What is 'Top Line' & 'Bottom Line'?

What Is the Top Line?

The top line is a reference to gross figures reported by a company, such as sales or revenue. It is called the top line because it is displayed at the very top of a company's income statement, and is reserved for the reporting of gross sales or revenue. A company that increases its revenue or sales is said to be generating top-line growth. The opposite of the top line is the bottom line.

What Is the Bottom Line?

The bottom line refers to a company's earnings, profit, net income, or earnings per share (EPS). The reference to the bottom line describes the relative location of the net income figure on a company's income statement

The term "bottom line" is commonly used in reference to any actions that may increase or decrease net earnings or a company's overall profit. A company that is growing its 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: increasing revenues (i.e., generate top-line growth) and improving efficiency (or cutting costs).

Let's understand in a bit more detail

Top Line

The top line is a record of a company’s revenue that reflects the full sales price of goods or services sold to consumers within the statement period. It is placed at the top of the income statement, as subsequent line items reference an expense or loss that must be deducted from the gross figure.

Expenses can include any payments made in order to support the production of goods or rendering of a service. Capital losses incurred through the sale of a capital asset at a loss can also be deducted. Common expenses include, but are not limited to, the cost of materials required to manufacture the goods that were sold as well as any operating expenses. Applicable taxes are also deducted from this running total.

Once the costs have been subtracted from the top line then a business arrives at its profits, also known as the bottom line.

Importance

The top line is one of the most important figures in a company's financial statements. It shows how much business a company does in the specified period. It reflects the pure demand for a company's goods or services without any other effects.

The top line reflects a company's growth by showing if a company is selling more goods or services over time. If it is, revenue will be increasing. If it is not growing or growing but not by the desired amount, it is an indicator to a company that changes need to be made. This can include the marketing strategy, quality of the product, pricing, or the customer's overall engagement with the company.

Special Consideration

Top line growth refers to an increase in the gross revenue brought into a company and does not necessarily guarantee an increase in profit. Growth in revenue may lead to growth in the bottom line only if it is not offset by increased expenses.

When top line growth is solely related to increased sales due to increased production, the increased costs of production must be deducted from the top line in order to determine the new bottom line.

Bottom Line

The bottom line refers to the net income reported at the bottom of the income statement. The income statement has a general format and, although there are multiple variations of layouts, all of them result in net income at the end of this financial statement.

The income statement begins with a company's main business activity's sale or service revenues at the top of the report. Other sources of revenue, such as interest or investment income, are listed next. The following section reports expenses, which may be grouped and reported differently depending on the industry and company preferences. At the bottom of the income statement, the total revenue minus total expenses leaves the net income for the accounting period that is available for company retention or dividend distribution.

Management can enact strategies to increase the bottom line. Increases to top-line revenues can 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 also increase its bottom line through the reduction of expenses. In relation to goods and products, items can be produced using cheaper raw materials or by using more efficient methods. Decreasing wages and benefits, operating out of less expensive facilities, and limiting the cost of capital are ways to decrease expenses to increase the bottom line.

How the bottom line is used

The bottom line, or net income, of a company, does not carry over from one accounting period to the next on the income statement. Accounting entries are performed to close all temporary accounts, including all revenue and expense accounts, at the end of the period. Upon the closing of these accounts, the net income is transferred into retained earnings, which appears on the balance sheet.

From here, a company may elect to use net income in several 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 can be 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 business.

Example of bottom line

Cigna, a publicly-traded health insurance company, reported its bottom line for the year ending December 31, 2020, as $8.49 million, a 65.8% increase from the previous year.

It recorded total revenues as $160.40 million and total benefits and expenses as $152.25 million, resulting in an income from operations of $8.15 million. From the income from operations, gains and other income totaling $4.35 million were added, and costs and losses of $1.64 million were deducted, resulting in an income before taxes of $10.87 million. Taxes of $2.38 were deducted, leaving a bottom line of $8.49 million.

Special Consideration

In addition to analyzing a company's bottom line for profitability, there is a push to view the company holistically by measuring its impact on society and the environment. Hence was born the concept of the triple bottom line (TPL), which focuses on profit, people, and the planet.

The triple bottom line theory suggests that qualitative factors should be incorporated in measuring the success of an organization. In accordance with this theory, a company's commitment to being socially and environmentally responsible is used along with profitability to evaluate performance.

There are no defined measurements prescribed, and there is no consensus among companies on how to measure success in these areas. So, it remains largely subjective. Some suggest converting social capital and environmental protections to monetary figures, whereas some suggest that TBL be measured according to an index.

Despite how it's measured, it warrants attention as more focus is given to how we protect and sustain the environment and contribute to society.

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