Two of the most critical lines on the income statement for a company are the top line and bottom line. Signs of any changes from year to year are being paid attention from investors and analysts.
A company’s revenues or gross sales are called the top line. The company is experiencing an increase in total sales or taxes when it has top-line growth.
The bottom figure, or the company’s net income, on a company’s income statement, is called the bottom line.
Expenses have been deducted from revenues, after all. The bottom line is a company’s income. General and administrative costs, interest charges paid on loans, and income taxes are included in the expenses. Net earnings or net profits are also a company’s bottom line.
Bottom-line vs. Top-line Key Differences
When both top and bottom lines grow, the company is said to be profitable. However, more established companies might have lower sales or revenue for a reporting period but are still able to improve their bottom line through expenses reduction. During periods of sluggish economic activity or recession, cost-cutting measures are standard.
Investors can determine whether a company’s management is growing their sales and revenue and managing expenses efficiently when they know the factors that impact both the top and bottom lines.
To increase the bottom line, management can enact strategies. The topliners should filter down and boost the bottom line, for the starters to increase in revenue. By lowering sales returns through product improvement, increasing production, expanding product lines, or increasing prices, this can be done. Other income, such as interest income, investment income, co-location fees, or rental, and the sale of property, also increase the bottom line.
Through the reduction of expenses, a company can increase its bottom line. Using different input goods or with a more efficient method, a company’s products could be produced. There are ways to improve the bottom line, such as operating out of less expensive facilities, decreasing wages and benefits, utilizing tax benefits, and limiting the cost of capital. A boost to the company’s bottom line finding a new supplier for basic materials that appeared in a cost savings of million dollars, is an example. Conversely, an indication the company has suffered a dip in income or a surge in expenses if a company’s bottom line shows a curb from one period to the next.
On the income statement, the bottom line of a company does not carry over from one period to the next from an accounting standpoint. All revenue and expense accounts are included in closing all temporary accounts, accounting entries are performed. The bottom line is transferred to maintained earnings upon the closing of these accounts.
Net income or the bottom-line figure can be sent in several different ways by a company’s executives. To issue payments to shareholders in the form of dividends as an incentive to maintain ownership, the bottom-line can be used.
Alternatively, to repurchase stock and retire equity, the bottom line can be used. Or a company may keep all earnings reported on the bottom-line to utilize in product development, or other means of improving the company.