What is Bottom Line
The bottom line refers to a company's net earnings, net profit, net income or earnings per share (EPS). The reference to "bottom" describes the relative location of the net income figure on a company's income statement. Bottom line also refers to any actions that may increase/decrease net earnings or a company's overall profit. A company that is growing its net earnings or reducing its costs is said to be "improving its bottom line". Most companies aim to improve their bottom lines through two simultaneous methods: growing revenues (i.e., generate top-line growth) and increasing efficiency (or cutting costs).
BREAKING DOWN Bottom Line
The bottom line refers to the net income reported at the bottom of the income statement. The income statement has a required layout and, although there are multiple types of income statement layouts, all of them result in net income at the end of the calculations. All income statements begin with sales at the top of the report. The total revenue figure is subsequently reduced by all expenses. Although expenses may be grouped and reported differently, all reductions of income are made to leave the residual income left for company retention or dividend distribution.
Positive Impacts on Bottom Line
Management can enact strategies to increase the bottom line. For starters, increases to revenue increase the bottom line. This may be done by increasing production, lowering sales returns through product improvement, expanding product lines or increasing product 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. In relation to products, items can be produced using different goods using 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 a bottom line.
What Happens to the Bottom Line
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.
From here, a company may elect to use net income in a number of different ways. The bottom line can be used to issue payments to stockholders as an incentive to maintain ownership; this payment is called a dividend. Alternatively, the bottom line is used to repurchase stock and retire equity. A company may simply keep all earnings reported on the bottom line to utilize in product development, location expansion or other means of improving the company.