When looking at the performance of companies, you will often come across two terms – bottom-line and top-line growth. Both are included in the income statement of a company.
Let’s first look at what these terms mean. Top-line growth refers to gross sales or revenue; when a company has top-line growth, it means it has experienced an increase in total sales or revenues.
The bottom line is the net profit or net income that a company reports. It is the income a company reports after deducting from revenues. These expenses include interest paid on loans, general and administrative costs involved in running the company, income taxes paid, etc.
What is the significance of the top line and bottom line?
Top line is an indication of how a company generates sales and revenues. On the other hand, the bottom line is how a company manages its operating costs. Top-line figures are not necessarily a measure of a company’s efficiency because its bottom-line growth figures may be weak.
Top-line vs bottom-line growth
The terms top line and bottom line originated from the placement of these numbers in a company’s income statement. You’ll find sales and revenues on the top, hence the term top line.
So when you hear that a company‘s focus is to increase top-line growth, it simply means that it wants to increase its sales and revenue. Let’s take an example of a company which manufactures cars and gives a discount of 15 per cent across all its models. This will mean more car sales and hence an increase in revenues. In this case, one can say that the company has experienced top-line growth.
The bottom line appears at the bottom of the income statement. As we have seen, this is the net income of the company that is calculated after subtracting all the expenses from a company’s gross revenues. It is thus the income that is left with a company after accounting for all the costs. So a company will register bottom-line growth only if it generates higher sales, cuts down on its expenses or both. Let us assume that the company mentioned above has made sales of Rs 200 crore during a particular quarter. It used to pay one of its suppliers Rs 150 crore but has now found another supplier. The new supplier offers a lower price of Rs 130 crore. Other expenses remaining constant, the company will register a Rs 20 crore growth in its bottom line.
|Income Statement of ABC Ltd (Example)|
|Sales revenue||500||Top line|
|Net income||105||Bottom line|
A company can improve its top-line growth in the following ways:
- It can invest in marketing and branding so that more people buy their products or services
- It can focus on better service to retain existing customers and get new ones
- It can make an effort to increase market share
- It can look for mergers and acquisitions to increase its revenues
When a company seeks to expand its bottom line, it can:
- Better manage costs, cutting down expenses where possible
- Get out of less profitable business areas
- Automate systems so that costs come down
So a company can increase its bottom-line growth in two ways. It can increase its revenues, or it can strive to improve efficiency and cut down costs.
Things to keep in mind
As an investor, you should know that a company can increase its top-line earnings, but may show no improvement in its bottom-line. This is because all sales might not mean profits for the company.
Profitable companies will show both top-line and bottom-line growth. However, big, established companies may have periods when their revenues do not grow much. Also, at certain times, a company’s growth may be affected by the overall economic scenario. Even in this situation, companies may improve their bottom-line figures by cutting down on expenses. So in times of slow economic growth companies tend to employ cost-cutting measures. The idea is to improve their bottom line even if revenue growth has slowed or stagnated. These companies tend to make money even when the sector or industry is in decline, to their shareholders’ benefit.
Both top-line and bottom-line strategies are linked and companies make an effort to boost growth in both departments. Both these measures, together and separately, indicate how efficient a company is.