When you are growing as a business, it is essential to keep tabs on your accounts to make sure the financials are heading in the right direction. Doing so can allow you to track success and determine when your enterprise is ready to take further growth measures on the road to achieving your long-term goals.
Growth can be measured in two forms: bottom-line and top-line. Bottom-line growth refers to your company’s net profit (usually the bottom figure on your account statements), which is your income after your outgoing costs have been taken off. Top-line growth refers to your sales and revenue.
It is important to track both figures to get a comprehensive understanding of how your company is growing and any emerging patterns in your accounts. In this blog, we will explain what each type means for your business and how to track it.
- Understanding top-line growth
- Understanding bottom-line growth
- How bottom and top-line growth work together
- Get advice for growth
Understanding top-line growth
Top-line growth focuses on increased sales and revenue for your business. Essentially, this means success in attracting new customers or generating more revenue from existing customers. To track this type of growth, you should track metrics such as orders/purchases received, the number of customers you have, average order size, lifetime value of customers and the sales figures detailed in the ‘Profit and Loss’ section of your company accounts.
Top-line growth is usually good news for a company. It indicates increased demand as well as your company’s ability to generate sales. It also suggests increased customer satisfaction and brand loyalty, particularly if you are seeing repeat sales from customers and a longer customer lifetime value. As such, top-line growth over time is a good indicator that your business is ready to take the next step and invest in additional equipment, staff and locations to meet growing demand and drive it forward.
There are several approaches you can take if you want to give your top-line an extra push. For example, an effective marketing campaign could increase brand awareness, which naturally leads to increased sales. Other ways to grow your top line you might consider include broadening your product/service offerings, encouraging word of mouth marketing (through increased customer satisfaction or referral schemes) and increasing your market share via acquisitions and mergers.
If you offer seasonal products or services, you will likely see peaks at relevant times throughout the financial year. It is essential to track your top-line year on year to make sure the growth you are experiencing is consistent. This will give you a more accurate insight into whether sales are increasing year-on-year or whether it is just a reaction to a seasonal trend. Likewise, if you can reduce the seasonality of your business, this can help with long term growth.
Understanding bottom-line growth
As previously mentioned, bottom-line growth is associated with the net profit of your company after your outgoing costs have been deducted. Outgoing costs include payments such as taxes, wages, loan repayments, supply and material costs and any other fees you incur. In simple terms, bottom-line growth is how much profit your company makes.
Bottom-line growth is essential to track as it demonstrates whether or not you are achieving profit to utilise elsewhere in your company. This can be used for investment and expansion. Many companies use their bottom line to determine bonuses or salary increases for workers.
Bottom-line growth can be earned via increased sales and therefore encompasses top-line growth. However, if your sales grow but your costs drastically increase at the same time, you may see a reduced bottom-line, despite your top-line growing. So understanding your margins is very important.
When you are expanding your business, by investing in new staff, assets or technology, your bottom-line will be affected. This isn’t necessarily bad news, as long as your company is still able to make a profit and your top line is boosted. However, if your bottom-line is shrinking, it can be a forewarning of issues with cashflow and a lower return on investment.
One of the easiest ways to grow your bottom-line is to cut costs. Reflect on your company expenses and identify any costs you can eliminate either partially or entirely. This could include switching to cheaper suppliers, automating elements of your process or selling assets you no longer need. By reducing your costs, you can benefit from increased profit.
Bottom-line growth is critical to track as it shows how your sales are growing in proportion with your outgoing costs. This will help to keep the balance right between business expansion, variable costs (cost of supply of product/service) and fixed costs (i.e. overheads), as well as making sure you are generating enough sales to account for your expenses.
The bottom-line is an incredibly significant indicator of success for any business, which is why you will hear companies refer to their profit and turnover when demonstrating their value in the market. As such, it is beneficial to monitor it regularly to see what patterns are forming for your company and to recognise any potential threats in plenty of time.
How bottom and top-line growth work together
Although they can be monitored separately, bottom and top-line growth are very much intertwined. Top-line growth can result in bottom-line growth and vice versa, with increased sales and profit going hand in hand.
If your goal is to expand your business, you ideally want to see both types of growth. A growing top-line suggests that the demand is there for your company to take advantage of. In order to meet that demand, you may wish to invest in new opportunities and resources for your enterprise. This investment will usually result in increased costs. This is where your bottom-line comes in, as you will want to track it to ensure your increased costs are being met with increased revenue, leading to overall increased profit.
The bottom and top-line should work together to make sure your company remains in the sweet spot between growing sales and growing expenses. As both lines continue to prosper, it can allow your business to grow operationally, and the cycle continues.
With this in mind, it is essential to track your accounts regularly to monitor both your bottom and top-lines.
Get advice for growth
Bottom and top-line growth are significant because it indicates that your company is ready to expand. However, the right support and growth measures also can increase your bottom and top-lines, so your company can enjoy advanced custom and profit.
If you are planning to grow your business, there are many types of finance that can help, including equity, grants, crowdfunding and loans. By utilising these, you can take the steps you need to reach the next level for your enterprise.
If you need guidance on how to grow your company effectively, including how to fund it, we can help. Our advisors have experience across many business types in a variety of sectors, so we can provide advice aligned to your unique needs and goals.