Bottom Line

The Bottom Line refers to a company's earnings, profit, net income, or earnings per share (EPS). The reference to bottom line describes the relative location of the net income figure on a company's income statement. Bottom line is commonly used in reference to any actions that may increase or decrease net earnings or a company's overall profit. A company that is growing its earnings or reducing its costs is said to be improving its bottom line. Most companies aim to improve their bottom lines through two simultaneous methods: increasing revenues (i.e., generate top line growth) and improving efficiency (or cutting costs).

The Bottom Line as an Indicator of Business Performance
The bottom line numbers are an important component of the scorecard for management.
Positive and growing profitability over time is a testament to a variety of factors including:

• Good market and customer selection
• The creation and delivery of products and services valued by customers
• Effective allocation of investment dollars in support of targeted customers
• Efficient control of costs across the organization
• Positive marketplace and macroeconomic factors

Alternatively, declining or low bottom line numbers over time is an indication of challenges in one or more of the areas mentioned above and should be examined by management. Shareholders, the board of directors, and employees all rely on the bottom line numbers after each accounting period (usually quarterly) to assess the effectiveness of the company's marketplace strategy and internal management. Of course, when bonuses or annual salary increases are tied to bottom-line results, employees naturally pay more attentive to these numbers.

The Limitation of Bottom Line Numbers as an Indicator of Performance
Although profitability numbers are important measures of a company's current success (and are used to compare previous time frames), they are not a tell-all. They do not tell management, directors, shareholders, or employees what worked or what failed.

Poor profitability numbers are an indication that something is wrong, ranging from strong competition to adverse economic circumstances to a failed strategy to runaway costs.

Likewise, positive numbers do not highlight what part of the company's overall approach is working. It is possible for strong economic conditions (or competitor failure) to lift revenues and improve profits, in spite of poor cost control or a weak long-term strategy.

In financial reporting for publicly listed and traded firms, it is important to look at the detailed notes including footnotes. It helps management (and other stakeholders) understand the assumptions, accounting approaches, and final derivation of the bottom line number.