What is the bottom line? In short, the bottom line is the earnings, profit, net income, or earnings per share of a company (EPS). The reference to “the bottom line” shows where the net income number is on a company’s income statement. People often use the term “bottom line” to discuss any action that can change a company’s net earnings or overall profit.
When a company makes more money or spends less, it can improve its bottom line. Most companies try to improve their bottom lines in two ways at the same time: by making more money (called “top-line growth”) and by being more efficient (or cutting costs). This article will explain the accounting bottom line and how Accounting ERP Software plays a role. Look at the pricing scheme to know the estimated price of the software if you consider using it.
Table of Content:
Table of Content
Example of Bottom Line and How to Calculate It?
The bottom line is also referred to as net income, net profit, or net earnings. The formula for the bottom line is as follows:
|
Total Revenue – Total E.xpenses = Net Income. |
You can find it on the last line of the income statement, which is why it’s called the bottom line. Let’s look at a hypothetical income statement for Company ABC Inc. for the year ending December 31, 2008.
| Particulars | ||
|---|---|---|
| Total Revenue | $100,000 | |
| Cost of goods sold | $20,000 | |
| Gross Profit | $80,000 | |
| Operating Expenses | ||
|
$10,000 | |
|
$10,000 | |
|
$5,000 | |
|
$5,000 | $30,000 |
| Interest Expense | $10,000 | |
| Taxes | $10,000 | |
| Bottom Line/Net Income | $30,000 | |
According the income statement data for Company ABC Inc. above, the conclusion is that the company’s bottom line for the year ending December 31, 2008, of the company is $30,000.
Why Is the Bottom Line Important?
The bottom line is one of the most important aspects of finance. It’s often used in ratio analysis and financial statement analysis. Not only that, but it’s also important to show how healthy the company’s financial management is. Shareholders pay close attention to the bottom line because it is how the company pays its owners. If a company can’t make enough money to pay its owners, the value of its shares will drop. On the other hand, if a company is doing well and growing, higher stock prices will show, attracting more profits.
Note that the bottom line does not show how much money a company made during a certain period. This is because the income statement shows a lot of expenses that don’t have to be paid with cash, like depreciation and amortization. You need to look at the cash flow statement to determine how much cash a business makes. When a company’s bottom line is low or negative, it could be due to several problems, such as fewer sales, bad customer service, or bad management of expenses.
How to Increase Your Bottom Line
The bottom line is not always expressed in a positive percentage. In certain cases, it also can be shown in a negative percentage. When the percentage is positive, businesses can make investments in the recruitment of new employees, the development of new products, and the expansion of existing operations. They also have the option to repurchase stock or pay shareholders dividends. That being said, it’s why the bottom line needs to be improved. It is not difficult to do so. Enhancing revenue and operational efficacy while simultaneously reducing costs is the way to improve the bottom line. Moreover, the following are possible approaches to take:
1. Reducing expenses
By Relocating to an operating facility with lower costs. For example, lowering your advertising budget or the number of employees on your payroll or looking into finding cheaper suppliers. Doing a hiring freeze also can be one strategy that you should consider especially when you’re business is having trouble turning a profit. When employees leave the company or retire, positions that they vacate are not filled until the company is in a better financial position to do so.
2. Pricing increases
Find out if the price you are charging for the good or service you are offering is reasonable and will benefit your company. First, determine how much it costs to produce the item, then add a markup percentage. While the markup percentage in some fields is relatively low, ranging from 5-10%, markup in other fields is significantly higher.
3. Adjust existing budgets
Negotiate with your bank to see if your company qualifies and is eligible for a lower interest rate on your loan. It is possible to obtain a lower interest rate if you are well-established in your field and have a positive credit history. Request that your accountant about any additional tax benefits that may be available.
4. Target the right customers.
Creating buyer personas is an important step in developing effective marketing strategies. The term “ideal buyers” refers to customers for whom a company’s product or service is most suitable; these are the individuals most likely to purchase. Because it keeps your attention on customers who provide the greatest return on investment, an effective buyer persona strategy can help you reduce expenses.
5. Recruit the best talent
Evaluating and improving your Employer Value Proposition (EVP) will help you recruit the most qualified candidates. EVP refers to the factors that encourage people to work for specific companies. Your EVP is partly shaped by elements such as your company’s culture and values as well as compensation and benefits packages.
Also read: Using Financial Data for Business Decision Accuracy
Conclusion
We may conclude that the bottom line is an important financial aspect. The bottom line refers to a company’s net income number, which ratio and financial statement analysis use often. The bottom line does not show a company’s earnings. This is because the income statement shows many non-cash expenses, like depreciation and amortization. Therefore, you still watch the cash flow statement t to determine how much cash a business makes. For that reason, accounting ERP software is needed to manage other accounting and financial statements in the company.
Accounting Software is specifically designed to manage commercial records or transactions, and to facilitate transaction data management. The software with robust features will manage your finances, such as cash flow management, journal entries, and reconciliation. HashMicro accounting software is also Peppol network-ready for seamless invoicing management. Download the pricing scheme here to know how much the software costs, or try the free demo now!
