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.
Explanation
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 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.read more. 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 dividendDividendDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more 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,Investment Income,Investment income is the earnings made from allocating funds in financial instruments or assets like securities, mutual funds, bonds, property, etc. It includes dividends on bonds and interest received on bank deposits, profits and capital gain from the sale of real estate and securities. read more 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.
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For eg:
Source: Bottom Line (wallstreetmojo.com)
How to Calculate the Bottom Line of a Business?
The formula to calculate the bottom line of a Business income is as below:
Bottom Line/ Net Income = Total Revenue (Top line + Other income) (–) Total Expenses (Direct Cost + Indirect Cost + Interest Expenses+ Taxes)
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 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. read more 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.
Advantages
Some of the advantages of net income are as follows.
- Net income tracks business performance.
- It acts as a basis for financial planningFinancial PlanningFinancial planning and analysis (FP&A) is budgeting, analyzing, and forecasting the financial data to align with its financial objectives and support its strategic decisions. It helps investors to know if the company is stable and profitable for investment.read more 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.
Disadvantages
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 expendituresNon-cash ExpendituresNon-cash expenses are those expenses recorded in the firm's income statement for the period under consideration; such costs are not paid or dealt with in cash by the firm. It involves expenses such as depreciation.read more can sometimes misrepresent the results.
- The derivation of net income is by considering many assumptions.
Conclusion
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 amortizationAmortizationAmortization of Intangible Assets refers to the method by which the cost of the company's various intangible assets (such as trademarks, goodwill, and patents) is expensed over a specific time period. This time frame is typically the expected life of the asset.read more. 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.
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