Top Line vs. Bottom Line: Understanding Key Financial Metrics
If you’re starting a small business, one of the many tasks on your plate is organizing your company’s finances. Knowing at least the basic financial metrics for business accounting is paramount to your success.
Arguably, two of the most important metrics are the top and bottom lines of a profit and loss statement. The term “P&L statement” is often used interchangeably with “income statement.”
Simply stated, the company’s top line includes all the company’s revenue for the accounting period. The bottom line is the amount of revenue left after you deduct business expenses.
In this article, we’ll go deeper into what those two lines mean, how you determine them, and the importance of each. But remember, you don’t have to tackle your business accounting alone. Upwork can connect you to expert freelance accountants, so you can focus on growing your business and let someone else take on the minutia.
What is the top line?
On an organization’s profit and loss statement, the top line is where you list the company’s total revenue (also called gross revenue). In other words, it’s everything the organization makes in profit before deducting the costs of running a business.
What is the bottom line?
The bottom line of a profit and loss statement lists the net income, which is also sometimes referred to as net earnings or net profits. To find this number, take the top-line revenue and deduct the business’s costs.
For example, you’ll need to figure out your general costs and the costs of any products you sell. In addition, make sure to include interest paid and taxes. You’ll also want to include loan amortization and the depreciation of equipment or inventory.
With a better understanding of the top line, let’s dig into the metrics that make up the total top line.
Revenue refers to your company’s income during the accounting period. Revenue includes every line of business and income you have. This includes sales and services, but it also might include nonoperating revenue.
This includes if you sold any assets or had interest and fees paid to you. It would also include one-time events like receiving payments from litigation.
Revenue is a critical component of knowing your company’s financial position. Your business needs to bring in revenue to be profitable. For many businesses starting out, turning a profit is an unattainable goal in the first few years. In that case, you can use the revenue to estimate how much profit you might make in future years.
The term “sales” is defined as income received from customers. While that may seem interchangeable with revenue, it’s actually different. As we discussed, when looking at a company’s total revenue, there might be several ways to bring in income. Sales might be a line item for revenue, but not the whole.
Another difference between sales and revenue is how someone looks at your report. If you want to attract investors, they’ll want to look at your total sales numbers and compare them to the prior period and the one-year prior numbers. Sales growth is a good indicator of your business’s success and potential future growth.
Looking at company growth can be a good indicator of future success. However, it can also be misleading. Revenue doesn’t mean profit. To determine a company’s profitability, there are other factors to consider. We’ll discuss your bottom line figures further in this section.
Gross profit is where you take the total revenue and subtract the costs of goods you sell. This is the profit you make before you factor in the other business costs, like salaries, taxes, and administrative needs.
Knowing this number is important because it calculates the gross margin. You find this number by taking the gross profit and dividing the total company revenue. Finding the gross margin allows you to see how efficiently your company runs and provides a more even comparison between competing companies.
Net profit—sometimes referred to as a company’s net income or net earnings—is what’s left of your income after all your business total expenses are removed. This is where you look at your gross profit number and subtract all other business expenses, including loan amortization, income taxes, and administrative costs.
Net profit is the last line on your profit and loss statement. It shows how profitable your business was during the accounting period. At the end of an accounting period, net profit is transferred to the retained earnings column on your balance sheet for the new accounting period.
How to determine your top line and bottom line
Let’s use an example to understand the steps to determine your company’s top and bottom lines. Let’s say your company sells specialty shampoo.
1. Determine the top line. To do this, we need to look at both sales and revenue. We’ll look at sales first.
Your company sold bottles of shampoo at $40 per bottle. You sold 1,000 bottles. Your gross sales are $40,000. In addition to the shampoo sales, you spoke at a professional conference and were paid $1,000. That makes your revenue $41,000.
2. Determine gross profit. Let’s assume it costs $10 per bottle to make your shampoo. That means selling 1,000 bottles costs you $10,000. Subtract that from your $41,000 total revenue. Your gross profit is $31,000.
3. Determine net profit. To do this, you’ll need to know your total operating expense. Let’s assume you have $5,000 in administrative costs, $2,000 in taxes, and $1,000 in loan amortization. That brings your operating costs to $8,000. Subtract that from your gross profit. That means your net profit is $23,000.
Which is more important?
Knowing where to spend your energy can be tough when evaluating your company’s top and bottom lines. Do you focus on increasing sales and revenue, or do you focus on cutting costs so that you keep more of your income? The answer is it depends.
Focusing on that top-line growth is essential for many businesses, especially for new businesses and startups, which may not initially show much profit in their financial performance.
Growth shows how quickly the company is gaining its foothold in the market. Companies can use that number to forecast projections for their financial planning. Additionally, showing sales success can attract investors to help grow your business.
However, the top-line growth doesn’t give a complete picture of your company’s health. As strong a market share as your sales may gain, you’re throwing money away if you don’t look to cost-cutting measures, like automation or new raw material sources, and experience bottom-line growth.
You want to show that your company has operating efficiencies and your profit margins are on par with or, ideally, lower than your competition. This is especially important if you have an established business and are considering selling it.
Ultimately, both matter and you should monitor and analyze them closely. Focusing on top-line growth means you have more money for marketing efforts, developing new product lines, and building your team.
These are all things that can help attract new customers and grow that margin more. But using this number and ignoring the bottom line means leaving a lot of options for improving profits off the table.
The bottom line shows how efficiently your business is running. Keeping a close eye on it means more earned dollars will stay with your company in retained income.
Knowing the top and bottom lines of your profit and loss statement is critical when determining if you have a profitable company. The first step is calculating them properly to understand where you stand.
Monitoring financial statements is equally important as knowing the correct numbers. You can use those figures to increase your top-line revenue and bottom-line efficiency.
A strategy for both can make your business more profitable and attract the kind of attention you want from investors.
Get help determining your top and bottom line with Upwork
When you run your own business, there’s a lot to do. If you don’t have a background in accounting, tracking your business’s financial health may feel overwhelming.
Fortunately, you don’t have to create your company’s income statement alone. Upwork can help you find the right accounting professional to watch the books while you grow your business.
If you’re a financial professional looking to boost your freelance career, let Upwork connect you with clients to move your career forward.