Bottom Line Meaning
The bottom line, also called as Net Income, is the total profit or loss of the business for a particular reporting period. It refers to the location of the net income figure in the income statement of the business (i.e.) as it is presented at the bottom of the income statement.
The Net Income is one of the critical factors which reflect the true business progress and position. It indicates the increase or decrease in the company’s wealth and profitability. It can be improved by increasing the revenue (Top-line) or by decreasing the cost and expenses via various strategies and improving efficiency in operations.
- The bottom line gets added to the retained earnings. The use of it can be for paying a dividend to shareholders, buyback of shares, investing further into the business.
- Investors in the business/ company, analysts, find the bottom line is a critical element in the income statement and monitors the movement of the same from period to period. It indicates the financial power of the company.
- The net income indicates the efficient operations and management of the cost and expenses in the company. Shareholders monitor the Net Income closely as a dividend payment happens only when there is a positive bottom line. It also impacts the share price in the market.
- Increasing the top-line directly contributes to the bottom line. Top-line can be increased by increasing production, expanding business lines, increasing the price of the products, reducing the return of goods, increase other income like receipt of interest, investment income, rental earnings, etc.
- The Net Income can be increased even by reducing the cost and expenses. E.g., efficient production and operation functions, effective pricing in the procurement of raw materials, reducing other expenses via effective operations and strategies.
How to Calculate the Bottom Line of a Business?
The formula to calculate the bottom line of a Business income is as below:
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Let us take an example –
ABC Corp presents its income statement for the year ended Dec’18.
Methods to Improve the Bottom Line
- Increasing the Top-line (Revenue) and, at the same time, managing the cost and expenses at minimal. It will have a significant impact on bottom-line growth.
- Controlling marketing costs and other fixed operational expenses;
- Have a proper strategy and be keep up the customer-focus.
- The monitoring of Return on investment on all the expenditures;
- Benchmarking the profits to other companies in the same industry;
- Identifying and implementing best practices;
- The various cost-cutting initiatives need implementation.
- Continuously monitor Direct cost. An efficient Supply chain team needs to be in place.
- Continuously monitor Product pricing. It should be competitive and fix it according to market conditions.
- Try to reduce the interest expenses by obtaining credit at effective interest rates.
- Explore new business opportunities and to expand the lines of business.
- The focus needs to be on marketing the products as it will have a direct impact on the top line and the bottom line.
- Improving production techniques and operational efficiency;
- Cash flow maximization needs to focus. Continuously monitor client receivables, and collect them on time. It will improve the working capital position, and the debts and credits can be reduced, which in turn reduces the interest cost.
- Implement the automation process wherever possible to reduce the manpower cost.
- Revenue and Expenses need to be budgeted and planned, and the same has to be in control.
Some of the advantages of net income are as follows.
- Net income tracks business performance.
- It acts as a basis for financial planning and forecasting for the future.
- It is useful for shareholders and analysts to understand financial performance.
- Loans and credits can be obtained only when the bottom line is strong.
- The analysis of variance from the budgets and forecasts;
- Benchmarking and performance of competitors can be analyzed.
Some of the disadvantages of net income are as follows.
- The bottom line doesn’t give the complete picture of the business performance as it is not cash profits. Many other elements need consideration in analyzing the business position.
- Non-cash expenditures can sometimes misrepresent the results.
- The derivation of net income is by considering many assumptions.
The Bottom line of the business indicates the net profit/income by the company after meeting their expenses. The net income does not indicate the cash profit, and calculation of it is after considering non-cash expenses like depreciation and amortization. A decrease in net income indicates that the company is at risk.
Creditors/bankers consider the bottom line as very important as it indicates the credibility and packs back capacity of the business. Any business loan can be obtained only when the net income is good. The positive net income indicates that the company is performing well, and it has a future.
This article has been a guide to what is the bottom line and its meaning. Here we discuss how to calculate the bottom line for a business along with examples and methods to improve the same. You can learn more about financing from the following articles –