How Important is “The Bottom Line”?

September 25, 2016 © Copyright Glomacs

You often hear the phrase ‘this is the bottom line’ as a justification for any decision or course of action both in business life, and in the world in general. Where does this phrase come from? It has its origins in Accountancy. Every year all businesses have to prepare an Income Statement. This shows all of the income of the business, then all of the business expenses are deducted, and what remains is the Net Profit, the last item at the foot of the page, the ‘bottom line’.

how-important-is-%22the-bottome-line%22The Net Profit is the reward for the owners of the business, its shareholders. If the bottom line is a healthy positive number, the shareholders will be happy, and will continue to support, and invest in, our company. Clearly, a decision that results in a good bottom line is a good decision. This assumes that the shareholders are the most important people, from the company point of view, and their needs and expectations should be prioritised. Indeed, much of the theory of finance is based on this assumption.

However, shareholders are not the only people who have a financial interest, and influence, in our company. There are other important stakeholders:

Our customers

We need to ensure that we are supplying our customers with what they want, where and when they want it, at a price they are willing to pay. If we don’t, they will no longer be our customers.

Our suppliers

We rely on our suppliers to provide what we need promptly and efficiently, at the right quality and the right price. If we are late in paying them, they may choose not to supply us any more.

Our employees

We also rely upon our employees to undertake all of the tasks necessary within the company to ensure that we remain a reputable and reliable business. This requires a variety of skills, abilities, experience, and knowledge. We should provide fair terms and conditions of employment, and rate of pay. If we don’t, our good employees will leave.

The community

These are the people who live in the area close to our business operations. Our business may have an impact on the visual landscape, on the level of noise, on air and water pollution, and road traffic congestion. We need to keep a good relationship with the community because many of our employees live there.

The government

The government give us permission to operate, and they expect us to make an effective contribution to the economy, and society in general. They expect us to comply with the law, and to pay all relevant taxes. If we fail to comply with government requirements we may be closed down.

Our managers

Our managers have to perform a careful juggling act to negotiate an effective and co-operative relationship between all of these stakeholder groups, to ensure the company’s continued smooth operation. We expect our managers to have high level skills and to apply them successfully in their respective roles. They should incorporate and maintain good systems of:

  • Corporate Governance
  • Corporate Social Responsibility

The managers are a recognisable stakeholder group in their own right, and they expect to be well paid for what they do.

One bottom line is not enough

When we talk about ‘the bottom line’ this is only addressing the interests of our shareholders. Perhaps it would be better to think in terms of the ‘triple bottom line’ approach proposed by John Elkington. This emphasises the three Ps (people, planet, profit), and gives each equal priority in corporate management.

Some of the GLOMACS Finance and Accounting Courses & Seminars available incorporate non-financial aspects of corporate management such as Corporate Governance and Corporate Social Responsibility. Contact the GLOMACS office for details.

Andy Wright is a Senior Consultant with GLOMACS.

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