Bottom Line Meaning
Bottom line refers to the net income that a company generates after considering the profit earned and losses incurred. The word bottom in the term depicts the location of the net earnings or the net income in the income statements, i.e., the last line of the bottom of the page. It is an important part of the document as it signifies the total profit reaped or total loss incurred by a firm.
Table of contents
A bottom line appears to be a ready reference for the management and directors to go through to make major business decisions. As a result, companies try to improve it by adopting measures to increase revenue and enhance productivity.
- The bottom line, also called net income, is the total profit or loss of the business for a particular reporting period.
- It can be improved by increasing revenue, decreasing costs and expenses, and improving efficiency in operations.
- The name indicates the location of the net income figure in the income statement, i.e., at the bottom of the last line of it.
- Considering triple bottom line makes companies consider their social and environmental factors besides their financial performance.
Bottom Line Explained
Bottom line usually refers to the most important conclusion or outcome derived from an explanation, elaboration, or discussion. In business, the term signifies the last thing that ultimately matters to the companies – the profits/earnings/income.
Firms frame strategies, adopt measures, carry out functions, and do whatever is necessary to be productive and profitable. The income statement’s bottom line indicates how effective all means have been in increasing the efficiency and profitability of companies.
At the bottom of the document, these figures ensure that all expenses are already deducted from the revenue generated for that period to obtain the net incomeNet IncomeNet income for individuals and businesses refers to the amount of money left after subtracting direct and indirect expenses, taxes, and other deductions from their gross income. The income statement typically mentions it as the last line item, reflecting the profits made by an entity. that companies are left with. These expenses or liabilities include everything from loans and taxes payable, interest expensesInterest ExpensesInterest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense. to administrative costs.
In short, the net income specified in the last line is the earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments. of a firm after all deductions are made, and there is nothing left to subtract. The stakeholdersStakeholdersA stakeholder in business refers to anyone, including a person, group, organization, government, or any other entity with a direct or indirect interest in its operations, actions, and outcomes. use this information for making major business and investmentInvestmentInvestments are typically assets bought at present with the expectation of higher returns in the future. Its consumption is foregone now for benefits that investors can reap from it later. decisions.
The triple bottom lineTriple Bottom LineTriple Bottom Line (TBL) is a theory that states that companies should make efforts to capture social and environmental prospects in their primary objectives besides earning profits. John Elkington coined the framework for the long sustainability of the business run by the corporates. concept needs a special mention while explaining the idea. While the bottom line also emphasizes the actions that influence a company’s net income or net profits, it is the concept that makes companies consider their social and environmental factors besides their financial performance. This is because the rest two factors also help in improving profit generation. In short, the concept works on – ProfitProfitProfit refers to the earnings that an individual or business takes home after all the costs are paid. In economics, the term is associated with monetary gains. , People, and Planet.
Methods to Improve
An improved figure at the bottom of the income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements. makes a company trustworthy. Thus, businesses have to ensure they work on increasing the bottom line. Multiple ways can be adopted to improve these figures, and the first on the list is to improve the top lineTop LineThe top line is the revenue earned by the business by selling goods or services, reported in the income statement for a defined period. , i.e., the sales. When the sales increase, the revenue will automatically improve.
Secondly, the revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions. does not increase if the expenses, obligations, and liabilities incurred do not decrease. Thus, minimizing the deductions is important to improve the net income figures. Finally, framing proper strategies and best practices to enhance customer focus is the best thing to do. It will ensure customer retention and guarantee retained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company. at the end of the month, quarter, or year.
Next, companies can have cost-cutting measures beyond reducing the workforce. Finally, keeping track of return on investments, direct costs, product pricing, profits, budget planning, etc., can also help. Fixing a competitive price is vital to ensure customers remain loyal to brands. Reducing the expected interest by decreasing the frequency of taking loans for business purposes boosts income retention and maximizes cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. .
Let us consider the following bottom line examples to understand how the concept works:
Example 1 – Conceptual
Though financial activities and different functions carried out by businesses help increase productivity, the social and environmental impact of the company and brand also plays a great role. Recent research indicated that the consumers in the United States are more inclined toward brands and businesses that pose less threat to the environment. By doing so, the citizens ensure their participation in saving the social and environmental surroundings.
Example 2 – Calculation
Suppose ABC Corp presents its income statement for the year ended Dec 2021.
The formula used to calculate the bottom line of a business in the above table is:
Bottom Line (Net Income) = Total Revenue -Total Expenses
Total Revenue = Top line + Other income
Total Expenses = Direct Cost + Indirect Cost + Interest Expenses+ Taxes
Bottom Line vs Top Line
The bottom line and top line are the two terms present in the income statement of a business. Both these concepts help gauge business performance in their own way. While the former is the net income or any factor or action influencing a company’s net income or net profits, the top line is the net salesNet SalesNet sales is the revenue earned by a company from the sale of its goods or services, and it is calculated by deducting returns, allowances, and other discounts from the company's gross sales. or net revenue a company makes or generates.
The top line growth measures the capability of a business to advertise their products and promote their brands to catalyze their sales. On the other hand, the bottom line measures the ability of a business to present its products and services in such a way that it reaps more and more profits.
While the net income on the bottom can be increased by increasing the top line and reducing expenses Expenses An expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.and financial obligations, the latter involves improving the quality of the products and raising their prices.
Advantages & Disadvantages
The bottom line consists of both good and bad points influencing a business. So, let us a have a look at some of the major ones:
|Tracks business performance
|Many factors missed; hence no clear picture on business performance can be obtained
|Helps in financial planning
|Non-cash expenditures can misguide the income statement’s last line
|Assists stakeholders in making decisions
|May be assumption-based
|Improved net income makes obtaining credits easier
|Easy competitor analysis
Frequently Asked Question (FAQS)
Bottom line is the total profit or loss of the business for a particular reporting period. It is one of the critical factors that reflect the true business progress and position. It can be improved by increasing revenue, decreasing costs and expenses via various strategies, and improving efficiency in operations.
The concept makes companies consider their social and environmental factors besides their financial performance. The idea works on 3Ps – Profit, People, and Planet.
It is calculated as the difference between the total revenue generated by a company for a period and the total expenses incurred, including the taxes, interest rates on loans, and other obligations.
This article is a guide to what is Bottom Line and its meaning. Here we explain its improvement methods along with examples and its differences with top line. You can learn more about financing from the following articles –