Bottom Line & Top Line Accounting Analysis

Bottom line and top line in accounting refer to two line items in the income statement, namely the net income on the bottom of the statement and sales revenue on the top of the statement. Accounting analysis may focus on growth in a company’s bottom line or top line, or both. While growth in bottom-line income measures a company’s operating efficiency, growth in its top-line revenue indicates the effectiveness of asset usage in generating sales. Companies may experience simultaneous growth in both their bottom line and top line, but an increase in either may not always lead to the increase in the other.

The accounting bottom line, or net income, is the primary measure of a company’s profitability. The bottom-line net income is the result of deducting all expenses from sales revenue. Expenses include everything from cost of goods sold, general and administrative expense, other operation-related expenses to interest expense, income taxes and other non-operating accounting charges. Thus, by controlling certain expenses to improve operating efficiency, companies can improve their bottom line, or increase net income. However, because of its all-inclusive nature regarding expenses, net income may be influenced by factors beyond operation controls.

The accounting top line, or sales revenue, measures a company’s ability to generate sales using its assets, both long term and working capital. The top-line sales revenue may also depend on a company’s marketing efforts and its pricing strategy. While an intensified marketing campaign may increase sales, it may also increase marketing expenses, negatively affecting net income. By the same token, a low-price strategy to attract more customers potentially reduces profit margin and thus net income. Therefore, increases in sales revenue may be helpful in gaining market shares but may not contribute to increasing a company’s profitability.

Growth in a company’s bottom line and growth in its top line are two important measures in accounting analysis that track changes in a company’s business fundamentals. Even though growth in sales revenue aimed at achieving market dominance may put pressure on a company’s profit margin, companies can still experience growth in both the bottom line and top line at the same time. Total expenses may increase as a result of increased sales revenue, but as long as the rate of expense increase is lower than the percentage increase in sales revenue, total profit will also increase.

Other times growth in the bottom-line net income may not be the result of growth in the top-line sales revenue when growth in sales doesn’t lead to growth in profits because of the larger amount of expense increase at the same time. Companies can increase their bottom line through improved profit margin, in other words, by reducing costs while maintaining the same level of sales revenue. In the end, it is the increased net income that contributes to a company’s real growth over time. Companies can achieve revenue growth, but without a focus on costs, they may loss money from increased sales.