Learn more about what a bottom line is in business.
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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 the 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 your company.
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 is referencing the actual location of the net earnings on the bottom line of the company’s income statement.
Let’s walk through the general format of an income statement to explain the 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 is other sources of revenue (think interest or investment income). The following section includes all expenses. After taking all profits and deducting all expenses, you reach the bottom line, which reports the net income. This is the actual amount of income the business has to retain for future use, distribute to shareholders, pay off debts, or do what makes sense for the company. This income statement is just a snapshot of a certain period of time (or accounting period).
You may hear the phrase “improving its bottom line” when a company is either increasing profits or decreasing costs.
You can calculate your company’s bottom line by adding up all gross sales or sources of revenue within a certain time frame. From that number, deduct all expenses, including operating costs and taxes. The resulting number is the bottom line.
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 recruitment 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.
To see if your business is profitable, you need to know its bottom line. From there, you can decide what to do with the income. Some businesses reinvest it back into the company and purchase new equipment, expand locations, or hire more employees. Corporations can distribute net earnings to shareholders in the form of dividends. It’s advantageous to know if your business is increasing its bottom line so you can set realistic goals and expectations for the growth of your company.
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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Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.