Loading the player...

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.

RELATED TERMS
  1. Investment Income

    Investment income is that coming from interest payments, dividends, ...
  2. Net Investment Income (NII)

    Net investment income is income received from investment assets ...
  3. Common Size Income Statement

    A common size income statement is an income statement in which ...
  4. Income

    Income is money that an individual or business receives on a ...
  5. Future Income Taxes

    Future income taxes are expected future tax costs or savings ...
  6. Net Loss

    A net loss occurs when expenses exceed income or total revenue ...
Related Articles
  1. Investing

    Understanding the Income Statement

    The best way to analyze a company - and figure out if it's worth investing in - is to know how to dissect its income statement. Here's how to do it.
  2. Investing

    Is Net Income The Same As Profit?

    Net income and profit both deal with positive cash flow, but there are important differences between the two concepts.
  3. Investing

    Calculating Net Income

    Otherwise known as the "bottom line", net income is the most commonly used indicator of a company's profitability. Learn more about how it an investor's decision to own or sell a stock.
  4. Investing

    3 Profit Metrics Every Investors Should Understand

    In this article, you will understand how the three metrics gross profit, operating profit, and net profit helps investors see how a company is performing.
  5. Investing

    How To Analyze Netflix's Income Statements

    Learn how to read Netflix's income statement, calculate net income and interpret EPS to evaluate the company's current financial condition.
  6. Investing

    What are Financial Statements?

    Financial statements are a picture of a company’s financial health for a given period of time at a given point in time. The statements provide a collection of data about a company’s financial ...
  7. Investing

    Valuing A Company Using The Residual Income Method

    Learn the underlying basics behind the residual income model and how it can be used to place an absolute value on a firm.
RELATED FAQS
  1. What's the difference between bottom-line and top-line growth?

    Both the top line and bottom line are critical to investors when analyzing a company's revenues, net income, and expense ... Read Answer >>
  2. How Are Earnings And Income Different?

    Earnings is the profit a company has earned for a period. When investors refer to a company's earnings, they're typically ... Read Answer >>
  3. What is the difference between revenue and profit?

    Revenue is the total amount of income generated by a company. Profit is the bottom line or net income after accounting for ... Read Answer >>
  4. How do operating income and revenue differ?

    Revenue and operating income have different deductions and credits involved in their calculations and both are essential ... Read Answer >>
  5. Gross Profit, Operating Profit and Net Income

    Find out how to calculate gross profit, operating profit, and net income. Learn about the relationships between theses types ... Read Answer >>
  6. How are the three major financial statements related to each other?

    Learn why investors analyze a company's financial statements, and how the income statement, balance sheet and cash flow statement ... Read Answer >>
Trading Center