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Difference Between Top-Line vs Bottom-Line Growth

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Synopsis:

A company’s top-line growth shows the growth in its gross sales. However, its bottom-line growth shows how fast its net profit is growing. Top-line only shows how efficiently a company is able to sell its products. It doesn’t consider the costs of a company. But, bottom-line considers both the sales and expenses of a company. Hence, bottom-line growth shows how efficiently a business is being run. In most cases, bottom-line growth is a better indicator of a company’s performance than top-line growth.

Both top-line growth and bottom-line growth are essential for the overall health of a business. These concepts are related and yet are different from each other. A company’s top-line growth shows the rate of growth in its gross sales. However, its bottom line growth depicts how fast its net profit is growing. Read this blog, as it explains how you should assess a company’s top-line vs bottom-line growth, which mistakes you should avoid, and what your approach should be to assess a company’s financial situation.

What is the Meaning of Top-Line Growth?

Top-line growth means the growth in a company’s total revenue or gross sales. Companies report their sales data at the top of their profit and loss statement. Hence, top-line refers to the gross sales of a company. And, top-line growth means the growth in a company’s gross sales.

A company’s top-line growth shows how good it is in selling its products and services. It only reflects the performance of the sales function of a company. It does not explain how a company is managing its expenses. Hence, top-line growth alone does not convey a clear picture of how efficiently a company is being run. 

What is the Meaning of Bottom-Line Growth?

Bottom-line growth refers to the growth in the net profit of a company. Net profit is arrived at after deducting all kinds of costs from total revenue, including manufacturing costs, wages of workers, salaries of employees, office maintenance costs, depreciation, taxes, etc.

As the net profit number is reported at the end of a profit and loss account, it is referred to as the bottom-line. While analysing a company’s net profit or bottom-line, we must realise that companies report their expenses on an accrual basis.

This means all expenses falling due (whether paid or not paid by a company) in a period are reported in a company’s profit and loss statement. A company’s bottom-line shows how effectively it is selling its products and how efficiently it is managing its expenses.

Top-Line vs Bottom-Line: Key Differences

Top-line and bottom-line are both important indicators of a business’s performance. Top-line refers to an enterprise’s gross sales. However, bottom-line refers to its net profit. To understand them further, let’s discuss how a company is run.

Typically, companies have a sales team, which is responsible for selling their products and services. The more they sell, the more will be the revenue of their business. A company’s top line indicates how much it is selling and at what price. Hence, top-line only indicates the performance of its sales team.

On the other hand, a company’s bottom line or net profit is arrived at by deducting all expenses and taxes from its gross sales. Hence, bottom-line indicates a company’s operational efficiency. It tells us how well a business is being run.

Typically, when a company is in a growth phase, it is able to grow both its top line and bottom line easily, provided its products are liked by its target-segment. Once a company enters a mature phase, its top line more or less remains flat.

However, it can still grow its bottom line by becoming more cost-efficient. For that, the company can use better technologies for making its products.

Strategies to Improve Top-Line Growth

A company can grow its top-line by either selling more products or increasing the price per product. It can also employ both these strategies to grow its revenue. That said, a company might find it difficult to sell more products and increase the average unit price per product. Hence, typically, companies reduce their average price per product to push more unit sales.

For example, in India, sports brands like Adidas, Nike, Puma, etc. offer huge discounts in year-end sales. This reduces their per product price but convinces their customers to buy more shoes, jerseys, shorts, etc. from them. As a result, these brands end up growing their top line during year-end sales.

There can be many other ways to grow top-line. For example, a company can start focusing more on its premium products, which have a high price. It can even acquire another company, which will also grow its top line.

Strategies to Improve Bottom-Line Growth

To improve its bottom line, an enterprise can grow its gross sales or/and control its expenses. To grow its gross sales, a company can produce and sell more, improve its products to reduce sales returns, or increase the price of its products. It can also increase its non-core income, like income from investments or profits on the sale of old machinery.

Reducing costs can also be an effective way to increase the bottom-line. For this, a company can use improved technology to manufacture its products in a cost-effective manner. It can also reduce its expenses on salaries and wages to give a boost to its bottom-line. Whatever decision a company takes, it has to understand its larger implications on the business.

For example, a company may decide to pay less to its employees to grow its net profit. However, such a move will demotivate its workforce in all probability and they may leave the company to join its rivals, which may reduce its sales.

Hence, a company should take business decisions based on the nature of its business and not by just looking at a few numbers in its income statement.

Mistakes to Avoid Regarding Top and Bottom-Line Growth   

If you don’t pay attention to how a company is growing its top-line and bottom-line, you’ll be making a big mistake. Therefore, it is extremely important to understand the strategies used by a company to grow its gross sales and net profit.

Let’s say that a company is facing a cash crunch. It doesn’t have enough cashflows to pay salaries to its staff. Hence, it decides to offer a 20% discount on its products, which increases its top-line by 30%, as more people are now buying its products.

If by offering discounts, its margins don’t get affected much, then it's fine. But in case, it is operating at thin margins, then it may not be able to offer discounts. Therefore, you should always compare the growth in a company’s sales with that in its profit. In other words, you should perform the top-line vs bottom-line growth analysis.

Overall, while analysing a company’s financials, you should analyse how its decisions to grow its top-line or bottom-line are affecting the entire business.

