Bottom Line

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.

Bottom-Line

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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.

Bottom Line

Methods to Improve the Bottom Line

  1. 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.
  2. Controlling marketing costs and other fixed operational expenses;
  3. Have a proper strategy and be keep up the customer-focus.
  4. The monitoring of Return on investment on all the expenditures;
  5. Benchmarking the profits to other companies in the same industry;
  6. Identifying and implementing best practices;
  7. The various cost-cutting initiatives need implementation.
  8. Continuously monitor Direct cost.Direct Cost.Direct costs are costs incurred by an organization while performing its core business activity and can be attributed directly in the production cost, such as raw material costs, wages paid to factory staff, power & fuel expenses in a factory, and so on, but do not include indirect costs such as advertisement costs, administrative costs, etc.read more An efficient Supply chain team needs to be in place.
  9. Continuously monitor Product pricing. It should be competitive and fix it according to market conditions.
  10. Try to reduce the interest expenses by obtaining credit at effective interest rates.
  11. Explore new business opportunities and to expand the lines of business.
  12. The focus needs to be on marketing the products as it will have a direct impact on 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. read more and the bottom line.
  13. Improving production techniques and operational efficiency;
  14. 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 capitalWorking CapitalWorking capital is the amount available to a company for day-to-day expenses. It's a measure of a company's liquidity, efficiency, and financial health, and it's calculated using a simple formula: "current assets (accounts receivables, cash, inventories of unfinished goods and raw materials) MINUS current liabilities (accounts payable, debt due in one year)"read more position, and the debts and credits can be reduced, which in turn reduces the interest cost.
  15. Implement the automation process wherever possible to reduce the manpower cost.
  16. 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.

Disadvantages

Some of the disadvantages of net income are as follows.

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.

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 –