Top-Line vs. Bottom-Line Growth: Which Matters Most
Top-line and bottom-line growth are both essential for business success. Quarter to quarter and year over year, they’re good indicators of a company’s overall health, and both investors and analysts pay close attention to each one.
What is Top-Line Growth? What is Bottom-Line Growth?
Top-line growth refers to the top line of a company’s income statement and reflects a company’s sales growth. If a business is experiencing top-line growth, then, it means the business’s gross sales or total revenues are increasing.
Bottom-line growth, on the other hand, refers to the bottom line of a company’s income statement. The bottom line number reflects a company’s net sales, which is how much of the total revenue taken in is left after operating costs are accounted for.
Together, a company’s top-line and bottom-line figures reveal how profits, loss, and expenses (and expense management) all relate to one another, giving an accurate picture of both the current health and potential health of a business.
Successful companies usually experience growth in both numbers, although fluctuations in ratios that correspond to things like adding major product lines are likely to happen. When the ratio is out of balance for a prolonged period (five to seven years), this is a red flag that a company is in trouble.
A new business, of course, will not have years of financial statements for analysts and investors to consider. So how should business owners and other stakeholders interpret a new company’s bottom-line and top-line numbers?
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Designed for SMBs How to Increase Top-Line Growth
There are many ways businesses, including small businesses and startups, can increase top-line revenue:
- Increase the number of customers through marketing efforts
- Secure a new customer base through advertising
- Launch a new product line
- Increase prices
- Acquire another company that increases market share
Increased sales revenue, and therefore, increased profits can come from a wide variety of efforts. While boosting gross revenue is generally positive and indicates good growth, the bottom line of the balance sheet reveals net earnings and tells a more thorough picture of expenses, from administrative costs to operating efficiencies.
How to Increase Bottom-Line Growth
While increasing gross profits does help a bottom-line number grow, bottom-line growth can also be helped by reducing costs or improving cost savings. Here are some ways companies can achieve bottom-line growth:
- Lower customer acquisition costs through smarter, more targeted marketing
- Increase efficiency in production or services
- Find new suppliers with lower costs
- Decrease wages and benefits
- Offer employee training to improve productivity
- Implement cost-cutting measures to decrease overhead expenses, including automating routine business tasks through software for accounts payable, email marketing, etc.
- Improve collections methods for late-paying customers
A decrease in a company’s net income is considered a red flag that can generate bad press from analysts and scare off investors.
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Which is More Important for New Businesses — the Top Line or the Bottom Line?
Startups and new businesses have greater upfront expenses related to costs like producing and marketing new products, adding employees, and the like, which affect the bottom line. They must invest and spend even while total sales are low or even non-existent. Because of this reality, new businesses need investors or loans to get started and stay afloat.
But where should a new business’s energy go? Should a new business focus on increasing sales or on cutting costs?
In most cases, a focus on top growth is preferable. Rapid top-line growth is an indicator of how quickly a new company is gathering market share. It can take a very long time for a startup to balance its top line with its bottom line, but continually increasing a company’s revenue is essential to success, even if the bottom line doesn’t increase at the same rate.
Without a doubt, there needs to come a time when a company is profitable and the bottom line reflects that profitability. For a new business, however, focusing too much on the bottom line too early can hinder the growth necessary to attract investors and customers.
Conclusion
Top- and bottom-line growth both provide vital information regarding a company’s overall health and each needs to be taken into consideration when assessing a business. Startups will always need to spend more money at the outset to get established, so an initial focus on top-line growth is recommended.
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