Bottom Line Definition

The bottom line is a business’s profits that are recorded on the bottom line of a net income financial statement. Knowing the bottom line is important because it reflects a company’s profitability during a certain time period. Keep reading to learn more about the bottom line definition and how to calculate this number that can be so important to a small business. 

What is the bottom line?

The definition of the bottom line is a company’s net earnings. Another word for the bottom line is net income or net profit. The term references the actual location of the net earnings on the bottom line of the company’s income statement. 

A quick walkthrough of the general format of an income statement can help explain that “bottom line” meaning. The first (or top) line on a company’s income statement shows the revenue from sales or services. Next on the statement are other sources of revenue (think interest or investment income). The following section includes all expenses. After taking all profits and deducting all expenses, the statement shows the bottom line, which reports the net income. This is the actual amount of income the business can retain for future use, distribute to shareholders, pay off debts, or use in a manner that makes sense for the company. This income statement is just a snapshot of a certain period of time (or accounting period). 

A common phrase in business is “improving the bottom line,” which refers to a company’s efforts to increase profits or decrease costs. 

How is the bottom line calculated?

The bottom line is calculated by adding up all gross sales or revenue sources within a specific time frame. After that, a business deducts all of its expenses, including operating costs and taxes. The resulting number is the bottom line. 

Bottom Line Example

Here’s a simple example of calculating the bottom line. 

In 2021, Company A made $100,000 in total sales and spent $15,000 to purchase new equipment. Its tax bill for the year was $3,000. To get the bottom line, start with $100,000 and subtract the $15,000 for equipment and $3,000 for taxes. Assuming the company had no other costs, the bottom line (net profit) for Company A in 2021 is $82,000. 

Granted, that’s an oversimplification; most companies pay more than that for taxes, and they often pay more for expenses like employee wages, operating costs, and so on. But it’s a helpful look at how bottom-line calculations work.

What are the benefits of knowing the bottom line?

A business owner needs to see their company’s bottom line to know whether their business is profitable. It’s essential to know those totals to decide what to do with the business income. For example, some businesses reinvest their bottom line back into the company and purchase new equipment, expand locations, or hire more employees. A C corporation can distribute net earnings to shareholders in the form of dividends.

It’s advantageous for a business owner to know if their business is increasing its bottom line so they can set realistic goals and expectations for the growth of their company. 

Summary

The bottom line is a snapshot of a company’s net profits during a specific period of time. This number is recorded on the bottom line of a net income financial statement. 

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