Understanding your business’s income statement helps you see where your company’s money is going, where you need to grow, and where you can cut costs. Your top and bottom lines are two of the most important parts of this statement.
Highlights
- The top line on your income statement is your total revenue or gross sales.
- At the end of your statement, you’ll find the bottom line: Your net income after paying all expenses.
- You want to grow both your top and bottom line, but if sales are stagnant you can still boost your bottom line with other cost-saving measures.
What is top-line growth?
Take a look at your income statement. The top line shows your total revenue, also called total earnings or gross sales. Basically, this is how much money your business made before any expenses. You can grow this number by increasing sales to bring in more revenue.
But let’s take a step back. What is an income statement? It is a financial statement that shows an organization’s financial performance, including profits and losses, over a set period of time. The statement can be yearly, quarterly, or over any length of time that makes sense for your business.
What is bottom-line growth?
The last part of your income statement is the bottom line, which describes your business’s net income after expenses. This is the bottom line formula:
Your total revenue – total expenses = net income, or the bottom line
As an example of the bottom-line formula, imagine a small business with a total revenue of $300,000. In order to make that income, the business will have a number of expenses. Let’s say they have to rent retail space, employ a sales clerk, purchase equipment, source raw materials, and make other purchases. If these expenses add up to $100,000, you would subtract that amount from the total revenue ($300,000) for a bottom line, or net income, of $200,000.
Your bottom line might grow as you increase sales, but if your expenses also increase, the bottom line could remain the same—or even decrease. This is why you should always consider both the top line and the bottom line.
How to grow your top-line revenue
There are many different ways to increase your cash flow—but it may take some trial and error to find the best path for your company.
For example, investing in marketing can increase your customer base, but you want to make sure you use marketing techniques that actually generate sales. You could also grow your top line by expanding your business into new markets or by offering a wider range of products or services. If these approaches are successful in increasing sales, you will have achieved top-line growth.
The important thing to remember is that the top line is only gross revenue, and the bottom line (revenue minus expenses) gives a more complete picture of the financial success of your business.
How to grow your bottom-line revenue
If your expenses stay the same but your top-line revenue grows, your bottom line will automatically increase. So if you want a more significant bottom line, you can start by increasing your top line.
But if sales are stagnant, it’s time to get more creative about increasing your net profits. You can decrease your operating expenses in a few different ways. One shortcut is to eliminate fraud, which is a type of loss no company wants to experience. You can also maximize your tax deductions so you’ll save money on necessary expenses.
Take a look at where you are spending the most and see where you can make cuts. Are you getting the best possible deal on raw materials? Would more efficient software save you time and money? Examine your expenses line by line to determine the best course of action.
Once you have a plan in place, you can also make your bottom line more predictable by automating your expenses.
Why this matters
The difference between top-line growth and bottom-line growth shows you how much you are spending to make a profit, so you can use this information to evaluate expenses, reimagine budgets, and make the most out of your business.