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Conclusion

If you have just opened a demat account and begun trading in the market, you should understand the concept of top-line vs bottom-line growth. It will help you analyse a company’s performance. That said, you need to understand a lot more to analyse the financial performance of a company. For example, you need to examine how a company generates its cash flows. For that, you need to look at its cash flow statement. A thorough analysis of a company’s income statement, cash flow statement, and balance sheet will be able to tell you how it is performing.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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Frequently Asked Questions

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What is the meaning of top-line growth?

Answer Field

Top-line growth means the growth in the gross sales of a company.

What is the meaning of bottom-line growth?

Answer Field

Bottom-line growth means the growth in the net profit of a company.

How do top-line and bottom-line growth impact a company’s financial health?

Answer Field

Top-line and bottom-line growth ensure that a business is able to generate sufficient funds to pay its suppliers and lenders. It also ensures that a business generates sufficient returns for its shareholders. Hence, it’s important for a business to grow its top-line and bottom-line.

Can a company have top-line growth without bottom-line growth?

Answer Field

If a company’s expenses grow at a higher rate than its top-line, then its bottom line may either grow at a lower rate than its top-line or it may even incur a loss.

Which is more important for investors: top-line or bottom-line growth?

Answer Field

On average, investors pay more attention to bottom-line growth than top-line growth because the former considers the expenses and sales of a firm, but the latter considers only the sales.

How do companies achieve top-line growth?

Answer Field

It can be achieved by selling more products or/and by increasing the per unit price of products. It can also be achieved by acquiring another company.

What strategies can companies use to improve bottom-line growth?

Answer Field

A company can sell premium products more, which will improve its margin and give a boost to its bottom-line growth. It can also control its costs to improve the growth in its profit.

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All leveraged intraday positions will be squared off on the same day. There is no restriction on the withdrawal of the unutilised margin amount. Brokerage will not exceed the SEBI prescribed limit. Visit : https://www.bajajbroking.in/pricing

MTF 

As subject to the provisions of SEBI Circular CIR/MRD/DP/54/2017 dated June 13, 2017, and the terms and conditions mentioned in the lights and obligations statement issued by the TM (if applicable).  

US INVESTING

International investment is not supervised by any regulatory body in India. Thus, any claim or dispute relating to such investment or enforcement of any agreement/contract /claim will not be under laws and regulations of the recognized stock exchanges and investor protection under Indian Securities Law. The account opening process will be carried out on Vested platform and Bajaj Financial Securities Limited will not have any role in it.  

MARKETSMITH / GOLDENPI / SOVEREIGN GOLD BONDS

Bajaj Financial Securities Limited is only distributor of this product. These are not exchange traded products and all disputes with respect to the distribution activity, would not have access to exchange investor redressal forum or Arbitration mechanism. Bajaj Financial Securities Limited is not a registered Investment Advisory. User discretion is required before investing. Client is requested to independently evaluate and/or consult their professional advisors before arriving at any conclusion to make any investment. The decision to invest shall be the sole responsibility of the Client and shall not hold Bajaj Financial Securities Limited, its employees and associates responsible for any losses, damages of any type whatsoever. 

IPO 

This should not be construed as soliciting investment. Investors’ discretion is required. Kindly consult your financial expert before investing. No need to issue cheques by investors while subscribing to IPO. Investments in securities markets are subject to market risks, read all the related documents carefully before investing.  

IPO FINANCING

IPO Financing is done through Bajaj Finance Limited. Bajaj Finance Limited (BFL or Lender) reserves the sole right to decide participation in any IPO and financing to the client shall be subject to credit assessment done by the lender. Also, BFL shall have full rights to decide the commercial terms for IPO and final application and financing shall be subject to all requirements being met by the client in a timely manner including documentation, account setup and payment of required Interest and Margin. Bajaj Finance Limited also reserves the exclusive rights to change any of the above-mentioned terms and conditions without prior notice to clients. The scheme margin is subject to change. UPI is mandatory to bid in all IPOs through our platform. As per exchange guidelines, all the UPI mandates will only be accepted till 5:00 PM on IPO closure day. 

SCREENERS 

Screeners is not Exchange-approved products and any disputes related to the same will not be dealt on the Exchange platform. 

SECURITIES 

Securities quoted are exemplary and not recommendatory. 

IPV 

Account would be open after all procedure relating to IPV and client due diligence is completed. 

IMAGES 

The images used are only for representation purpose. Proper due diligence has been done for the images and the image is not of any artist. The same is captured from royalty free sites. 

DISCLOSURE TO CLIENTS REGARDING PAYOUT OF FUNDS

As per SEBI circular no. SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/84 dated June 08, 2023, Stockbrokers are required to upstream the entire client funds lying with them to the Clearing Corporation. Based on client’s request the funds’ release request must be placed with the Clearing Corporation. Based on the internal process and cut-off timelines of the Clearing Corporation the funds will be released to the Stock Broker. In view of this new process, as specified by the regulatory and the cut-off time of Clearing Corporation/Banks processing the funds, Bajaj Financial Securities Limited cannot commit the exact time for releasing funds payout to its client. Clients are requested to note that, Bajaj Financial Securities Limited will not be responsible for any inconvenience caused to clients due to delay in release of funds payout, including fines, delayed charges, defaults, etc.