The bottom line and the top line are two of the most important figures on a company’s income statement. The bottom line in business is a company’s net income. The top line is a company’s gross revenues, or total sales, before subtracting any operational costs.
What is the Bottom Line in Business?
You can define the bottom line as the company’s profits after deducting the following expenses from the top line:
- Cost of goods sold, including direct labor and materials
- Fixed overhead and administrative expenses
- Interest charges on loans and other debts
- Depreciation and amortization charges
- Federal, state and local income taxes
The bottom line is how much profit a business has left over after all expenses are considered. This can also be referred to as a company’s net income and earns its name by being found at the bottom of a financial statement. Sometimes you’ll also see the bottom line referred to as net earnings or net profit, but all refer to the same line item on a financial report: the net income of a business after all expenses.
The bottom line is a key factor used in making decisions for all small business owners and an excellent way to monitor performance. Businesses are seeing a rise in monitoring an additional bottom line, called the triple bottom line. This concept considers the social and environmental factors in addition to a company’s financial performance. Companies that consider the “social good” aspect of their business are known to resonate more with consumers – 82% of consumers want a brand’s values to align with their own, according to Consumer Goods. The triple bottom line – of people, profit, and planet – allows a business to keep an eye on their values or monitor social impact.
Top Line vs. Bottom Line
While both figures help to gauge business performance, each term is significant for different reasons. For example, the top line indicates business growth. It’s a measure of a company’s ability to market and sell its products against its competitors.
More revenue means that the company has more to spend on advertising, marketing, new product development and hiring additional employees. Companies can increase their top line by:
- Increasing advertising to gain new customers
- Adding new product lines
- Raising prices
- Improving product quality to elevate brand image and reduce returned sales
The bottom line in business demonstrates how efficiently a company can make a product or provide a service that creates enough gross profit to cover overhead expenses, while yielding a reasonable net profit.
Companies can boost their bottom line by:
- Lowering cost of materials by finding new suppliers
- Improving manufacturing productivity
- Reducing operating expenses
- Taking better advantage of tax benefits
At a minimum, a small business owner should be monitoring the company’s top and bottom lines on a monthly basis to stay focused on growth and manage costs effectively.
Another factor to consider is a company’s net profit margin, which calculates the percentage of profit by dividing the net profit by the revenue. This percentage is used to quickly understand the overall financial health of a business and give insight into opportunities for improvement. For instance, a low net profit ratio indicates either overhead costs are too high or a business has priced its goods or services too low. A higher profit margin indicates a business owner has found the right threshold for controlling expenses and pricing their services accordingly. There are always many factors to consider when running a business but keeping an eye on your top and bottom line – as well as an understanding of your profit margins – can go a long way in monitoring your business’s financial health and help you notice trends.