What Is the Bottom Line?
The bottom line refers to a company's earnings, profit, net income, or earnings per share (EPS). The reference to the bottom line describes the relative location of the net income figure on a company's income statement.
The term "bottom line" is commonly used in reference to any actions that may increase or decrease net earnings or a company's overall profit. A company that is growing its 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: increasing revenues (i.e., generate top-line growth) and improving efficiency (or cutting costs).
- The bottom line refers to a company's net income, which is presented at the bottom of the income statement.
- Management can increase the bottom line by enacting strategies to increase revenues or decrease expenses.
- Net income, or the bottom line, can be retained for future use in the business, distributed in the form of dividends, or used to repurchase shares of outstanding stock.
- The top line refers to gross sales or revenues, which are found on the top line of the income statement.
- Triple bottom line (TPL) refers to measuring the profitability of a company, along with how socially and environmentally responsible a company is.
Understanding the Bottom Line
The bottom line refers to the net income reported at the bottom of the income statement. The income statement has a general format and, although there are multiple variations of layouts, all of them result in net income at the end of this financial statement.
The income statement begins with a company's main business activity's sale or service revenues at the top of the report. Other sources of revenue, such as interest or investment income, are listed next. The following section reports expenses, which may be grouped and reported differently depending on the industry and company preferences. At the bottom of the income statement, the total revenue minus total expenses leaves the net income for the accounting period that is available for company retention or dividend distribution.
Management can enact strategies to increase the bottom line. Increases to top-line revenues can 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.
The net income of the most profitable company in the world, Saudi Aramco.
A company can also increase its bottom line through the reduction of expenses. In relation to goods and products, items can be produced using cheaper raw materials or by using more efficient methods. Decreasing wages and benefits, operating out of less expensive facilities, and limiting the cost of capital are ways to decrease expenses to increase the bottom line.
How the Bottom Line Is Used
The bottom line, or net income, of a company, does not carry over from one accounting period to the next on the income statement. Accounting entries are performed to close all temporary accounts, including all revenue and expense accounts, at the end of the period. Upon the closing of these accounts, the net income is transferred into retained earnings, which appears on the balance sheet.
From here, a company may elect to use net income in several 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 can be 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 business.
Bottom Line vs. Top Line
Bottom line refers to a company's net income found at the bottom of its income statement. Net income is derived from deducting expenses (and COGS, if applicable) from revenues. The bottom line shows how profitable a business is and how well it controls expenses.
The top line, also found on the income statement, is a component of net income. It refers to the gross revenues generated by a business within a certain period. As the name suggests, the top line refers to the top line item of an income statement. Bottom line results can give insight on whether there are issues with the top line, or revenues.
Increases in the top line indicate an increase in sales or revenues, whereas increases in the bottom line could indicate an increase in sales, a decrease in expenses, or both. An increased top line indicates that more products and services were sold in the reported period. However, it does not necessarily correspond to a higher net profit or income. If the top line increases yet the bottom line decreases, attention should be given to expenses and other deductions from revenues.
Example of Bottom Line
Cigna, a publicly-traded health insurance company, reported its bottom line for the year ending December 31, 2020, as $8.49 million, a 65.8% increase from the previous year.
It recorded total revenues as $160.40 million and total benefits and expenses as $152.25 million, resulting in an income from operations of $8.15 million. From the income from operations, gains and other income totaling $4.35 million were added, and costs and losses of $1.64 million were deducted, resulting in an income before taxes of $10.87 million. Taxes of $2.38 were deducted, leaving a bottom line of $8.49 million.
In addition to analyzing a company's bottom line for profitability, there is a push to view the company holistically by measuring its impact on society and the environment. Hence was born the concept of the triple bottom line (TPL), which focuses on profit, people, and the planet.
The triple bottom line theory suggests that qualitative factors should be incorporated in measuring the success of an organization. In accordance with this theory, a company's commitment to being socially and environmentally responsible is used along with profitability to evaluate performance.
There are no defined measurements prescribed, and there is no consensus among companies on how to measure success in these areas. So, it remains largely subjective. Some suggest converting social capital and environmental protections to monetary figures, whereas some suggest that TBL be measured according to an index.
Despite how it's measured, it warrants attention as more focus is given to how we protect and sustain the environment and contribute to society.
Bottom Line FAQs
What Is the Bottom Line in Business?
The bottom line in business refers to a business's net income, net earnings, or net profit. It is referred to as the bottom line as it is found at the bottom of the net income financial statement. The bottom line is calculated by deducting expenses from revenues.
What Is Another Word for Bottom Line?
Another word for bottom line is net income, which is found on the bottom line of a company's net income statement. Other words used to describe the bottom line are net earnings and net profit.
How Do You Calculate the Bottom Line?
The bottom line is calculated by deducting expenses from gross revenues or sales. Gross sales or revenues generally include the total sales and other income for a certain period. Examples of commonly used expenses include depreciation expenses, operating expenses, and interest expenses from the same accounting period.
Why Is the Bottom Line Important?
The bottom line tells a company how profitable it was during a period and how much it has available for dividends and retained earnings. What's retained can be used to pay off debts, fund projects, or reinvest in the company.
The Bottom Line
The bottom line refers to the net income of a company for a certain period. It is recorded on the bottom line of the net income financial statement. The bottom line is calculated by subtracting expenses from gross sales or revenues, and it shows how profitable the business was during a specific accounting period. Business management can employ different tactics, such as reducing expenses or focusing on marketing efforts to generate more sales, to increase the bottom line. In contrast, the top line refers to the gross sales or revenues of a company during an accounting period. The top line, or gross revenues, is used to calculate the bottom line. Alternatively, the concept of triple bottom line suggests that companies should focus on the profitability of their company, as well as their commitment to being socially and environmentally responsible.