An Overview of Bottom-Line vs. Top-Line Growth
The top line and bottom line are two of the most important lines on a company's income statement. Investors and analysts pay close attention to them for any indications of changes from quarter to quarter and year to year.
The top line of a company refers to its revenues or gross sales. As a result, when a company experiences "top-line growth," it is experiencing an increase in gross sales or revenues.
The bottom line is a company's net income, also known as the "bottom" figure on its income statement. More specifically, the bottom line is a company's income after deducting all expenses from revenues. These costs include loan interest, general and administrative expenses, and income taxes. The bottom line of a company is also known as net earnings or net profits.
Increase in Profitability
Management can implement strategies to boost the bottom line. To begin, increases in revenue, or the top line, should trickle down and benefit the bottom line. This can be accomplished by increasing production, decreasing sales returns through product improvement, expanding product lines, or raising prices. Other sources of revenue, such as investment income, interest income, rental or co-location fees, and the sale of property or equipment, all contribute to the bottom line.
The reduction of expenses can help a company's bottom line. Products made by a company could be made with different input materials or with more efficient methods. Lowering wages and benefits, operating in less expensive facilities, taking advantage of tax breaks, and limiting the cost of capital are all ways to boost the bottom line. For example, a company that finds a new supplier for raw materials and saves millions of dollars would benefit the company's bottom line. In contrast, if a company's bottom line decreases from one period to the next, it indicates a drop in income or an increase in expenses.
In accounting, a company's bottom line does not carry over from one period to the next on the income statement. Accounting entries are made to close all temporary accounts, which include all revenue and expense accounts. When these accounts are closed, the net balance, or bottom line, is transferred to retained earnings.
The bottom line, or net income, can be spent in a variety of ways by a company's executives. The bottom line can be used to pay dividends to stockholders as an incentive to keep their ownership. The bottom line can also be used to repurchase stock and retire equity. Alternatively, a company may decide to keep all earnings reported on the bottom line in order to invest in product development, location expansion, or other ways to improve the company.
Top-Line Development
Companies that experience a surge in top-line growth typically see an increase in sales or revenues. A company's top line can be increased in a variety of ways. For example, the marketing team could launch a new ad campaign that successfully attracts customers and boosts sales by 20% over the previous quarter. The company could release a new product that generates additional revenue, or it could raise prices. A company's top line could also be increased by acquiring another company. A strategic acquisition can result in increased market share, which boosts top-line growth.
The top line demonstrates the company's ability to generate sales. It does not, however, take into account operational inefficiencies that may have an impact on the company's bottom line. The term "top line" refers to the fact that a company's revenue figures are reported at the top of its income statement. The top line is a simple gross sales figure that shows how much revenue the company generated in a given period. As a result, it does not deduct expenses incurred by the company to manufacture its goods, such as the cost of goods sold (COGS). There are no reductions for discounts or returns.
Top-line growth refers to an increase in revenue generated by a company's core business operations. Other types of revenue can be generated by businesses, such as interest and gains on asset sales. These types of revenue are excluded from top-line growth calculations.
Important distinctions
The most profitable businesses typically see increases in both their top and bottom lines. More established businesses, on the other hand, may have flat sales or revenue for a given reporting period but still be able to boost their bottom line through expense reduction. During periods of slow economic activity or recession, cost-cutting measures are common.
Example of Bottom-Line Growth vs. Top-Line Growth
Apple Inc. (AAPL) reported a revenue of $260.2 billion in 2019. This was a decrease from the previous year's top-line revenue of $265.6 billion.
In the same period, Apple posted a bottom-line figure of $55.3 billion, which was less than the $59.5 billion it posted in 2018.
A company like Apple may experience slower top-line growth as a result of maturing products and a lack of new products, resulting in sluggish sales. A decrease in the top line has a knock-on effect on the bottom line, resulting in a lower net profit.
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