Bottom-Line Growth vs. Top-Line Growth: An Overview
The top line and bottom line are two of the most important lines on the income statement for a company. Investors and analysts pay particular attention to themfor signs of any changes from quarter to quarter and year to year.
The top line refers to a company's revenues orgross sales. Therefore, when a company has"top-line growth," the company is experiencingan increase in gross sales or revenues.
Thebottom line is a company'snet income, or the "bottom" figure on a company's income statement. More specifically, the bottom line is a company's income after all expenses have been deducted from revenues. These expenses include interest charges paid on loans, general and administrative costs, and income taxes. A company's bottom line can also be referred to as net earnings or net profits.
Key Takeaways
- Both the top-line and bottom-linefigures are useful in determining the financial strength of a company, but they are not interchangeable.
- The bottom line describes how efficient a company is with its spending and managing itsoperating costs.
- Top line, on the other hand, only indicates how effective a company is at generating sales andrevenue and does not take into consideration operating efficiencies which could have a dramatic impact on the bottom line.
Bottom-Line Growth
Management can enact strategies to increase the bottom line. For starters, increases inrevenue, or the top line, should filter down and boostthe bottom line. This may be done through increasing production, lowering sales returns through product improvement, expanding product lines, or increasing 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 increase its bottom line through the reduction of expenses.A company'sproductscouldbe produced using different inputgoods or withmore efficient methods. Decreasing wages and benefits, operating out of less expensive facilities, utilizing tax benefits, and limiting the cost of capital are ways to increase thebottom line. For example,a company finding a new supplier for raw materials that resultedin a cost savings of millions of dollars would give a boost to the company'sbottom line.Conversely, if a company's bottom line shows a decrease from one period to the next, it'san indication the companyhas suffered a dip in income or a surge in expenses.
From an accounting standpoint, the bottom line of a company does not carry over from one period to the next on the income statement. Accounting entries are performed to close all temporary accounts including all revenue and expense accounts. Upon the closing of these accounts, the net balance, or the bottom line, is transferred to retained earnings.
The bottom line figure, or net income, can be spent in a number of different ways by acompany's executives. The bottom line can be used to issue payments to stockholders in the form of dividends as an incentive to maintain ownership. Alternatively, the bottom line can beused to repurchase stock and retire equity. Or perhaps acompany maykeep all earnings reported on the bottom line to utilize in product development, location expansion, or other means of improving the company.
Top-Line Growth
Companies that see a surge in top-line growth are usually experiencing an increase in sales or revenues. There are various ways a company can grow its top line. For example, the marketing team might launch a new ad campaign that successfully brings in customers and increases sales by 20% over the previous quarter. The company could come out with a new product that generates additional revenue or a company could increase prices. A company could also increase its top line through an acquisition of another company. A strategic acquisition can lead to greater market share, which in turn boosts top-line growth.
The top line shows how effective the company is at generating sales. However, it does not consider operating inefficiencies that could affect the company's bottom line. The term "top line" comes from the fact that a company reports its revenue numbers at the top of its income statement. The top line is a pure gross sales number showing how much revenue the company brought in for a given period. As such, it does not subtract expenses, such as the cost of goods sold (COGS), incurred by the company to manufacture its goods. It does not show any reductions for discounts or returns.
Top-line growth refers to the increase in revenue a company earns through its core business operations. Companies can earn other types of revenue—such as interest and gains on the sale of assets. These types of revenue are not included in top-line growth figures.
Key Differences
The most profitable companies typicallygrow both their top and bottom lines. However, more established companies might have flatsales or revenue for a particular reportingperiod but are still able toboost their bottom line throughexpenses reduction. Cost-cutting measuresare common during periods of sluggish economic activity or recessions.
Knowing the factors that impact both the top and bottom lines can help investors determine whether a company's management is growing its sales and revenue and managing expenses efficiently.
Bottom-Line Growth vs. Top-Line Growth Example
Apple Inc. (AAPL) posted a top-line revenue number of $365.8 billion for 2021. This was a major increase from the previous year when the company's top-line revenue number was $274.5 billion.
Apple posted a bottom-line number of $94.7 billioninthe same period, which was also a substantial increase from the $57.4 billion it posted to its bottom line in 2020.
A company like Apple might alsoexperience weaker top-line growth due to maturing products and lack of new products, which leads to sluggish sales. A drop in the top line feeds through to the bottom line, resulting in a smaller net profit.
