Should you Focus on the Bottom or Work from the Top?
May 5, 2016
In any business operation, owners and investors focus on key metrics of their financial statements. Key metrics include myriad different analytics and ratios, revenues, revenue growth, EBITDA, cash flows and debt financing.
Depending on the stage and history of the business, many financial statement users focus on top and bottom line figures. The top line figure is generally gross sales or revenues of a company; the bottom line is typically EBITDA or net income. Now one may ask: which one is more important?
The answer to this question: it depends. For example, sales managers and other sales-driven personnel will focus on the top line because their commissions are typically based on sales results for a given period. On the other hand, shareholders (owners) typically pay greater attention to what can go back as a return on their investment through dividends that can be declared, or “saved” in the company’s retained earnings. This is not to say that shareholders do not care about the top line because after all it is a great indication of growth in a company. The top line provides guidance as to what will ultimately flow back into their pockets.
This also applies when a company is being acquired. Of course, the purchaser would like to go through all the financial information with a fine-tooth comb. However, if the purchaser believes they can implement better cost structures than what already exist in the company (e.g., reducing rent expenses by relocating, replacing certain staff with the purchaser’s current staff in place, achieving synergies by combining two companies together), then the purchaser would be increasingly focused on the top line figure.
In any case, one key metric does not necessarily trump the rest. Depending on the user’s focus, greater emphasis will be placed on the areas that impact them the most. The key is to define what type of user you are when presented with the financial information provided.