Most small businesses do not have a Chief Financial Officer (CFO) or someone to keep an eye on the books full-time. Even if you're diligent in printing monthly P/L reports, it's still not enough. Financial insights are crucial to your business' operations, and most entrepreneurs don't see trends and patterns emerging until they dominate the reports.
Often, entrepreneurs find themselves in a tight spot with their ledger and need to brainstorm ways to improve it. This need poses an interesting question. Should you focus on top or bottom-line growth? Many entrepreneurs don't realize there is a difference.
A sale is a sale, right? Not necessarily!
Topline growth refers to a company's revenues or gross sales
Bottom line growth involves the company's total net income
Think of it this way. If you're growing the top line, you're bringing in more money; if you're increasing the bottom line, you're using your money efficiently. The two aren't mutually exclusive, and that's important to remember. Focusing on one vs. the other can have profoundly different effects on your balance sheet.
A focus on the top line
Topline growth is all about sales and revenue. If you sell 20% more product this quarter and bring in $600,000 in revenue, you're experiencing topline growth. For most entrepreneurs, this is where their focus is—and it's generally the right place to concentrate your efforts.
More sales and revenue generally resolve most cash flow issues. For example, if you have cash flow issues and trouble making payroll at the end of the month, increasing upfront sales will help you get the cash you need to alleviate that bottleneck.
But topline growth isn't a panacea for everything. For example, if you've got margin problems, selling more generally isn't the solution, and it might take you a long time to break even selling products with minimal revenue opportunity.
Emphasis on the bottom line
Bottom line growth is what matters at the end of the day because it's a sign of your company's operational efficiency. You can grow the bottom line in many ways. For example, if you save 5% on the cost of production of your product and maintain the same sales margin, you're growing the bottom line. Bottom line growth is usually a driver of total company growth since businesses are more likely to flourish with responsible cost management and operational expenses.
The bottom line growth doesn't focus on revenue. That means if your business has stagnant sales, targeting the bottom line doesn't make sense. Cutting operational costs to improve the bottom line won't help you generate revenue.
Balance efforts with objectives
The best companies grow both the top and the bottom line results simultaneously. But that doesn't mean you shouldn't focus specific initiatives one way or the other. For example, if your business has reported losses for two quarters, you might cut extraneous costs by focusing on the bottom line while rolling out a new sales campaign to kickstart topline growth.
Knowing where to focus your efforts based on the challenges your business faces is key to getting back into the black.
For more information about the top and the bottom line growth or to schedule a free consultation with FocusPoint Strategies, please contact us today. We're eager to help you discover simple strategies that improve your business' results in a meaningful way!