It's a common phrase used in daily conversation: "what is the bottom line?" In everyday speech, it refers to the grit or core of what someone is saying. When it comes to business, the bottom line is something that business owners, investors and bankers need to understand. People want to know what the profit is, because of there is no profit, there is no reason to be in business. There are many factors that affect the bottom line.
Definition
In most simplistic terms, the bottom line is the profit of a company. This is the net revenue---the amount made after expenses and taxes are paid. Before expenses are paid, the company has gross revenues. So, gross revenues, less expenses, less taxes, is the bottom line. Taxes are paid on gross revenues, not net, which can have a large effect on the bottom line if a company has high expenses. The taxes on the gross revenue can put the company into a deficit; paying out more out than it is bringing in.
Financial Strength
The bottom line number is used to determine the ultimate financial strength of a company. If a company is in the red, it has a negative bottom line, meaning it is making a loss. If the cost of doing business is greater than the money the business is earning, it is making a loss. Either the company will go into bankruptcy or it will find an influx of capital to offset the debt while restructuring operations to reduce costs. Of course, companies hope to make a profit (be in the black).
Use for Bottom Line Money
Companies have the option to pay profits out to owners, pay dividends to stockholders or invest the money into growth. Management may also decided to keep the money as cash to save for unforeseeable expenses that may arise.
Investor Considerations
There are many reasons that a company seeks investment capital. Public companies want their stock prices to remain favorable and showing a strong bottom line is the ultimate in public cheer leading. Private companies may need money for expansion. They may use the bottom line or need to have additional capital beyond the bottom line value. In situations like this, investors have confidence in companies that show a strong profit. For companies that are making a loss, examining the revenues and expenses can help find problematic areas and help get the company back on track to being profitable.
Transparency
People who invest seem to use "getting to the bottom line" as a mantra for daily activity. Just as the bottom line financially shows whether a company is truly working or not, executives have embraced the term to reflect transparency in financial disclosure, negotiations and contractual agreements. When someone wants the bottom line, they don't want the fluff.
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