What is the Bottom Line in Business?

Business Knowledge

When we start a business, we need to create a startup budget and this budget includes the bottom line. The Bottom line indicates what is the extent of the business and the things related to it such as profit, net income, revenue, expenses, costs, sales, etc.

What does the bottom line describe?

If we describe the “bottom line” in easy language, it refers to the end of the business criteria. Every business has its target to achieve in a particular time and business targets are attached and interlinking with each other because we would like to explain this with an example in the easiest way and we hope this example will clarify the actual meaning of the bottom line.

Suppose you had fixed a target in 2022, that this year you will not have to spend more than 1 crore in production because of last year(2020) due to covid-19, there were not so many sales of the company, due to which the net profit was not good, due to which revenue was not so much valuable after deducting all the expenses or cost. So could you see that, how does one thing affect another thing? Each department in a business is interlinking and depending on each other whether sales depend on the purchase, income depends on revenue (comes out from revenue after less all the expenses or cost), Profit depends on sales, etc.

That’s why we can say that the bottom line depends on these things like as we said above in the example suppose you have a target of 1 crore of production in this year only, so if you sell all the products within a year so you will earn a profit, due to which you will get net income from revenue after deducting all the expenses or cost. 

We hope you understand what we want to describe with this example.

The bottom line reflects the value of the business and tells us that we don’t have to go beyond the limits of our business to generate revenue and achieve success. We have to set this business bottom line in advance for our business so that we cannot cross it. If we cross it so we can face any obstacles which will be unhealthy and not fit for business net income.

Who sets the bottom line in business?

Now we should also know who sets the bottom line, the people who set them by analyzing the last previous year’s performance are only responsible for upcoming profit or loss.

Investors, Owners, Board of directors, Chairman, set the bottom line in business in which they describe each plan to achieve success with the business bottom line to the manager of each department (such as sales, purchase, marketing, accounting, finance). They use a variety of formulas to describe the plans by using charts, bar graphs, pie charts in meeting with senior employees (managers, supervisors, and other employees). They prepare all the things and employees just have to show or prove themselves by achieving goals within the bottom line.

What do we achieve by setting the bottom line in business?

If the company’s seniors set the bottom line, so employees can handle all things smoothly considering the bottom line.

  • Business activities are performed well.
  • There is no problem in achieving the target.
  • Effective sales.
  • Get chances of more than enough profit.
  • Fewer chances of more expenses.
  • Automatically generate revenue.
  • Reduce other extra costs.

The Bottom line describes the whole year’s performance

The bottom line shows the reality of realtors who have contributed to the business and also calculates the overall resources used in business. From Purchase to Sales, they analyze each transaction to get output in the end and tell the business owners about the business strength and financial status. 

The bottom line is beneficial in two ways:

When we start a new year of business

When you enter into your new financial year, you prepare new accounting books for transactions and everything is fresh, instead use the last year’s accounting books. Now you are thinking, why am I talking about this? I tell you that the bottom line describes last year’s performance and alerts the business owners to avoid errors of the past year and prepare your new business plans after learning from the past mistakes. 

Bottom line: improve strategies for upcoming projects so that the owners can better output in the future. With the bottom line, owners move for the next step:

When we close the balance sheet at the end of the year

When we prepare a balance sheet at the end of the year, it represents the accurate performance of the business by analyzing the increase and decrease of assets and liabilities. It shows the work efficiency of employees in business and also alerts for the improvement in the next year.

The company set a bottom line in advance that they cannot take a single step out from this line, it is the ending line of limits and they need to fulfill the targets after crossing this line because the company needs to invest its resources according to its bottom line and also promote it based on their business budget so that they can attract new customers and keep old customers for new dealings.

The bottom line determines the cost and revenue earned in the past year so that owners can estimate future revenue by correcting all the errors such as reducing wasteful expenses, healthy products, allocation of resources, and investment decisions. 

Ending Bottom line

A bottom line is also one that describes the end of our business performance by measuring accounting records such as income statements, cash flow statements, profit and loss statement.

Low Net Income: Suppose the Company did not earn much income so performance shows that the business bottom line is not good.

High Net Income: Suppose the company did earn more income than expected so performance shows that the business bottom line is good than enough.

Average Net Income: Suppose the company did earn average income which did not even profit, so did not lose. It shows that the business bottom line is average.

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