WHY DO SMALL INDUSTRIES REMAIN SMALL? — PART 5
Minish Umrani (Industrial Consultant)
Mobile: 9822390363
TOP LINE VS. BOTTOM LINE
Which is more important for a business—the top line or the bottom line? I am often asked this question.
Let us first understand what top line and bottom line mean.
Top line means the company's total revenue or sales, before GST. It is called the top line because it appears at the top of the income statement. It is the revenue before business expenses.
Bottom line means the company's net profit. It is called the bottom line because it appears at the end of the income statement. It is what remains after all expenses, taxes and interest are deducted from total income.
Suppose your company's annual turnover is ₹3 crore. Your total income, or top line, is therefore ₹3 crore.
After deducting employee salaries, taxes, bills, interest and other expenses, suppose ₹15 lakh remains. That is your bottom line, or net profit.
The bottom-line-to-top-line ratio is 5%.
Now let us ask: can we increase the bottom line without increasing the top line?
If the bottom line has to increase, the net profit percentage must rise from 5% to 6%, 8%, 10% or something similar.
That means we need to control the deductions from net sales.
How much can you realistically reduce government taxes, employee salaries, bank interest or raw-material costs?
If you have not taken a loan to run the factory, you can certainly save bank interest. But then you need sufficient own capital and holding capacity.
If you do not have that capital, and you want monthly sales of ₹25 lakh, you may need at least ₹15 lakh in CC.
At 10% interest, that costs about ₹1.5 lakh per year.
If you save that amount, your bottom-line percentage rises only to around 5.5%—an increase of just half a percentage point.
Most other expenses cannot be reduced very easily.
The selling price of your product and the price of the raw material required to make it are often not completely under your control.
If receivables are not collected on time, or if inventory increases unnecessarily, your bottom line can immediately be disturbed.
Overall, therefore, the possibility of significantly increasing the bottom line without increasing the top line is limited.
In a small business, cost reduction is necessary. But continuous efforts to increase the top line are equally important.
As a thumb rule, remember that your top line should be large enough that even if the bottom line fluctuates slightly, you should not face difficulty in meeting routine monthly expenses.
Employee salaries, supplier payments, loan instalments and bills must be paid on time.
If you want to increase the top line, your focus must be on the top line.
That means properly marketing your products, advertising wherever necessary, and taking all the required steps to grow sales.
Set targets at least every quarter and make deliberate efforts to achieve them.
For this, you need time.
If you are trapped every day in firefighting, it becomes impossible.
I have seen businesses where people actually think, “It would be better if no new orders came this month. Somehow we can finish the orders already in hand.”
The general objective should be at least 25% growth every year.
A more ambitious target would be 50% growth every year.
A small business that is continuously driven by such an objective and works consistently towards it cannot remain small forever.
.... PART 5 ENDS | 14 July 2024
Minish Umrani (Industrial Consultant)
Mobile: 9822390363
TOP LINE VS. BOTTOM LINE
Which is more important for a business—the top line or the bottom line? I am often asked this question.
Let us first understand what top line and bottom line mean.
Top line means the company's total revenue or sales, before GST. It is called the top line because it appears at the top of the income statement. It is the revenue before business expenses.
Bottom line means the company's net profit. It is called the bottom line because it appears at the end of the income statement. It is what remains after all expenses, taxes and interest are deducted from total income.
Suppose your company's annual turnover is ₹3 crore. Your total income, or top line, is therefore ₹3 crore.
After deducting employee salaries, taxes, bills, interest and other expenses, suppose ₹15 lakh remains. That is your bottom line, or net profit.
The bottom-line-to-top-line ratio is 5%.
Now let us ask: can we increase the bottom line without increasing the top line?
If the bottom line has to increase, the net profit percentage must rise from 5% to 6%, 8%, 10% or something similar.
That means we need to control the deductions from net sales.
How much can you realistically reduce government taxes, employee salaries, bank interest or raw-material costs?
If you have not taken a loan to run the factory, you can certainly save bank interest. But then you need sufficient own capital and holding capacity.
If you do not have that capital, and you want monthly sales of ₹25 lakh, you may need at least ₹15 lakh in CC.
At 10% interest, that costs about ₹1.5 lakh per year.
If you save that amount, your bottom-line percentage rises only to around 5.5%—an increase of just half a percentage point.
Most other expenses cannot be reduced very easily.
The selling price of your product and the price of the raw material required to make it are often not completely under your control.
If receivables are not collected on time, or if inventory increases unnecessarily, your bottom line can immediately be disturbed.
Overall, therefore, the possibility of significantly increasing the bottom line without increasing the top line is limited.
In a small business, cost reduction is necessary. But continuous efforts to increase the top line are equally important.
As a thumb rule, remember that your top line should be large enough that even if the bottom line fluctuates slightly, you should not face difficulty in meeting routine monthly expenses.
Employee salaries, supplier payments, loan instalments and bills must be paid on time.
If you want to increase the top line, your focus must be on the top line.
That means properly marketing your products, advertising wherever necessary, and taking all the required steps to grow sales.
Set targets at least every quarter and make deliberate efforts to achieve them.
For this, you need time.
If you are trapped every day in firefighting, it becomes impossible.
I have seen businesses where people actually think, “It would be better if no new orders came this month. Somehow we can finish the orders already in hand.”
The general objective should be at least 25% growth every year.
A more ambitious target would be 50% growth every year.
A small business that is continuously driven by such an objective and works consistently towards it cannot remain small forever.
.... PART 5 ENDS | 14 July 2024
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