Now as the companies across industries have begun to announce their earnings results for the quarter ended March, we often come across two terms i.e. topline and bottomline growth. While these may sound to be intricate, the two metrics help in better understanding the company's performance.
While topline is the sales or revenue, bottomline is the profit figure reported by the company. The figures for both these metrics are ascertained from the accounting document which is called the profit or loss account or income statement.
The top line is the company's gross sales or revenues. And so when ‘topline growth' is referred to, the company is indicative of an increase in its revenue or gross sales. The figure for sales or revenue appears on the top of the company's income statement.
In quarterly results announcement, companies report the sales figure for the period as the first entry in the top line of the income statement. So, when we hear companies talk about focusing on their top line, they simply stress on the need to increase the company's sales or revenue.
Say for instance, a new promotional offer on the product, pushed product sales by 15%, which resulted in an increase in revenue for the company. The company in such a situation would be said to experience top-line growth.
For the company, the bottom line refers to its net profit which comes on the bottom of the income statement. The bottom line figure is arrived at after reducing all expenses from the company's revenue. Expenses include interest paid on loans, administrative charges, operating cost, income tax etc. This is the income stream left with the company after it pays for all its expenses for the period under review.
The bottom line of the company is also referred as its net earnings and the metric enables understanding of the company's efficiency with respect to its cost management. So, the company which generates higher sales whilst cutting down on its costs is improving on its bottom line.
Say for instance, bottom line growth can be realized in a situation when the company finds a new supplier for its input material, which results in cost saving of significant amount.
To increase their bottom lines, most companies resort to two ways i.e. increasing revenues or generating topline growth and also increasing efficiency by cutting down on costs.
Situation when topline and bottomline move in reverse direction:
There may arise a situation where the two performance metrics i.e. topline and bottomline
move in opposite direction This happens when a company generates higher sales or revenue for the reporting period (topline growth) but the increasing costs of raw material reduces its net earnings dragging bottomline figure lower.
How important are topline and bottom line growth for a company?
Both these metrics are important in knowing the financial health of a company. While topline highlights the company's competence in the area of sales generation it does not factor operating efficiencies. On the other hand, the bottom line suggests how efficiently the company manages operational costs and other expenses and also how it controls total costs.
Notably, these two figures are not interchangeable. But a company at the same time can experience both top line and bottom line growth by increasing its revenue (top line growth) and reducing its operational costs (bottom line growth).