Getting to the bottom of things
WHEN someone is presenting too many charts, going on and on too long, and way past his allotted time, the head of the table (even in a virtual meeting) is bound to curtly interrupt with a question — can you get to the bottom line? This need to cut to the chase strips away the rhetorical flourishes to wrap up with the conclusion.
Getting to the bottom of things focuses on the destination of a meandering journey. Companies use the bottom line as a way to define the most important goal. Is the net profit (or the more current “earnings before income tax, depreciation and amortization” — EBITDA) worth the trouble? Why is this year’s bottom line worse than last year’s? Of course, the pandemic shutdown can explain this decline, but not its severity. And if the bottom line is decreasing, or increasing but embraced by parentheses, can this trend be reversed?
To improve the bottom line, there are mainly two financial categories to look at: revenues and expenses.
Accountants do not accept responsibility for generating revenue, except for the collection part, including tracking days’ receivables. They focus on the expense side. CFOs sign checks and borrow from banks to pay salaries, rent, and representation expenses (now down due to working from home), when revenues are not enough to cover these. They know where the money is going, not so much where it’s coming from. They chase the spendthrifts — can you just stick to fast food take-out for your dine-in client calls? Be sure to wear a face mask when eating.
The revenue side is trickier. It’s why marketing people get paid more than accountants.
Still, salesmen also sell excuses, and are experts in justifying unmet targets. The litany of woes for declining revenues is long. The industry is shrinking. Competition is growing, especially from allied industries. (Home-made jams from the neighborhood are toppling pastry shops.) The competing brand is cooler. This all ends in a dramatic rhetorical question — why don’t you try selling our shitty stuff?
This outburst is met with shocked silence. It portends the sudden exit of the drama queen, maybe to the cooler company she praised, or a new entrant in the business… if either one will take her.
Managing a healthy bottom line has many moving parts. Say, you try to improve your top line by investing in new technology, as well as hiring outside talents and relaunching the brand. But then the competition too has moved forward and changed the game again.
Let’s move to the expense side. Doesn’t headcount reduction (or right sizing) bring savings straight to the bottom line? This looks easy to do. (Are they really working from home, or just taking siestas?) Still, exit packages enhanced to encourage people to jump out of a moving train with a bit of a push, can be a big drain. This cost premium reduces the impact of savings in salaries.
Still, a negative bottom line can be temporary, just as a healthy one is. Scenarios on “when the vaccine is available” offer hope, and a bit of wishful thinking. Analysts understand that financial statements are mere snapshots of particular periods. There may be hidden risks that will impact the bottom line in the next reporting cycle.
Even in social situations, the bottom line is alluded to. It directs where a narrative is headed, what the possible outcome of a thorny situation is, or how a relationship will resolve itself. A rambling monologue of hurts and slights (expenses) and momentary shrieks of delight (revenues) is cut short by posing the question — what’s the bottom line here? Where is this leaky ship headed?
Non-financial situations can use the economic concept of the bottom line. There, perhaps it can be more properly called the “net outcome.”
The bottom line is useful in navigating through life. The revenue of glorious moments is reduced by the miseries of public humiliation and financial reversals. The bottom line tells us not what we have accomplished or even where we failed. It points to what we have left in the day of reckoning.
The last line may be a negative sum telling us we need to work harder at reducing the unhappiness deficit and moving towards the point of breaking even… or breaking down.
Tony Samson is Chairman and CEO, TOUCH xda
