By Tony Samson
IN TERMS of evaluating a company’s performance, there’s no better number to look at than net income, or the “bottom line.” Even with the cash flow approach, another measure uses Earnings Before Interest, Taxes, Depreciation, and Amortizations (EBITDA). Companies use the bottom line for comparing one period with another, whether success so far is sustainable or whether it is declining. Others in dire straits with the bottom number embraced in parentheses check to see how much time is needed for a turnaround and what steps need to be taken.
To improve the bottom line, there are only two sides to look at: revenue and expenses.
Financial types who bear little responsibility for revenues, having little inkling on the details of sales or marketing, tend to focus only on the expense side. Dismissively referred to as “bean counters” due to their fixation on the beans inside a jar and how the level is dropping, they have only cost to look at, and how to cover it if revenues do not. They can see where the money is going, not where it’s coming from. Thus, do they obsess about line items that look manageable like salaries (why is that guy getting so much?) or such variable items as traveling costs, training, representation, and unliquidated cash advances.
The revenue side is trickier. Sales people are experts in justifying rising costs. (It’s not an expense, it’s an investment.) If this does not work, they offer other reasons for revenue shortfalls. The industry is shrinking. Competition is growing. Our products are obsolete, and nobody wants them. The other company is cooler.
A gauntlet is thrown down on their critics — just try selling our shitty stuff? This kind of remark is met by shocked silence and portends the exit of the glove thrower, maybe to the cooler company he praises so much. The Tarzan Law applies here: When swinging from a tree, do not let go of a vine…until another is already at hand. In such cases, exit interviews are unproductive except for gluttons for insults.
Managing a healthy bottom line has many moving parts and is therefore not easy to pull off. Say, you have improved your product line with a lot of innovations, capital investments, and even pirating new skills to improve the revenue side. But then the competition too has moved forward and changed the game again.
Cost-cutting is not the magic bullet it is advertised to be, even if the impact seems to be immediate — it all goes straight to the bottom line. There are morale issues and sometimes litigations. Also, exit packages are enhanced to encourage people to voluntarily jump out of the movie train. (We’ll slow it down for you.) The redundancy premium reduces the immediate impact of the cost savings in salaries.
The negative bottom line is cause for concern. But, it can be temporary, just as a healthy one is. Any analyst will see that financial statements are a snapshot of the company’s financial health for a time. There may be hidden risks that will impact the bottom line in the next reporting period.
Can non-financial situations also use the bottom-line approach?
Even in social interactions, the bottom line is alluded to. It tries to direct where an argument is going, what the possible outcome of a thorny situation is, or how a relationship will resolve itself in the end. A meandering monologue of hurts, raised voices, and repetitive complaints, is interrupted with a curt question — So, what’s the bottom line here, Dear? Isn’t the net outcome what is important after all the inputs and outputs are computed?
The bottom line as a concept is useful when navigating through life. The revenues of glorious moments and shared joys are reduced by the miseries of forgetfulness, humiliation and communications breakdowns. When the computation is added and subtracted, there is only the bottom line left.
The net outcome tells us neither what we have accomplished nor what we have failed in. Instead, it points to what we have left, after the dust settles. This may be a negative sum telling us we need to work harder at reducing unhappiness and then moving slowly up to the break-even point or desperately drifting down to a new low.
Getting to the bottom of things lead to a better understanding of a situation and if it is still worth saving.
Tony Samson is Chairman and CEO, TOUCH xda
