Understanding top line growth vs bottom line growth for businesses
Understanding the profitability and growth of your company is crucial for any owner in order to make, execute, and adapt business plans.
One major way of measuring growth is the organization’s financial standing. This can be analyzed using financial statements and gauging the bottom line vs top-line growth.
What is top-line growth?
When you look at your company’s income statement, the total revenue that you see, or in other words the gross sales is what is known as the top-line growth.
This is the revenue that your business makes before considering any expenses. The top line is a metric that keeps changing periodically and is affected by many different factors that may not always be in your control.
The role of many executives in the company is to optimize operations in a way that increases revenue as much as possible. When it comes to finance-related professionals though, a metric they focus much more on is the bottom line.
What is bottom-line growth?
As the name suggests, the bottom line growth of your company is the bottom line of your income statement that shows the net income. The net income is calculated by subtracting your total expenses from your total revenue.
Improving your net income or the bottom line should be the ultimate goal for your team as it shows how productive and efficient your business is. The more you can get by spending as less as possible is the way to improve your bottom line.
When it comes to ways in which you can improve your bottom line vs top-line growth, both are done in different ways.
How to increase the growth of top-line revenue?
Depending on the type of business you have, the products you are selling, the industry you are a part of, and the competition you have, you will find various different ways to improve your top-line growth.
1. Use best-performing marketing campaign
One area of any business that has a direct impact on the top-line margins is the marketing that you do. The more demand and leads you are able to generate for your business, the more revenue you are going to make.
2. Expand into new markets
When a business reaches a plateau of customers in a particular market, it could be worth exploring other geographic regions that have the potential to generate more revenue by acquiring new customers.
This of course should be done after considering all the necessary factors to introduce your business in a new region.
3. Increasing brand awareness
Your business can’t sell its products or services if people don’t know your brand exists. Getting the word out about your business today is as important as it has always been.
Thanks to digital media, creating brand awareness has become much easier than a decade ago.
4. Offering a wider range of products
Depending on your market and the type of product or service you provide, it can be worth the investment and effort to provide your customers with a diversified range of products and services.
This helps in catering to different needs so that you don’t lose out on potential customers.
How to increase the growth of bottom-line revenue?
Optimizing a company’s bottom line growth is usually associated with ways of cutting costs and reducing business expenses. Listed below are a few of the common ways that businesses tend to improve their bottom line.
1. Reduce marketing cost
The interesting part about marketing is that it not only affects your top line but also your bottom line as there are costs associated with its execution.
So optimizing your marketing cost to be as low as possible while still getting the necessary business will reflect on the bottom line.
2. Eliminate fraud
Financial fraud is a major cause of increased expenses a business has to face. These can be avoided by setting proper systems and processes in place so that there are no unnecessary expenses and fraudulent activities.
3. Maximize tax deductions
As a corporate or business entity, you should be aware of all the tax deduction benefits you can get. There are many different tax saving schemes for various types of businesses in certain industries.
Many types of expenses when used for business purposes are exempt from tax laws.
4. Analyze spending patterns
Different teams and employees have different budget requirements in order to fulfill their daily tasks. All these expenses need to be kept in check.
Your business should cut down on expensive spending, set department budgets, and have restrictions on spending using expense policies.
Calculating top and bottom line revenue for your business?
The top-line growth or the revenue of a business is calculated using the following formula:
Top line/Revenue = Price of a product x number of units sold
So if a business has sold 1000 units and the cost of 1 unit is USD 100, then the top line or total sales/revenue of the business is USD 100,000.
The bottom-line growth or the net income of a business is calculated using the following formula:
Bottom line/Net income = Total revenue – Total expenses
Let’s take the hypothetical example of the business above that earned a top line of USD 100,000. To achieve this income the business incurred certain costs that include:
• Salaries - USD 10,000
• Total raw materials - USD 1000
• Total shipping charges - USD 1000
• Marketing costs - USD 3000
So the total expense of the company was USD 15,000.
Using the formula for the bottom line we get the business’s net income which is USD 85,000.
How Volopay can help manage your bottom-line revenue
Volopay is an all-in-one expense management software. Our platform allows businesses to centralize all their spending through a single system so that you get complete visibility of all business expenses.
An expense management system like Volopay is the perfect way for your business to improve its bottom line by keeping expenses in check and setting necessary controls for budgets.
FAQs
Both, the bottom line as well as the top line are equally important financial metrics to understand the growth of a business. Any business should always strive to improve revenue as much as possible and at the same time keep costs to a minimum.
The top line in a P&L or income statement refers to the total revenue or gross sales that a business has made in a particular period. This value does not include the expenses the business has incurred in order to generate revenue.
EBITDA is neither your business's top line nor bottom line. It comes between your gross income and net income and is calculated by adding interest, taxes, depreciation, and amortization to your net income.
No, operating profit refers to the income of your business before interest and tax. The bottom line or the net income is different from the operating profit as it is the final value after subtracting all the expenses like interest and taxes.