The top line and bottom line are two of the most crucial lines in evaluating a startup. A better bottom line can help attract acquirers for your startup which is different than when someone is evaluating for financing and you are dealing with safe notes. Even once you get a LOI and enter the due diligence phase, you are going to be under a lot of pressure to deliver strong numbers.
The revenues or gross sales of a company are referred to as the top line. As a result, when a startup has top-line growth, gross sales or revenues have increased.
The Bottom Line Explained
The bottom line is a startup’s net income, or the “bottom” figure on its income statement. The bottom line, more precisely, is a startup’s profit after all expenses have been deducted from revenues. Included in these costs are:
- Interest on loans
- General and administrative costs
- Income taxes
The bottom line of a startup is also known as net earnings or net profits. The bottom line can reveal whether or not there are concerns with the top line or revenues, and how well things are being optimized in between.
A startup’s bottom line can also be referred to:
- The final earnings or profit
- Net income
- Earnings per share (EPS)
The bottom line is widely used to reference any acts that can influence – increase or decrease – the startup’s net profit. When a startup’s earnings or expenditures are reduced, the bottom line is considered to be improving.
The bottom line is what is used to determine a company’s financial stability, profitability and value. When it comes to corporate mergers and acquisitions, the bottom line is also thoroughly scrutinized.
When the bottom line is strong, more businesses will be interested in acquiring a company or absorbing it in a merger. When the bottom line is weak, hostile takeovers could be attempted.
Typically, the income statement begins at the top with the main business activity for sales and service revenue.
Other revenue sources are indicated, such as investment income or interest earned from various investments. The costs that follow are likely to be determined by the nature of the industry or company.
The type of the product can also determine it. Finally, when all expenses have been deducted, the amount left at the bottom is net profit.
The components that reduce the bottom line are:
- Corporate expansion
- Hiring additional employees
- Rising material costs
- Taxes
The components that increase the bottom line are:
- Cutting costs
- Use of alternative raw materials
- A rise in sales
- The decrease of government taxes
Rather than focusing on the top line, a company’s ultimate end goal should enhance its bottom line. This will also ensure that the startup’s attention is on the correct route, with the end profit in mind.
This also demonstrates that the organization is cost-conscious. A healthy bottom line indicates a financially sound startup.
Of course, it has become trendy for early stage startups to push customer count, transactions, and the topline at all costs to grow fast. Many, even at the bidding of their investors push thinking about the bottom line down the road.
A startup’s top line can be increased by:
- Increased marketing to attract new clients
- The addition of new product lines
- Price increases
- Increasing revenue per customer
Author Bio
Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a foreword by ‘Shark Tank‘ star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide to today‘s way of raising money for entrepreneurs.
Most recently, Alejandro built and exited CoFoundersLab which is one of the largest communities of founders online.
Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding where he was involved in one of the biggest investment arbitration cases in history ($113 billion at stake).
Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and NYU Stern School of Business.
Alejandro has been involved with the JOBS Act since inception and was invited to the White House and the US House of Representatives to provide his stands on the new regulatory changes concerning fundraising online.
