The bottom line and top line are both useful for calculating a company's financial performance. However, it is essential to note that when the topline increases, it does not indicate that your bottom line is going to expand equally.
The top line merely refers to the total sales or revenue without considering expenses and costs. Thus, the top line figures only aid analysts in understanding how efficient a company is in generating sales.
The bottom line is a more comprehensive analysis of the various costs and expenses. It provides analysts with an accurate view of how efficient an organisation was at an exact period. The most profitable businesses experience both bottom and top-line growth.
Did you Know?
EBITDA doesn't represent net earnings, and it doesn't include interest, equipment depreciation, taxes and amortisation on loans. However, these are all paid out of profits. It's not a way to help investors decide the value of a stock.
What Is Top Line: In-Depth Explanation
Let’s start knowing about what is a top line? The top line on an income statement reflects the revenue of a business or gross sales before the deduction of the operating expenses. This line item shows the amount of money a business has earned during operation.
For instance, if a bookstore employs you, then the amount your business earns through the sale of books and various other items in your top line.
The information is separated into sections in the income statement, including the top section dedicated to describing revenue and sales. The first line of that section is called the revenue total. This is why that name refers to the top line. Businesses aim to increase their top line.
If a company's top line is generally growing, it means that the company's sales have increased. This can lead to an increase in profit if the business does not counter the increase in profits by reducing costs and expenditures.
What Is Bottom Line: In-Depth Explanation
The bottom line on an income statement is the net income of a business which is sometimes referred to as net income or net profit. The bottom line represents the amount of cash a business is left with after deducting operating costs essential to the business. These expenses include the price of the goods sold, labour expenses, general and administrative expenses, depreciation costs, interest tax, etc.
Net income is often the final figure on an income statement. It is how the bottom line earns its name. Businesses typically seek to improve their bottom line to show their effectiveness in various fields, such as sales, operations and cutting costs.
Understanding the Top Line Vs Bottom Line Figures
Now that you know differences between top line vs bottom line are, let’s understand the figures. One way to look at the top/bottom line is to think of them as an image frame. The top line is an image frame that displays a company's total revenues and sales.
The top line also has lines that are subtracted from it. Think of every section as a shade that adds to the bigger image, which is your bottom line. Then you'll have the bottom line of your business, which is the company's net income that reflects the efficiency of the business overall.
The top and bottom lines' growth can increase similarly. Bottom-line growth is about effectiveness. However, any process changes won't necessarily impact the growth of the top line. This suggests that they are getting more efficient within their processes by increasing their net profit but not increasing the amount of revenue they're creating.
Top Line growth highlights revenue pipeline and sales. However, bottom-line growth might not grow due to no adjustments to operating efficiency. In this case, the business must analyse its operating costs and processes to reduce costs and watch the bottom line increase.
In 2021, Apple Inc. reported a topline profit of ₹28,390 billion. This was a rise from the previous year when the topline revenue figure for the company was ₹21,311 billion. Apple reported a bottom-line number of ₹73,49,95,11,00,000 during the same period. This was an increase of a considerable amount compared to the ₹44,54,98,62,00,000 that it reported at its lowest point in 2020.
A company such as Apple could also be experiencing weaker topline growth due to maturing products and the absence of new offerings, which causes a slowing in sales. A decline in the top line can feed down to lower margins and decrease net profits.
If a business is growing its top line, usually, there is an increase in revenue that comes from sales or business operations. Businesses can focus on their topline growth by increasing the effectiveness of marketing efforts, introducing new products that increase pricing or targeting specific consumers using sales initiatives.
Topline numbers can grow if a business buys another company, leading to a larger market share. A rise in a business's top line could also help it increase its bottom line, but it isn't always the situation.
The growth of the bottom line is contingent on a myriad of variables aside from sales. A company may also improve its bottom line and reduce its bottom line because many sales are not profitable. Growth in sales may lead to a massive increase in other costs.
It is also crucial to remember that topline growth figures don't consider the revenue generated by companies from other business operations that are not core to their business, such as interest revenues or asset gains.
Businesses can improve their bottom line by reducing their costs significantly. This can be achieved by employing more cost-effective techniques for operation. It may include - using less costly raw materials or working out of a less expensive facility. Additionally, companies can boost their profits through the use of tax advantages.
Growth in the bottom line isn't necessarily dependent on growth on the top line. One way to increase your bottom line while not the upper line is to increase the growth of income sources like passive investment income or interest income, or even asset gains.
For example, suppose your company earns a similar amount of revenue from sales every year, which means your bottom line remains stable. In that case, you can improve your bottom line and overall earnings by reducing the cost of operations and expenses.
Bottom lines, just like top lines, may also shrink. If this occurs, it is possible that a decline in net profit isn't due to a decline in sales. The bottom line can be affected by other income-related changes, such as increased expenses.
How to Grow Your Top and Bottom Lines?
You've got your income statement that clearly defines the top line vs bottom line growth. What do you do with this data? The most effective finance teams look into the specifics, make strategic assessments about their company's growth, and provide proactive recommendations that allow the company to grow.
If you're looking to increase your top line, you must prioritise anything that will increase the revenue.
- Increase the effectiveness of marketing campaigns that prove successful and the programs that are helping to attract new customers. Think about how much you should invest in advertisements to maintain the momentum of lead generation strategies?
- Include Account Executives (AEs) in your sales force. Revenue allows you to establish a headcount plan throughout the organisation. Collaborate with your revenue department to develop a sales capacity plan and determine the number of new AEs you need to recruit. More AEs mean more deals going across the line.
- Update pricing to boost the value of your contract. As your company grows, so does your product development, too. Review how you structure your SaaS pricing plan and market suitability frequently. Take into consideration your value-adds, such as dedicated customer success specialists and brand new products and features that might not be present in the first version of the contract but could be considered through renewals and new customers.
Also Read: How Does Profit Work in a Business?
To increase bottom-line growth, you must cut costs by improving the efficiency of operations:
- Review expenses to discover ways to cut costs. Eliminating unnecessary expenses gives your company the chance to understand which department delivers the greatest worth.
- Find ways to optimise your marketing spending. New customers are added to the pipeline at the time they're ready. They'll have a variety of options to learn about your products. Finance can track whether performance is improving or decreasing to help marketers determine what's working financially and what's not working in the development of the next campaign.
- Be proactive in ensuring that your customers successfully boost the rate of net revenue retention. Customers pay for your item or service, but they face problems regularly if they don't renew. Customer success teams act as the point of contact for customers, acting as agents who assist in gathering feedback to improve customer relationships. Also, they help keep the value of a customer's lifetime and net revenue retention rising.
This article outlined the importance of top line vs bottom line growth and explained a few vital tips about achieving growth on both lines. Growing top and bottom lines are vital for any business, and if you're a part of any business, deeply consider the tips mentioned above.
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