Achieving balanced growth: How to manage your top line vs. bottom line more effectively

Top line and bottom line are two key indicators of a company's  financial performance. Both can help you gauge its success and operational health, from different perspectives and hold unique importance for SaaS companies given their revenue generation model.  

Understanding the concept of top line

The top line, as the name implies, is located right on top of the income statement. Top line refers to the gross sales or total revenue a company brings in. For a SaaS company, this comes primarily from subscriptions to the product and in some cases, but usually to a far lesser degree, from licensing fees, support, customization, and training. 

For an external party, say, an investor, journalist or board member, top-line growth indicates the company’s ability to attract, retain and grow its customer base, expand its market share, and monetize its offerings. Positive or growing top-line revenue (total sales) illustrates a better (or improving) product-market fit and overall effectiveness of the sales and marketing strategies (customer acquisition methods). 

More importantly, for early and growth-stage SaaS startups, a rapidly growing their top line signals to current and future investors that the company is a good bet.  

Key metrics for evaluating your top line growth

There are four primary metrics that can help SaaS businesses better understand their top-line growth. 

Annual recurring revenue 

Annual recurring revenue (ARR) is the predictable top-line revenue generated from SaaS subscriptions over the course of a year. ARR is a comprehensive revenue metric including sources that add to the top line and sources that reduce it. It includes revenue generated from new customers, upgrades,  downgrades, and cancellations. It is the go-to metric for gauging both the long-term financial stability and growth potential of a company and the effectiveness of its customer acquisition and retention strategies.

Monthly recurring revenue

Monthly recurring revenue (MRR) is closely related to ARR. MRR is the predictable recurring revenue that a SaaS firm generates in a single month. MRR is a great indicator of short-term revenue trends and helps businesses be more agile in their financial and operational planning.

Number of customers

Tracking the number of customers is table stakes for any SaaS company. The customer count directly impacts revenue. The number of customers also significantly impacts growth. Unlike in traditional businesses where each sale results in a single dose of revenue for the company, for SaaS businesses each sale to a new customer represents revenue generated on a continual basis, month after month. 

Every customer represents potentially significant earnings, which means that more customers can have a huge effect on top-line revenue. This is why SaaS businesses keep a close eye on the number of customers they have and work hard to grow it. 

Customer retention and churn rate

Customer retention and churn rate are two sides of the same coin and together help to assess a company's health and sustainability. 

Customer retention rate (often referred to as logo retention rate) measures the percentage of customers who remain subscribed to a service over a specific period, indicating customer satisfaction, product value, and loyalty. 

The churn rate, on the other hand, calculates the percentage of customers who cancel their subscriptions within the same period. Churn is a critical metric for identifying potential issues with the product, customer service, or pricing strategy.  

The ultimate goal for every SaaS company is to have a high retention rate and a low churn rate, thereby achieving the Holy Grail of a strong product-market fit with high demand.

Understanding the concept of bottom line

Now that you have a solid understanding of what top-line revenue is and the different metrics used to measure and track it, let’s flip the script and look at the bottom line.

The bottom line is the net income or the profit a SaaS company retains after subtracting all expenses and costs from the overall revenue. And yes, you guessed it: The bottom line is found at the bottom of the income statement. 

The expenses for a SaaS company that impact its bottom line include a myriad of costs related to: 

• Delivering the product or service, including cloud hosting costs, and payroll for customer success/support teams.
  
• Research and development (R&D), such as payroll for developers and engineers, software and tools for developing and maintaining the product/service.
  
• Sales and marketing (S&M), which includes activities related to content marketing, social media marketing, and advertising.
  
• General and administrative (G&A) expenses, which includes overhead expenses, payroll administrative staff, and other costs associated with running the business. 
  

Understanding your bottom line and all the expenses that impact it can help you figure out the efficiency, cost management, and overall profitability of your company. A robust bottom line demonstrates that you’re not just generating revenue, but also that you’re wisely managing resources to ensure long-term sustainability and profitability. 

Metrics for to help you evaluate your bottom line

Now, let’s look at some of the metrics that can help SaaS companies gain a better understanding of their bottom line.

Net income

The bottom line is actually the net income in a business – the profit a company retains after subtracting all of its operating expenses (including G&A, R&D, and S&M and other costs associated with delivering the product/service) from total revenue. It is a direct measure of a company's profitability over a specific period. 

