Top-line is the revenue or gross sales of the company. That is why when the company refers to growth as top-line growth; the company is witnessing an increase in the gross sales or revenues of their products or services. The topline is usually written at the top of the Profit & Loss Account in the Balance sheet.
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What is Top Line?
The reason that it is called the top line is that it is displayed at the top of the Income Statement of the company. Whenever a company increases its Sales or revenues then it is said to be having a top line growth.
All the expenses or losses, which must be deducted from the total gross figure, are placed just below the Top-line in the income statement. Expenses include all of the purchases and payments which support the production or service.
If there is any sale of the capital asset, then that capital losses also can be deducted from the topline. Other expenses like the cost of materials which are necessary for the manufacturing of the goods and other operating expenses deducted first.
Government taxes also deducted from this top-line revenue. Usually, a period of one accounting year is used to measure the top-line and it is reported as percentage growth over the previous year or previous some other time period.
4 Methods of Calculating Top-line
Topline is calculated by every organization in every sector since it is the key indicator of the performance of the company. Topline growth is also crucial for the organizations to set their yearly, quarterly as well as five year or long term growth targets.
The most common method for calculating Top-line is with the use of financial statements but there are other ways in which it can be calculated.
Following are the four methods by which Top-line can be calculated:
1) By the use of Financial Statements
The income statement which is also known as profit and loss treatment contains gross revenue figure that is usually located at the start of the statement. The expenses are then reduced from this figure in order to derive the bottom line figure which is also termed as net value or net profit.
Often, it is seen that businesses use percentage change formula in order to calculate the top-line growth across various periods. Calculating the Top-line by the use of financial statements is one of the most common methods followed by almost every organization. It is popular because of its ease of deduction and clarity in the statements.
2) Modelling Top-line
Sometimes the figure of the Top-line is modified and changed into graphical trendlines. These are the graphs that are often reported to the shareholders or investors and potential creditors in order to show the increase in growth or expansion for establishing a new business.
Usually, it is seen that these revenue models are highly influenced by the nature of the industry and the nature of the product along with the business environment at the time. These revenue models are very useful to businesses.
These models are used to forecast future sales that can be incorporated into businesses and can also be used to present future business strategies. The rate of the growth of these trend lines is used to predict the future performance of the business.
3) Relationship to bottom-line
Sometimes top-line is evaluated in terms of Net Income growth, more popularly known as Bottom-line growth. This is not a direct increase in the gross revenue but accounts for the general economic gains and cash flows which are associated with greater operating income and increased output.
Higher operating expenses would result in a decrease in the net figure of the bottom line at an equivalent rate. It is often seen that all the expenses are increasing; the neoclassical theories often link profitability or the bottom-line with the Top-line.
Classically, it is determined that the growth of sales is a function of profit is not directly proportional to the output sold in a market but is rather a result of operating efficiency. These are the conditions under which the bottom-line is seen to be influencing the decisions of a business’s capital structure.
It is also contrary to the popular belief that a business invests more in projects which have more sales and get more top-line growth.
4) Managerial limitations
Top-line growth is not openly used in isolation since it is not an indicator of business efficiency. Many unnecessary expenses are incurred because of efficient business policies and this can prevent a company from being profitable.
The CSO or chief sales officer is the person responsible for mediating between expenses and growth factors. He is also responsible for the motivation of the sales team along with creating good experiences for customers with the help of efficient business policies and procedures.
He is also the person who capitalizes on new growth opportunities of the business. CSO is the same person who answers to shareholders about their company when reporting the growth strategies and performance report.
4 Strategies to Achieve Top-line growth
There are many theories that have been emerged for growing the Top-line and each of them has reflected on their respective business area. Often businesses use these strategies in order to make the revenues more diversified and achieve a Top-line growth which is sustainable.
Diverse growth strategy is considered to be popular among businesses which believe that it will protect in the times of economic slowdown for economic collapse in the market. In these times, sales tactics are often used to achieve incremental Top-line growth like seasonal demands.
However, there is no sustainable way to maintain the Top-line growth trend positive. Hence, the following four methods or schools of thought can be considered for the purpose of achieving top-line growth:
1) Emerging market expansion
Due to the globalization in 1980, the strategy of expansion was very popular in the market. It was also popular because of the westernization of many countries which led to the development of technology. Historically It is seen that the top 500 nonfinancial companies of the United States have grown drastically with the help of emerging markets expansion.
They have captured the momentum in their sales which is about the GDP of many developing nations. Strategies applicable to businesses with large capital budgets are the ones who have extensive infrastructure which can facilitate a global expansion strategy.
This approach is also adopted by many companies which are not present in many locations and they have a lot of room to expand. This strategy is not for the companies who have already established themselves into many nations and many emerging markets.
2) Fulfilling unmet consumer demands
Recent business strategies that many companies have adopted in order to secure top-line growth in a globalized economy is that they should invest in research and development heavily in order to target the consumer demands that are unmet in established markets instead of approaching developing economies.
There is an increase in the competition in the domestic market which forces the organizations to shift the consumer behaviour and their preferences in order to capture the top-line. Loyalty programs are used by businesses in order to invest in research activities along with Data analytics in order to gain market insights and identify the current trends which can result in increasing the demand.
Apart from these two; the other two strategies which help in gaining Top-line growth which are as follows:
3) Innovational approach
This strategy requires the development of new products and services which will be better than the competition and will link to meeting the unmet demands of the customer. Innovation is done in such a way that it will change now competition from the competitors in the market.
More often than not companies face a challenge of creating new business and preserving the established revenues which are essential for maintaining the Top-line. Human resources are considered as a key for these businesses since they can contribute new business ideas and execute them effectively.
Established businesses find it easier to use innovation for top-line because they have large capital expenditure capacities.
4) Consumer behaviour approach
Customer service is the main point of focus in terms of consumer behaviour approaches utilized by companies in order to increase the Top-line. There are many demands of which are unmet in the market and companies use these and demands and provide excellent services in order to generate revenue which can contribute to Top-line.
These needs are analyzed and the psychological motivation behind them is studied by the companies so they can custom make the product and their marketing approach in order to gain increased sales revenue.
Acquisition of fresh customers, increasing the sales from existing customers, and gaining back the old business customers are few of the strategies of consumer behavior approach which contribute to the Top-line of the company.
Since every company in every industry has become service-oriented and it is not only the products but also services that need to be evaluated before a customer adopts a product; this consumer behavior approach has gained importance in recent days.
2 Major Applications of Top-line
Many decisions are made on the basis of talking like increasing the sales revenue or cost-cutting strategies. The top management seeks to analyze the top-line, which will help to gain an insight into the business performance.
The following two are the major applications of top-line for a business:
1) Goal setting
The top-line determines the growth that is set for the upcoming year. Budgets determined based on the Top-line achievements and strategies to maximize the profit margins are outlined on its basis.
There can be extra costs which are associated with growth. That is why businesses emphasize cutting cost in order to increase their profits. Goal setting also helps the companies to give increments to their employees accordingly.
2) Key performance indicator
Performance management is an important task for many public and private businesses. The key performance indicators which are abbreviated as KPIs are ways to multiply their effectiveness with the help of the management strategies.
These indicators are predetermined and the targets are given to the staff accordingly which will help them to achieve higher revenue for the business thereby increasing their Top-line. If the KPIs of the company are fulfilled or excelled then the target of the company which is linked to the KPIs is also achieved thereby contributing to the major growth factor to the Top-line.
These KPIs also help the organization by acting as indicators of growth and indicate the direction of growth going ahead. Companies can stop and check if their growth is matching the indicators which are set by them.