Bottom-Line Growth vs. Top-Line Growth: An Overview
The top line and bottom line are two of the most important lines on the income statement for a company. Investors and analysts pay particular attention to them for signs of any changes from quarter to quarter and year to year.
The bottom line is a company's net income, or the "bottom" figure on a company's income statement. More specifically, the bottom line is a company's income after all expenses have been deducted from revenues. These expenses include interest charges paid on loans, general and administrative costs, and income taxes. A company's bottom line can also be referred to as net earnings or net profits.
- Both the top-line and bottom-line figures are useful in determining the financial strength of a company, but they are not interchangeable.
- The bottom line describes how efficient a company is with its spending and managing its operating costs.
- Top line, on the other hand, only indicates how effective a company is at generating sales and revenue and does not take into consideration operating efficiencies which could have a dramatic impact on the bottom line.
Comparing Bottom Line And Top Line Growth
Management can enact strategies to increase the bottom line. For starters, increases in revenue, or the top line, should filter down and boost the bottom line. This may be done through increasing production, lowering sales returns through product improvement, expanding product lines, or increasing prices. Other income, such as investment income, interest income, rental or co-location fees collected, and the sale of property or equipment, also increase the bottom line.
A company can increase its bottom line through the reduction of expenses. A company's products could be produced using different input goods or with more efficient methods. Decreasing wages and benefits, operating out of less expensive facilities, utilizing tax benefits, and limiting the cost of capital are ways to increase the bottom line. For example, a company finding a new supplier for raw materials that resulted in a cost savings of millions of dollars would give a boost to the company's bottom line. Conversely, if a company's bottom line shows a decrease from one period to the next, it's an indication the company has suffered a dip in income or a surge in expenses.
From an accounting standpoint, the bottom line of a company does not carry over from one period to the next on the income statement. Accounting entries are performed to close all temporary accounts including all revenue and expense accounts. Upon the closing of these accounts, the net balance, or the bottom line, is transferred to retained earnings.
The bottom line figure, or net income, can be spent in a number of different ways by a company's executives. The bottom line can be used to issue payments to stockholders in the form of dividends as an incentive to maintain ownership. Alternatively, the bottom line can be used to repurchase stock and retire equity. Or perhaps a company may keep all earnings reported on the bottom line to utilize in product development, location expansion, or other means of improving the company.
Companies that see a surge in top-line growth are usually experiencing an increase in sales or revenues. There are various ways a company can grow its top line. For example, the marketing team might launch a new ad campaign that successfully brings in customers and increases sales by 20% over the previous quarter. The company could come out with a new product that generates additional revenue or a company could increase prices. A company could also increase its top line through an acquisition of another company. A strategic acquisition can lead to greater market share, which in turn boosts top-line growth.
The top line shows how effective the company is at generating sales. However, it does not consider operating inefficiencies that could affect the company's bottom line. The term "top line" comes from the fact that a company reports its revenue numbers at the top of its income statement. The top line is a pure gross sales number showing how much revenue the company brought in for a given period. As such, it does not subtract expenses, such as the cost of goods sold (COGS), incurred by the company to manufacture its goods. It does not show any reductions for discounts or returns.
Top-line growth refers to the increase in revenue a company earns through its core business operations. Companies can earn other types of revenue—such as interest and gains on the sale of assets. These types of revenue are not included in top-line growth figures.
The most profitable companies typically grow both their top and bottom lines. However, more established companies might have flat sales or revenue for a particular reporting period but are still able to boost their bottom line through expenses reduction. Cost-cutting measures are common during periods of sluggish economic activity or recessions.
Knowing the factors that impact both the top and bottom lines can help investors determine whether a company's management is growing its sales and revenue and managing expenses efficiently.
Bottom-Line Growth vs. Top-Line Growth Example
Apple Inc. (AAPL) posted a top-line revenue number of $365.8 billion for 2021. This was a major increase from the previous year when the company's top-line revenue number was $274.5 billion.
Apple posted a bottom-line number of $94.7 billion in the same period, which was also a substantial increase from the $57.4 billion it posted to its bottom line in 2020.
A company like Apple might also experience weaker top-line growth due to maturing products and lack of new products, which leads to sluggish sales. A drop in the top line feeds through to the bottom line, resulting in a smaller net profit.