By A. R. Samson
Of course life is more complicated than an income statement, if only because so much of it is unquantifiable and not subject to laws of profit and loss. What are heartaches after all but emotional deficits in life’s cash flow?
And yet financial jargon applies to things other than earnings. Take net income which is also called the bottom line. It subtracts expenses from revenues to come up with a final number to determine the health of an organization, or its moribund Stage 4 status.
Nonfinancial situations too can use this concept of the bottom line, in this case perhaps more properly called a “net outcome.”
Even in social conversations, the bottom line is alluded to. It directs where an argument is headed, what the possible outcome of a thorny situation is, or how a relationship will resolve itself “at the end of the day” (another favorite phrase of business people). The effort to cut short a rambling monologue of hurts and slights is to cut to the chase and pose the question — what’s the bottom line here?
Companies use the bottom line for comparing one quarter with another. Is the present success sustainable? And if the bottom line is declining, even embraced by parentheses, are the present challenges capable of being addressed? To improve the bottom line, there are really only two numbers to look at: revenue and expenses.
Financial types seldom accept responsibility for the revenue side, having little inkling on sales or marketing, except for the collection part. They tend to focus on the expense side. Sometimes referred to as “bean counters” probably due to their fixation on the beans inside a jar and how the level is dropping, CFOs sign the checks and borrow from banks to pay salaries and services, when revenues do not cover these. They know where the money is going, not too much where it’s coming from. It’s then the time to go after the spendthrifts — can you just stick to fast foods for your client calls?
The revenue side can be trickier. Sales people are experts in justifying unmet targets. The litany of woes is long. The industry is shrinking. Competition is growing. Our products are obsolete and nobody wants them. My grandmother hates our ads. The other company is cooler. This all ends in a dramatic rhetorical question — why don’t you try selling our shitty stuff? The outburst is met with shocked silence. This portends the sudden exit of the drama queen, maybe to the cooler company she praises so much, if they’ll have her. The Fence Sitter’s Tarzan Law for high pitched noises applies here: Do not yell out defiantly when letting go of a vine… unless another one is close at hand.
Managing a healthy bottom line has many moving parts. Say, you try to improve your top line by investing a lot of capex, as well as taking on board new (and expensive) talents to raise the revenue side. But then the competition too has moved forward and changed the game again with cheaper and more knowledgeable staff.
So you move to the expense side. Cost-cutting is not the magic bullet it is advertised to be. Doesn’t head count reduction bring the savings straight to the bottom line? This even looks easier to do. (They’re just lounging around waiting for a bayonet attack.) There are surely morale issues and sometimes even litigations and media-hogging protest moves. Also, exit packages enhanced to encourage people to jump out of a moving train with a bit of a push, can be pricey. This cost premium reduces the immediate impact of savings in salaries.
Still, a negative bottom line can be temporary, just as a healthy one is. 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.
The bottom line as a concept then is useful too 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 still have left. This may be a negative sum telling us we need to work harder at reducing self-inflicted unhappiness and then moving slowly up to a break-even point.
When we have hit bottom, the only way to go is up… or down to a new bottom.
A. R. Samson is chair and CEO of Touch DDB. firstname.lastname@example.org