more thorough picture of how operationally effective a company was at a particular point in time. The most profitable companies experience simultaneous top-line and bottom-line growth.
By drastically cutting their costs, businesses can increase their bottom lines. They can achieve this by employing more economical operating techniques, such as locating less expensive resources for production or working out of a less expensive facility. Businesses can also improve their bottom lines by utilizing any available tax benefits.
Bottom-line growth is not necessarily dependent on top-line growth. Growing other sources of income, such as passive investment income, interest income, or asset gains, is one way to boost the bottom line without boosting the top line. For instance, even if your business consistently generates the same amount of sales revenue, or your top line, you can still boost your bottom line, or overall profit, by cutting costs and expenses.
Bottom lines, like top lines, can also decrease. When that occurs, a drop in net profit is not reliant on a drop in sales. Non-income changes, such as an increase in expenses, could cause a bottom line to drop.
What is the top line?
The bottom line gets its nickname because net income is frequently the final number on an income statement. Businesses frequently strive to boost their bottom line as well, as this can show their effectiveness in a number of areas, including sales, operations, and cost-cutting.
Bottom line vs. top line: Formula and example calculation
You can use the following formula to determine how the top line and bottom line of your income statement differ from one another:
Gross sales minus all expenses plus other revenue equals net income.
In this instance, the top line is the gross sales, and the bottom line is the net income. Despite the fact that most income statements are a little more complicated than the formula above—taking into account a variety of costs and non-core operating income sources—this straightforward calculation can assist both stakeholders and investors in evaluating a company’s financial performance. Many people believe that top-line growth accurately represents a company’s financial value, but bottom-line growth is much more important to a company’s success.
Your top line would be, for instance, $300 million if you worked for a software company with $300 million in total sales revenue. You must subtract costs and expenses from your total revenue to determine your bottom line. Therefore, your bottom line would be $30 million in net income if your operating costs total $270 million, including expenses for labor, materials, facilities, interest, and taxes, and you do not derive income from sources other than your core operations.
If you want to improve your bottom line in this case, you might want to reduce the amount you spend on expenses, boost sales revenue for your business, boost revenue from non-core operations, or do all of the above. For instance, your net income (or bottom line) would be $180 million if you increased your overall sales revenue to $370 million, decreased your operating costs to $210 million, and then added $20 million in revenue from non-core operations.
Other important line items on an income statement
As was already mentioned, income statements contain a variety of other line items that you must consider in order to understand a company’s financial situation in addition to their top and bottom lines. Other crucial income statement line items to be aware of when talking about profit include the following:
Operating profit or loss
The amount of money made or lost after operating deductions is shown in this line item in the operating expenses section. This amount, which represents the business’s pre-tax earnings, is calculated by deducting operating expenses from gross profit.
Total other income
The total revenue from non-core operations, such as interest or asset gains, is shown in this line item.
What does bottom line mean?
The earnings, profit, net income, or earnings per share (EPS) of a company are referred to as the bottom line. The position of the net income figure relative to other figures on an income statement is described by the term “bottom line.”
Is Ebitda top line or bottom line?
The term “bottom line,” in contrast, refers to the company’s net earnings or profit, most frequently EBITDA, or earnings before interest, taxes, depreciation, and amortization.