The top line and bottom lines 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.
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.
Comparing Bottom Line And Top Line Growth
Example - Apple Inc.
Apple Inc. (AAPL) posted a top-line revenue number of $228.57 billion at the end of their fiscal year on September 30, 2017. The company's revenue number represented a 6.7% top-line growth rate from the same period a year earlier.
Apple posted a bottom-line number of $48.35 billion in the same period which represented a 5.8% increase in their bottom line from 2016.
A company like Apple might experience top-line growth due to a new product launch like the new iPhone, a new service, or a new advertising campaign that lead to increased sales which boosted revenue by 6.7% year-on-year. Bottom-line growth might have occurred from the increase in revenues, but also from keeping expenses under control.
Analyzing The Top And Bottom Line
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, in a situation where a company found 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.
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.
However, this is not to say that a company cannot experience both top-line and bottom-line growth at the same time. This can be achieved if a company earns more revenue (top line) and reduces its operating costs (bottom line).
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 their sales, revenue, and managing expenses efficiently.
To learn more, see Understanding the Income Statement.