It’s important to know top line revenue vs bottom line revenue. You can see a huge difference between them because what’s in between is expenses.
In this post, we’ll walk you through top line revenue vs bottom line revenue. We’ll talk about what affects both numbers and how to calculate and manage them for greater business success.
What is Top Line Revenue?
The term “top line revenue” talks about the top line of your business’s income statement. This refers to your gross reported income, otherwise known as sales or revenue. Your top line is where you record the full sales price of the goods or services that you sell. Every statement period, you have a different number based on what your customers bought.
If your sales or revenue increases from one period to the next, you call this top line growth. Top line revenue vs bottom line revenue is your business’s ability to sell, or how much business you are doing. This number also shows if you’re growing, so it’s an important metric.
Based on this reflection of pure demand for your goods or services, you can make better growth decisions. For example, you can adjust your pricing, change your marketing strategy, or improve the quality of your products. You can also make moves to increase customer engagement to boost brand reputation and visibility to get more sales.
What is Bottom Line Revenue?
Have you heard of the expression, “the bottom line”? This refers to an accounting term that means profits. Your bottom line is the last number you end up with after subtracting everything from the gross. You will deduct things like:
- the cost of goods sold, which includes direct labor and materials or payments for the production of goods;
- capital losses;
- federal, state, and local income taxes;
- operating expenses;
- payments for services rendered;
- fixed overhead;
- administrative expenses;
- interest charges on loans and other debts; and
- depreciation and amortization charges.
When you’re done subtracting everything, you get your net income figure. That’s your profits, or your bottom line. (Note: Take care not to confuse net income vs retained earnings.)
Your bottom line is a figure that you will use to make some of your most important business decisions. Especially for small business owners, this figure is key to the business’s future and a great performance indicator. If you want to go even further, you can look into the triple bottom line. This figure factors in social and environmental elements and not simply financial performance. Most consumers find the people, profit, and planet bottom line especially attractive as it aligns with their values.
Top Line Revenue vs Bottom Line Revenue
Both the gross and net figures can help business owners gauge their business’s performance. However, we note the most significant difference here.
Top line revenue is an indication of business growth and ability to sell. When you have more revenue from sales, you have more leeway for spending. This can mean bigger and better advertising campaigns, marketing initiatives, team members, and products.
Bottom line revenue, on the other hand, is an indication of efficiency. When the gap between your gross and your profits is small, it means you’re doing well. You generate more than enough income to pay for all your expenses and end up with a nice chunk in net profits.
Factors that Affect the Top Line
If you want to boost your top line, you can look into several strategies.
One of the best ways to boost your top line is to invest more in additional advertising campaigns. This brings in new customers who will generate more in sales.
You can also achieve a boost by developing new products and product lines. Make sure that you are at least maintaining the quality of current offerings, and better yet, improving these, too.
The goal with any strategy is always to elevate your brand image and keep customers happy. This reduces returns and brings satisfaction levels up to where buyers become brand ambassadors.
You can try raising prices as well, but do so with caution. Raising prices can increase revenue fast, but you want to protect your current customer base. This ensures that revenues will stay high over time because you care about people more than a quick buck.
Factors that Affect the Bottom Line
If you want to increase your bottom line, you can look into several strategies.
Cost Reduction Strategies
One of the most popular ways to increase your bottom line is to lower the cost of materials. If you work with manufacturers or suppliers, you can try finding new ones. Remember to make sure that you are not sacrificing quality in the process.
Maximizing Tax Deductions
Talk to your accountant about how you can take better advantage of all the tax benefits that are available to you. Depending on your business model and where your business is registered, you will be eligible for different deductions.
Analyzing Spending Patterns
Aside from reducing your cost of goods, you can work with suppliers to optimize the manufacturing process. Then you can also improve manufacturing productivity through additional optimization methods. On your end, you can also reduce your operating expenses by applying streamlining techniques. Look into increasing the amount of revenue you earn through non-core operations as well.
Calculating Top and Bottom Line Revenue for Your Business
Top line revenue is basically the total amount of revenue that your business gets from sales to customers. You calculate this figure by adding all of your revenue generated within a period. This is where you begin in determining revenue growth in your business and budgets for different activities.
With your top line computation, you can now figure out your bottom line. Simply take your gross sales, subtract your total expenses, then add any other applicable business revenue. The number you get from that is your net income, your bottom line.
These are the simplest ways to compute these numbers. You can find other formulas that are more complicated. They might, for example, take into account non-core operating income sources. The simple formula can still help you get a basic analysis of your business’s financial success, though. Note that your top line growth can show positive changes while your bottom line growth shows your business success.
Measuring the Success of Your Business with Top and Bottom Line Growth
At the very least, we recommend that you keep an eye on your top and bottom lines. As a business owner, you need to monitor these numbers comparatively month over month. This is what will help you to stay focused on business growth as you properly manage costs to reach your growth goals.
With your top and bottom lines, you can also watch your net profit margin. You can calculate this percentage by dividing your net profits by your revenue. With this percentage, you can get a quick view of how healthy your business is overall. Then you can spot areas where you can make more improvements.
What you really want to pay attention to is your ratios. If you have only a small difference between your gross and your net, it means trouble. Specifically, it can mean that your business overhead costs are too high. Or, maybe your prices are too low. If your profit margin is higher, then your business is doing well. You have struck a balance that allows you to keep a good level of control over expenses and pricing.
Frequently Asked Questions
How does bottom-line revenue relate to shareholders?
Most businesses will spend some of a business’s bottom line earnings on making the business better and stronger. For instance, you might launch expansion plans, new product development, increased marketing, and the like. Aside from this, a portion of your profits can go towards payments to shareholders as dividends. These payments can incentivize them to maintain ownership.
Does top-line revenue include all sources of income?
The top line revenue of a business includes the company’s total sales. This is everything you earn before you take away various costs and expenses.
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Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
And here’s some free resources:
- Monthly Finance Meeting Agenda
- 9 Steps to Master Your Ecommerce Bookkeeping Checklist
- The Ultimate Guide on Finding an Ecommerce Virtual Bookkeeping Service
- What Is a Profit and Loss Statement?
- How to Read & Interpret a Cash Flow Statement
- How to Read a Balance Sheet & Truly Understand It
Your top line revenue vs bottom line revenue is a simple computation that packs a punch. It’s not the only factor that plays an important role in running a successful business. However, keeping an eye on these two numbers along with your profit margins is a great start. As you continue to monitor your business’s financial health, you will start to notice more trends that will help you grow stronger and faster.