By Mark Truax
VP, Commercial Banking Officer
In my experience, the quickest way a company can go out of business is by growing too fast. Growing “REVENUE” too fast. Too often we see new growing companies cut their prices to get the sale. They’re increasing REVENUE at the cost of PROFITABILITY. If they cut their profitability too much, they won’t have capital enough to run their business. Great Top-Line, lousy Bottom-Line. Here's how I define the two:
TOP-LINE refers to the top line of the income statement, REVENUE. One of the most important lines on an income statement but not the most important.
BOTTOM-LINE refers to the bottom line of the income statement, PROFIT. Most of us would agree that this is the most important line on an income statement.
It's Not Always a Cash Flow Problem
It can be compounded if it’s misdiagnosed as a Cash Flow Problem. A business might request a Line of Credit to support their A/R and inventory. This is a reasonable request, however, if they have cut their prices and their profitability to grow their A/R, the Line of Credit is not what they need. Too often this kind of Line of Credit becomes evergreen; it will be termed out and/or reduced when the Line of Credit comes up for renewal.
The Right Way to Grow
The proper way to grow both top-line and bottom-line is to make sure you price your product correctly. Then take the profits and reinvest in your company. This may mean passing on a larger project until you’ve grown your company’s capital. By taking your company’s profits and reinvesting, you will be able to invest in equipment, raw materials, and cash capital.
The Equipment investment will enable you to become more efficient, Raw Material investment will allow you to purchase at a discount, and Cash Capital will allow you to take advantage of A/P discounts. All lowering your costs.
By lowering your costs, you will improve your profitability. This also gives your company some sale price flexibility to grow that TOP-LINE, but always keep an eye on that BOTTOM-LINE.