We come across these terms so very often and perhaps have got used to it without even understanding.
As always let us try and understand these concepts through a story.
Punit was a โBhelpuri Walaโ in Mumbai. He would sell Bhel at Juhu beach. Every day he would buy the ingredients worth Rs. 1000/- to prepare his โBhelโ. By the end of the day, he would sell all his stuff for Rs. 1400/- thereby pocketing Rs. 400/- for a dayโs efforts.
Thus, from the perspective of day, his topline is Rs. 1400/- while his bottom line is Rs. 400/-.
Thus, the aggregation of โpriceโ of the product comprises the โtop-lineโ whereas the aggregation of โprofitsโ comprises the โbottom-lineโ.
Thus โtop-lineโ growth would be in the shape of selling more units of Bhel which he can achieve by either working for longer hours or by hiring people under him or increasing the price per unit of bhel.
When the top-line (i.e., no. of units of bhel sold ) goes up profit margins remaining the same, the bottom-line too goes up proportionately.
But, it is also important to note that โbottom-lineโ growth would also take place if the โBhelpuri Walaโ decides to increase the price of his โbhelโ.
Or is able to buy the ingredients at lower price.
So, in a sense to increase his bottom-line it is not necessary to increase top-line.
Takeaways
- Both the top-line and bottom-line figures are useful in determining the financial strength of the company, but they are not interchangeable.
- The bottom line describes how efficient a company is with its spending and managing itsย operating costs.
- Top line, on the other hand, only indicates how effective a company is at generating sales andย revenue and does not take into consideration operating efficiencies which could have a dramatic impact on the bottom line.