Understanding the Bottom Line in Business

Graphs on paper and men using a pen to review them

The world of business is filled with a variety of terms, jargons and even odd phrases along with an ample supply of acronyms. The term, bottom line, refers to the profitability of a business after all expenses are deducted from revenues. Bottom line profits are net profits where all of the costs of the business have been accounted for, and the remainder is either positive or negative. 

The phrase is also referenced in business conversations where someone is attempting to communicate the final conclusion, outcome or recommendation.

For example: "The bottom line is, we are not able to manufacture more than 10,000 widgets per month without an expansion in production capacity." Or, "My bottom line price is $4.55 per unit. I cannot go any lower."

This article explores issues surrounding the financial definition of the bottom line.  

The Bottom Line is an Outcome of All of the Work of the Business:

It is not uncommon to hear some variation of the phrase, "we are managing to the bottom line." It is a misnomer. The firm may set bottom line profit targets, however, marketplace circumstances and the firm's strategy and operations approach ultimately combine to create the revenues and costs from which the bottom line is derived. 

Consider: an organization chooses to invest its resources in a strategy to find and keep customers. It develops products or services; markets those offerings; supports its customers and repeats the cycle all over again.

At the end of each accounting period, the firm counts up what it took in from customers and other revenue sources and subtracts all of the costs incurred in the process. After accounting for these costs, including taxes, interest on debt and various accounting driven numbers, including depreciation and amortization, the firm arrives at a bottom line number.

This is the net profit or net loss number. 

What a firm can and should do is monitor and control expenses, striving to minimize unnecessary or wasteful expenses while optimizing the allocation of resources to support the firm's strategy. This type of "managing to the bottom line" is reasonable and healthy. Organizations that focus predominantly on costs and choose not to invest in current strategies or fund investments to support future initiatives struggle in the long-term.

The Bottom Line as an Indicator of Business Performance:

The bottom line numbers are an important component of the scorecard for a management team. Positive and growing profitability over time is a testament to a variety of factors, including:

  • Good market and customer selection.
  • The creation  and delivery of products and services valued by customers.
  • Effective allocation of investment dollars in support of targeted customers.
  • Efficient control of costs across the organization. 
  • Positive marketplace and macroeconomic factors. 

    Alternatively, declining or low bottom line numbers over time are an indication of challenges in one or more of the above areas. 

    Shareholders, the board of directors and employees all rely on the bottom line numbers after each accounting period (often a quarter of a year) to assess the effectiveness of an organization's marketplace strategy and internal management. When compensation in the forum of bonuses or annual salary increases is tied to bottom line results, employees are particularly attentive to these numbers. 

    Limitation of Bottom Line Numbers as an Indicator of Business Performance:

    While profitability numbers are important measures of a firm's current success and useful as a comparison over earlier time frames, they do not tell management, directors, shareholders or employees what worked or what failed.

    Poor profitability numbers are an indication that something is wrong, ranging from strong competition to adverse economic circumstances to a failing or failed strategy or runaway costs.

    Alternatively, positive numbers do not highlight what part of their overall approach is working positively. It is possible for strong economic conditions or competitor failure to lift revenues and improve profits, in spite of poor cost control or a weak long-term strategy. 

    In financial reporting for publicly listed and traded firms, it is important to look at the detailed notes including footnotes to understand the assumptions, accounting approaches and final derivation of the bottom line number. 

    The Bottom Line on the Bottom Line:

    Profit is an outcome of all of the activities of an organization. It is an important indicator of overall conditions in the firm's target markets, and it is a barometer of management's effectiveness in selecting strategies, investing in products and services, marketing and controlling costs. It is best compared over time and smart analysts look carefully to understand the variables leading to an organization's bottom line. 


    Edited by Art Petty

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