The Top Line is the Most Important
In order to fully understand profits, the “bottom line” of our Profit & Loss Statement (P&L), we must first understand where profits come from. The basic format of a P&L is as seen below:
What is the "Bottom Line"?
Most people will look at a P&L and argue that profits (or losses) are the most important line. In fact, by name the statement is called the Profit & Loss statement so it must be the most important! It’s not.
The bottom line is simply an output- it is not something that can be measured or changed without influencing the other items in the statement, so while it is important, it is not the most important.
What is the "Top Line"?
So which line is? The "top line" or revenues, and here’s why: the amount of money you bring in from sales determines the amount of money that can flow through the rest of the P&L (the business). It determines how much money you have to make your product, run your business, and then drive a profit. The rest of the P&L is all a function of this top line.
That’s great, so let’s focus on more sales! Absolutely, in my experience, most businesses can benefit by focusing on increasing revenue. However, the tricky thing with the top line is that although it is the most important line on the P&L it is also the least predictable and hardest to control. This is why most businesses end up focusing on variable costs and fixed costs to increase profits- they are easier to control.
Absolutely, in my experience, most businesses can benefit by focusing on increasing revenue.
Increase Profit By Focusing on "Top Line"
For example, you can work with your suppliers to decrease COGS and cut labor hours from every shift to reduce wages. You can also renegotiate your lease and reduce your marketing budget to cut costs- I’m not saying these things are easy to do or that they are wise decisions, but the point is that they are entirely within the business’ control.
But can you force people to buy more? Just because you want to increase sales doesn’t mean they automatically go up. Even increasing your marketing budget or hiring additional sales staff doesn’t guarantee an increase in the top line and even if it does increase that’s not to say it will remain at that level in the long run. Revenue is difficult to predict and control.
That’s not to say you shouldn’t try, in fact it is precisely why increasing revenues should always be a priority for your organization- it is the most important part of the operational success of your business.