Understanding top line vs bottom line growth and strategies to improve
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The top line and bottom line of a company’s income statement are the two most important metrics in its financial statements. It's even more critical to monitor these metrics in the face of a possible recession, especially as consumer spending drops and inflation increases your company's costs.
Managing your top and bottom lines is complicated during difficult economic periods. In this post, we'll give you the tools to understand how financial headwinds impact your top line—and how to develop a healthy financial culture despite them.
What is top line growth?
Top line growth is an increase in all the revenue a company manages to pull in during a reporting period. This could be through the sale of manufactured goods, activities as a market maker, middleman, or trader, or the provision of professional services, be they law, accounting, financial, or skilled work like plumbing or carpentry.
How businesses can improve top line growth
A business can increase its top line in several ways. Here are some common approaches:
- Launching a new marketing or advertising campaign to gain new customers
- Increasing the price of its products
- Adding new product lines
- Improving its products to gain new customers
- Increasing the efficiencies of manufacturing its products by finding cheaper raw materials
- Acquiring a rival to gain market share
The top line is used as the denominator in several important ratios. For example:
- Profit margin: This is a measure of all of a company’s costs. It's (revenues - total costs)/revenues. A good profit margin depends on the industry but generally runs between 5 and 10%.
- Gross profit margin: This shows a company’s variable costs. It is gross profit/revenue, where gross profit is (revenue - COGS). Retail stores need a 50% gross profit margin to cover their distribution costs.
What is bottom line growth?
Bottom line growth comes from managing resources carefully and keeping a tight rein on costs. It shows how good a company is at managing spending and operating costs.
The bottom line, meaning a company’s earnings, is arguably the most critical metric. It is used to set the company’s market valuation. (Share and venture capital investment values are usually informed by some multiple of a company’s earnings.)
As the sample income statement above shows, for a company to grow its earnings, it must either
- Increase revenues while holding costs steady, or
- Cut costs
How businesses can improve bottom line growth
First, management can grow a company’s bottom line by growing its top line and keeping expenses from rising.
But since the bottom line reflects the company’s management of its fixed costs and expenses, you can also:
View top line and the bottom line together
Top and bottom line growth often diverges in mature companies, where cost control measures and plateauing sales can cause earnings to grow faster than revenues. However, this is unsustainable over the longer term since only so many costs can be cut.
Similarly, if revenues grow consistently faster than earnings, something is amiss. Costs may be out of control or management has become complacent.
External factors like a recession, during which a company might have flat sales and decide to cut its workforce to reduce expenses, also have uneven effects. Apple’s revenues blew out in 2021 by over $90 billion, to $365.8 billion, compared with 2020. Its bottom line went up by over $35 billion.
How to improve top line and bottom line growth with expense management
Develop a healthy financial culture
Many companies today focus on developing a healthy financial culture to manage and reduce selling, general and administrative (SG&A) expenses. A better spend culture for modern organizations is one where employees feel trusted to spend responsibly.
These positive behaviors should permeate every aspect of your company, from product development and go-to-market strategy to financial operations. You want people to understand the guardrails for healthy spending and saving and model positive financial behaviors.
This helps curtail tail spend, too. Tail spending is high-volume, low-value expenses that make up 80% of the average company’s transactions and 20% of total spend. A recent study by Deloitte found that companies who manage their tail spend effectively have savings between 5-20% in total spend. It provides visibility into spending so you can:
- Uncover spend that is outside of your procurement policy or doesn’t contribute to your top line initiatives
- Track billing inconsistencies over time to find areas you can save
- Identify duplicate services and supplies
- Get more accurate budget forecasts by adopting a rolling budget
Conduct a spend analysis
You can conduct a spend analysis to identify and understand SG&A expenses. This is a review of external spend across various expense categories to determine whether you could spend less going forward.
All this can lead to your development of a spend control plan. As you build it, consider implementing some of these strategies to help manage your company’s spend and make effective, data-driven choices.
Practice continuous accounting
Continuous accounting involves updating financial information throughout the month rather than waiting until month-end like many manual processes do. These real-time updates allow the finance department and key players in the company to see where money is going and better manage cash flow.
Using the right financial management software for this can save your team hours, sometimes even days, of time.
Automate your expense reports and spend policies
When you automate your expense reports, it becomes much easier to control any ad hoc spending. It’s also easier to eliminate any human entry errors that could cause issues later down the line.
Expense management software, like the platform Ramp offers, can let employees submit receipts on the spot. The software then reconciles the information from that receipt to an automatically created expense report.
Within the system, you can also create digital expense policies that will remind the employee of everything they need to enter to document their purchase, avoiding a long back-and-forth process if they forget a key piece of information, and leading to better spending habits among employees. Employees are also typically reimbursed the next day. Check out our product demo and discover what expense management is and why it's essential for your business.
Use employee corporate cards
If your employees often wait for expense reimbursements, you may want to switch to a spend management solution offering employee credit cards with built-in controls. They can be virtual cards or physical cards. The company can place limits on them, restrict what merchants employees buy from, and more.
Approve spend ahead of time and use multi-level approval to stay in control of spend
Empower employees by making it easy to request spend and route requests for approval. To do this, you’ll need software that instantly generates corporate cards for employees to use upon approval. If you’re having trouble controlling spend, you can set up multi-level approval for bills. This approach provides accountability across the company, gives managers and executives a better view into what employees are doing, and reduces maverick spending.
With the right software, you can also create custom workflows that will automatically send the bills to the right people so that employees don’t use up their time chasing down approvals—this is especially valuable in companies with a distributed workforce.
Keep your company spending in check with Ramp
At Ramp, we know how easy it can be to fall victim to poor spend control practices—that’s why we created our corporate credit cards and financial management software that works together to help you be as efficient as possible.
If you want to see how Ramp could help your organization streamline spend control, you can sign up for free today.