A business’s income statement gives vital insight into its financial health, showing profit and earnings over time. It’s broken down into a series of line items, one of which is the bottom line. What is the bottom line exactly, and what does this figure tell you? We’ll explore the bottom line meaning in business along with how it’s calculated in our guide below.
What is bottom line?
The bottom line primarily refers to a company’s net income, which appears as the final line on the income statement. It’s the total amount of profit a business has remaining after paying expenses, expressed with the equation:
Revenue – Expenses = Net Income
Apart from its technical definition on the income statement, the term ‘bottom line’ is also used as a catch-all phrase for any activities that increase or decrease overall profit. These activities are said to impact the bottom line. For example, if your business cuts down in expenses this quarter, you’re improving the bottom line.
Understanding bottom line on the income statement
To get a better sense of how the bottom line functions, it’s helpful to quickly go over how to read an income statement. Company income statements follow a certain format that results in net income appearing at the bottom.
At the top of an income statement, you’ll see the business’s revenues earned from the sale of goods or services. Below this appears any additional sources of revenue, such as investment income and earned interest.
The section below revenue shows all company expenses for the same period. These might appear as a lump sum or be broken down into subcategories, depending on the type of expense incurred and the industry involved.
After subtracting total expenses from total revenues, the remaining profit is net income. This is what appears as the bottom line.
How to improve your bottom line
There are two main ways to improve your company’s net income or bottom line:
To increase revenues, a company might sell off assets, improve its products, or expand into new markets. You could also increase product prices in a bid to increase the bottom line.
To decrease expenses, you could look at ways to reduce the cost of production. Examples include everything from sourcing cheaper raw materials to finding less costly premises. Additional options to improve the bottom line using this strategy include decreasing wages or reducing workers’ hours.
Top line vs. bottom line meaning
Along with bottom line, the top line is another important component of the income statement. This refers to total revenue – the income generated from providing goods and services.
While the bottom line meaning gives you an indication of how well a business is managing its expenses, top line takes expenses out of the equation and only shows revenue. The top line might increase due to a boost in sales but if expenses are higher during this same period the bottom line would show a decrease. The opposite could also be true – if a company cuts its expenses dramatically, it sees an increase in the bottom line despite reduced earnings.
Why is the bottom line useful?
The bottom line is an important metric to track over time. When you look at net profit for a given accounting period, it serves as a time-limited snapshot of the balance between revenue and expense. The bottom line won’t transfer over into the following accounting period’s income statement. Instead, accounting entries close out all revenue and expense accounts for the period. After these are closed, net income transfers to retained earnings on the company balance sheet.
There are several options when it comes to using your company’s net income. One option is to issue dividends to stockholders, while another is to purchase additional stock. However, you can simply choose to retain your earnings for future investment and company growth.
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