Bottom Line in Business: Definition & Concept

Instructor: Cori Arnold
Have you heard someone use the phrase 'bottom line' and wondered what it meant? Surprisingly, when people refer to the bottom line, they are actually talking about the bottom line of the income statement. In this lesson, we will review the some of the most common categories in an income statement and calculate the bottom line.

Definition

The term bottom line is used frequently in our professional lives. I am sure you have heard someone ask a question similar to, 'how does this decision affect the bottom line?' What does the bottom line actually represent? The bottom line refers to the net profit or loss on a company's income statement. The profit or loss line on the income statement is literally the bottom line of the statement.

Sample Income Statement

Looking at the image of the sample income statement, we will review all of the components that are included. First, it is important to understand that an income statement represents financial figures for a certain period of time. In this example, we are looking at the 2012 figures for the company, Joe's Bike Shop.

Revenue

The first line item is the revenue line. Revenue represents the value of the sales in the period. All businesses, which set out to make a profit, need to sell something in order to make a profit. Some businesses sell goods and some sell services. Examples of goods are tangible products, like bikes, toys, appliances, and furniture. Examples of services are the jobs lawyers, accountants, and real estate agents do for their clients. In this example, Joe has sold $350,000 of bikes and accessories during 2012. To calculate total revenue, we need to multiply the number of bikes sold times the price of each bike. In the second image, we can see that Joe sold 1,000 bikes in 2012 at $350 each.

Cost of Goods Sold

Cost of goods sold is the next line. Cost of goods sold (or COGS) represents the costs that can be directly linked to the product or service sold. In this example, COGS was $200,000 over the 2012 period. COGS in a bike shop would consist of the cost of the materials to build the bikes. For example, Joe needed to purchase many sets of handle bars, tires, and chains in order to build these bikes. These materials are directly linked to the sale of a bike; therefore, they are considered COGS. COGS is calculated similarly to the revenue. To get the total COGS, multiply the number of bikes sold times the cost per bike. In this example, 1,000 bikes were sold and cost $200 each.

Contribution Margin

The next line is the contribution margin. The contribution margin is simply the difference between revenue and COGS. Businesses need to make a positive contribution margin in order to be able to pay for their remaining costs. In this example, the contribution margin equals $150,000. Another way to look at the contribution margin is to calculate the contribution margin percentage. The calculation for the contribution margin percentage is in the second image. In this example, Joe is making 43% on each bike he sells.

Income Statement Calculations

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