Financial Mysteries: top vs. bottom line

I get frustrated when people throw financial terms at me. I’m a tech guy. Before my last job, I didn’t understand much of Capex vs. Opex, top vs. bottom line, or IFRS vs. GAAP. By the time I left, financial controllers in our company would reach out to me, asking how we managed and allocated our project Capex and Opex.

Photo by Kelly Sikkema on Unsplash

It’s one of the unfortunate side effects of becoming a tech leader. You’ll need to broaden your horizon – significantly! I’ve talked a lot about people, teams, and culture in past articles. Financial jargon and management is at least as important.

Top- and bottom line

When CEO’s or CFO’s talk to us, we often hear about ‘increasing the bottom line’ or ‘boosting the top line,’ but what does that really mean ? The top-line and bottom-line are more than just numbers on a page; they’re the core of our business, our strategy and our financial planning. Yet, many entrepreneurs and business leaders don’t fully understand the distinction, potentially leading to misguided decisions that can impact overall business health.

Top line is very simply said, your revenue for the month, quarter or year. In this article, we’re going to keep it simple, and not go into all the accounting intricacies. There is one topic to highlight though: revenue is not the same as sales, and not the same as income. Let’s say you sell a customer a 1-year deal for € 1,200, which starts next month. You have a sale, but no income, and no revenue (yet). Next month, when the contract starts, you send the full invoice for the year. Even though the customer hasn’t paid yet, your income is € 1,200. However, your revenue for the month is only € 100. It’s € 100 for every month of the contract.

Your bottom line is your revenue (top line) minus your costs. Costs here include direct operating expenses such as support and hosting costs, personnel costs, marketing & sales costs, fees for accountants, lawyers, etc. Items such as interest, taxes, depreciation or amortization are not included, hence the name “EBITDA”, or “earnings before interest, taxes, depreciation, and amortization”.

Again, this is a simplified view, but it should be enough to have a discussion around the topic.

Where to focus?

By having a grip on these concepts, you can make more informed decisions, drive more sustainable growth, and have more informed conversations with your investors or stakeholders.

Over the years, I’ve seen companies focus only on growth, driving sales, to the extent where they forget about profitability (the bottom-line). This happens often with VC-funded startups. Growth is everything. Unfortunately, when down-turns happen, such as the one we’re in now, a lot of such startups will falter and fail. There’s also the opposite. I’ve worked organizations obsessed with cutting costs to improve their bottom line, only to realize they were stifling their own growth potential. Balance is key.

And then, there’s the problem with tech. Tech is often seen as “just” a cost driver, decreasing the bottom line. CEO’s and CFO’s often think that more you spend on tech, the lower your income. Even in today’s world, tech isn’t always seen as a growth driver, only a cost driver. In the end – it’s both.

Applying them

Let’s look at the different options you have for growth.

Top-Line Growth (Revenue Growth): This is all about your sales numbers. Increasing your top line means you’re boosting your total revenue. Think marketing strategies, sales efforts, and market expansion. It’s the flashy, front-end stuff that gets everyone excited.

Bottom-Line Growth (Net Income Growth): Here’s where profitability plays its part. Improving your bottom line is about increasing your net income, which comes from reducing costs or optimizing operations. It’s the less glamorous, but oh-so-crucial part of the business.

Balancing the Two: The magic happens when you find the sweet spot between top-line and bottom-line growth. That’s when you drive sustainable business growth without sacrificing profitability.

Photo by Piret Ilver on Unsplash

If you don’t probably balance, but neglect the bottom line, this can lead to unprofitable growth. It’s like filling a leaky bucket – not very effective. You can make lots of money, but you’ll be spending even more. On the other hand, cost-cutting is very effective at improving the bottom line, but taking it too far will harm the top line (e.g. if you cut your ad spend, you’ll be spending less, but over time – your sales will reduce).

In summary

So there you have it! Top-line growth gets you the visibility, but bottom-line growth ensures you stay in the game. Mastering both is key to driving profitable growth.

Ready to take your tech growth strategy to the next level by mastering top-line and bottom-line growth? Ready to optimize your tech to contribute to top line growth, whilst optimizing for the bottom line? Let’s chat!