Word of the day

What is bottom line of a business?

As we have already discussed about the top line growth of a business  in our previous blog , which describes the company revenues or the gross sales. In this blog, bottom line, we will discuss the net profit sales after the expense which forms the bottom line for the balance sheet.

The top line and bottom lines are two of the most important lines on the income statement for a company. Investors and analysts pay particular attention to them for signs of any changes from quarter to quarter and year to year. Let’s first look at their definition:

The top line refers to a company’s revenues or gross sales. Therefore, when a company has “top-line growth,” the company is experiencing an increase in gross sales or revenues.

The bottom line is a company’s net income, or the “bottom” figure on a company’s income statement .

More specifically, the bottom line is a company’s income after all expense have been deducted from revenues. These expenses include interest charges paid on loans, general and administrative and income taxes. A company’s bottom line can also be referred to as net earnings or net profits.

Management can enact strategies to increase the bottom line. For starters, increases in revenue or the top line should filter down and boost the 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’s products could be produced using different input goods or with more 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 the bottom line. For example, in a situation where a company found a new supplier for raw materials that resulted in a cost savings of millions of dollars would give a boost to the company’s bottom-line. Conversely, if a company’s bottom line shows a decrease from one period to the next, it’s an indication the company has 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.

Satish Gupta
Done bachelors in Mechanical Engineering in 2018. #LEARNER #BLOGGER

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