So, a positive net income indicates that a company is making more money than it spends, while a negative net income indicates the opposite. In SaaS, operating at a loss isn’t uncommon for early-stage startups, when R&D expenses are high. However, the ultimate aim is to achieve and, more importantly, maintain a positive net income to create long-term sustainability and help attract investment.

Profit margin 

Profit margin or net profit margin (aka the net income-to-revenue ratio) measures how much of each dollar in revenue is converted into profit. 

In contrast to gross profit (aka gross margin), which indicates how profitable a company is overall, the profit margin of a business provides insight into the overall cost management and operational efficiency of a business. 

A high profit margin  is ideal because it means that the company’s leadership is effectively controlling costs and maximizing profitability. For SaaS companies especially, the profit margin also illustrates how well the subscription revenues are covering costs that impact their bottom lines.

How top-line growth affects bottom-line growth

Understanding the relationship between the top line and the bottom line is essential for effective financial management and long-term strategic planning. 

Direct influence 

Top-line growth directly impacts the bottom line by potentially increasing net income. Simply put, when the revenue from sales grows, there should be a corresponding increase in profitability, thereby enhancing the bottom line.

Scale and efficiency 

In SaaS businesses, the cost of goods sold (COGS) is usually about 80%, regardless of sales, which means that as revenue grows, COGS will grow, too. 

However, it’s possible that with increasing top line growth, economies of scale can kick in to keep sales and marketing expenses relatively stable, making any spending there more effective and impacting the bottom line positively. 

Investment in growth 

Companies focusing on growing their top-line revenue usually look at reinvesting a portion of their profit into the business in product or to expand into new markets. While this can temporarily reduce the bottom line due to higher expenses, it is a strategic bet aimed at achieving higher profitability.

Market perception and investment 

Strong top-line growth never goes unnoticed, especially by present or future investors. With new investment, it can lead to a positive feedback loop, where increased investment leads to more growth opportunities, further enhancing both top and bottom lines.

Balancing the top line and bottom line for better financial performance

Balancing the top-line and bottom-line growth is, at times, a tightrope exercise, especially in the early and growth stages of a SaaS company. Finding the right balance can be hard. 

Focusing solely on increasing revenue without regard to profitability can lead to uncontrolled spending and inefficiencies, potentially harming the company's financial health. On the other hand, an excessive focus on bottom-line growth can stifle innovation and experimentation, both of which are crucial for a company’s long-term viability and success.

So how do you achieve the right balance?

Strategic cost management 

Companies need to come up with a strategy to manage their costs in such a way that ensures top-line growth translates into bottom-line growth. This means doing careful budgeting, initiating cost control measures, and carefully investing in high-return initiatives.

Revenue quality 

It is really essential to remember that not all revenue is equal. Companies should focus on high-margin products/services that contribute more significantly to profitability. Fail fast, learn fast is the mantra. One must closely analyze product lines, customer segments, and markets to identify and prioritize the most profitable areas for growth.

Investment in innovation 

The highly competitive nature of the SaaS industry makes continual innovation a survival imperative. In order to maintain a competitive advantage and drive future revenue growth, SaaS businesses need to balance their short-term profitability with long-term investments in R&D. 

How Drivetrain can help you track and understand your top line and bottom line together 

Considered together, the top-line and bottom-line metrics covered here offer a comprehensive view of a company's financial health and strategic direction.

Many SaaS companies today still use spreadsheets to track their key metrics, which is both burdensome and inherently unreliable.

One issue is that most of these metrics are calculated from data that resides in many different source systems.

For example, metrics such as customer acquisition cost, lifetime value, churn rate, and others, may require data from a CRM and marketing automation platforms like Salesforce or Hubspot while revenue and expense data might be derived from systems such as Netsuite, Quickbooks, or Sage. 

Manually consolidating all the data you need for your metrics is not only time-consuming but highly prone to error because spreadsheets don't offer much in the way of versioning. As a result, they require a lot of effort to verify the data. 

Drivetrain solves all the problems in working with spreadsheets to spare you hours and days of mind-numbing effort. 

By offering seamless integration capabilities, Drivetrain connects all these disparate source systems, enabling businesses to automate the calculation of metrics in real-time.

Without the heavy lift of manual data consolidation and the back-and-forth necessary to verify the data you’re working with, you can spend more time digging into the data to reveal actionable insights that you can use to grow your top-line revenue and boost your bottom line.