Learn how to identify the final price of your startup without confusing it with other profitability statistics commonly used during funding.
The bottom line sometimes gets mistaken with another proﬁtability statistic which is the typical stuff you would deal with during ﬁnancings when investors are discussing with you an investment via safe notes.
On an income statement, EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, may or may be present. Whether or not the startup publishes EBITDA, according to US GAAP, it is not a requirement.
EBITDA is a proﬁtability metric that is distinct from net income. All expenses are subtracted from net revenues to arrive at net income. All expenses are deducted from EBITDA, excluding interest, taxes, depreciation, and amortization.
When certain organizations report EBITDA, it may be the last line item on the income statement.
Net income and EBITDA aren’t the same. Interest, taxes, equipment depreciation, and loan amortization are not included. All of these, however, must be paid from earnings. It does not assist an investor in determining the net value of a stock.
Calculation and Formula for the Bottom Line
The gross earnings are used to calculate the bottom line, which is net proﬁt, and all expenditures and costs get deducted, including overheads. The ﬁnal amount received is termed net proﬁt.
The measurability of the organization’s core proﬁt is referred to as net proﬁt.
It’s a common misconception that if the aim is exceeded, the proﬁt will increase as well. The example below can be used to help explain this:
How to Increase the Bottom Line
Because the bottom line is used by organizations to represent growth, proﬁtability, sustainability and value, management can use various tactics to boost the bottom line. Increases in income, or the top line, should, for starters, trickle down and beneﬁt the bottom line.
This can be accomplished by increasing production, improving product returns, expanding product lines, or raising prices. Other means of income, such as rental or co-location fees, interest, or the sale of property or equipment may all contribute to the bottom line as well.
This proﬁt must also be recorded in the accounting books for investors and shareholders.
When the market is well-established, and there are several competitors, or when the economy slows down, the startup will utilize this method to keep their proﬁts up. The startup seeks to reduce costs to preserve or enhance proﬁtability, consequently positively impacting its bottom line.
To retain proﬁtability, many companies minimize employee expenses such as yearly bonuses, or pay increases, which are usually given out at the end of every year.
Another cost-cutting technique would be to use cheaper raw materials over production, which would naturally drop costs.
Apart from lowering employee compensation and beneﬁts in exchange for employing lower-cost raw materials, certain startups may utilize the strategy of operating out of comparatively low-cost premises, or going all remote, reducing capital costs.
Management may encourage the sales staff to attain better numbers by offering extra incentives and bonuses when they meet the target.
Another method to boost revenue is to expand the startup into new territory. Many startups are expanding internationally to produce more revenue from various areas. They can promote their products or services for little money with digital marketing and incremental proﬁts.
On the other hand, if startups utilize traditional marketing methods, they may have to make a signiﬁcant upfront investment, and the results are not always predictable.
During the expansion or growth phase of their products, the majority of organizations employ a revenue-growth strategy when the startup is a relatively new arrival in the market, and there are no other competitors to compete with.
It may be challenging to follow and implement for a well-established startup in a crowded market.
Pricing a product is one of a startup’s most signiﬁcant decisions, and it may make or destroy the product. This directly impacts the startup’s bottom-line proﬁtability. When a startup expects alterations in its bottom line, one of the ﬁrst elements to modify is pricing.
This is a delicate balance. Lowering prices may increase sales volume. Higher prices could burn loyal customers and kill the business fast.
Effective Marketing Campaigns
Investing in marketing is one of the best decisions a startup can make. Traditional marketing strategies are expensive for any business. Combining traditional and digital marketing strategies can help you reach and target the right customers.
Because of the laser targeting that digital marketing provides, the cost is signiﬁcantly lower than traditional marketing, and the eﬃcacy rate is much higher.
If the marketing strategy is successful, you will be conﬁdent that the business will expand, resulting in a higher bottom line.
Concentrating on collections can boost the bottom line instantly. Many clients pay late due to ﬁnancial constraints for a variety of reasons. Or because they’ve been given a free pass to do so in the past. The cash ﬂow can be severely harmed as a result of these late payments.
After a transaction, employees can update the payment schedule and successfully follow up with clients to collect payment.
Alternatively, the startup can reward consumers who pay early with special programs, bonuses, or reward points, incentivizing them to pay early even more.
If the connections are made promptly, the bottom line will increase signiﬁcantly, making the balance sheet more proﬁtable.
Triple Bottom Line Concept
There’s a trend to assess a startup holistically by considering its inﬂuence on society and the environment, in addition to analyzing its bottom line for proﬁtability. The triple bottom line (TPL) is a concept that focuses on proﬁt, people, and the environment.
In 1994, John Elkington proposed the concept of the triple bottom line. Two additional bottom lines, social and environmental, are added to the usual bottom line of proﬁtability under this paradigm.
There are no mandated metrics, and there’s no agreement among startups on measuring performance in these areas. As a result, it’s still primarily subjective. Some propose that social capital and environmental safeguards be converted to monetary values, while others suggest that the triple bottom line be quantiﬁed via an index.
Regardless of how it’s measured, it’s essential to pay attention to it as more emphasis is on maintaining and sustaining the environment while also contributing to society.
How the Bottom Line Can be Used
On the income statement, a startup’s bottom line, or net income, does not necessarily carry over from one accounting period to the next. At the end of the period, accounting entries are made to shut all temporary accounts, including income and cost accounts. The net income is allocated into retained earnings when these accounts are closed, which appears on the balance sheet.
A startup can then choose to use net income in various ways. It can be used to make payments to stockholders as an incentive to keep their shares; this is known as a dividend. The bottom line can also be used to repurchase stock and retire equity. A startup may keep all earnings on the bottom line to invest in product development, geographic expansion, or other ways to improve the company.
The Limitations of Bottom-Line Numbers as a Performance Indicator
Proﬁtability ﬁgures are key indicators of a startup’s present success and can be used to compare past periods, but they don’t tell the whole story. They don’t reveal what worked and didn’t to management, directors, shareholders, or staff. They are not a crystal ball into the future.
Poor proﬁtability numbers indicate that something is amiss, ranging from:
- Fierce competition
- Diﬃcult economic conditions
- A failing strategy
- Spiraling costs
- Poor management
On the other hand, positive numbers do not reveal which aspects of the startup’s broader strategy work. Excellent economic conditions or rival failure can boost revenues and improve proﬁts despite poor cost control or a weak long-term plan.
The ﬁnancial reporting for publicly traded companies explains the assumptions, accounting methods, and ultimate derivation of the bottom line number to management and other stakeholders.
There are a few things to keep in mind when looking at the top and bottom-line earnings data. It’s possible for a startup’s top line, or sales, to climb while its bottom line, or net earnings, falls. This can happen when expenses outpace income growth.
It is also possible for a startup’s top line to fall while its bottom line grows. Proﬁts can be made via decreasing costs, automating processes, and changing the structure of a startup.
In many cases, the ideal scenario is for the top and bottom lines to expand in lockstep. This demonstrates that the startup’s ﬁnancial performance and operations are improving over time. If revenues and proﬁts ﬂuctuate erratically, it could be a red ﬂag.
About the Author
Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a foreword by ‘Shark Tank‘ star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide to today‘s way of raising money for entrepreneurs.
Most recently, Alejandro built and exited CoFoundersLab which is one of the largest communities of founders online.
Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding where he was involved in one of the biggest investment arbitration cases in history ($113 billion at stake).
Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and NYU Stern School of Business.
Alejandro has been involved with the JOBS Act since inception and was invited to the White House and the US House of Representatives to provide his stands on the new regulatory changes concerning fundraising online.