What’s the Difference between top-line and bottom-line growth?
If you decide to start investing, you will need to know the terms such as top-line and bottom-line growth sooner or later. Sometimes, understanding these terms and everything in between is required to reach sustainable investing success.
When we analyze a company’s income statement, we find the terms top-line and bottom line. Quarter to quarter and year to year, investors and analysts pay special attention to them for signs of any changes.
The top line points to a company’s revenues or gross sales. If the company has top-line growth, it means it is experiencing a gross sales increase.
The bottom line indicates the net income of the company – income after deducting all expenses. Expenses contain interest paid on loans, general and administrative fees, income taxes, and more. The bottom line is also called net profit.
How to increase the bottom line growth?
Management can formulate strategies to increase the bottom line.
Boosting the bottom line can be done through increasing production, reducing sales returns through improving a product, expanding product lines, or growing prices. On the other hand, other incomes, such as investment or interest income, rental or co-location fees collected, and property or equipment sale, can raise the bottom line.
Besides, a company can increase its bottom line by reducing expenses. Lowering wages and benefits, operating out of less expensive facilities, utilizing tax benefits, and limiting capital costs are ways to increase the bottom line.
If a company’s bottom line suffers decreases from time to time, it means that it has experienced a drop in income or increase in expenses.
A company’s executives can use the bottom line figure or net income in several ways. They can use it to issue payments to stockholders in dividends as an incentive to secure ownership. Also, they can repurchase stock and retire equity. Besides, a company may keep all earnings to use in product development, expand the location, or other means of improvement.
How can a company grow its top-line growth?
When companies see an increase in top-line growth, they are seeing a rise in sales or revenues. A company can apply several methods to grow its top line. For instance, the marketing team could start a new ad campaign to bring in customers and increase sales. Also, the company could develop a new product that produces additional revenue, or it could raise prices. On the other hand, the company could also acquire another company to expand its top line. A strategic acquisition can lead to a more significant market share, which in turn raises top-line growth.
By the top-line figures, we can see how effectively the company is generating sales. Still, we can’t estimate how it is operating inefficiencies. The latter could harm the company’s bottom line.
The phrase top-line comes from the fact that a company announces its revenue figures at the top of its income statement. The top-line is a pure gross sales number determining how much revenue the company produced for a given period. It does not deduct expenses, such as the cost of goods sold, incurred by the company to produce its goods. It does not exhibit any reductions for discounts or returns.
Top-line growth refers to the rise in revenue a company makes through its core business operations. Companies can make other types of revenue like interest and gains on the sale of assets. These types of income are not included in top-line growth figures.
Key Differences between the top-line and bottom-line
The most successful companies typically grow both their top and bottom lines. However, more well-established companies might have flat sales or revenue for a particular reporting period. Still, they can boost their bottom line through expense reduction. Cost-cutting measures are standard during periods of inactive economy or recessions.
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