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Corporates need growth to sustain their activities and increase their profits. What is known in financial jargon as Top Line Growth is the increase in revenues that happens because of growth that the corporate actualizes during a given year.
In contrast, what is known as Bottom Line Growth is the net result of revenues minus costs of doing business and taxes paid apart from other items in the income statement that result from an outflow of funds.
In other words, a corporate is profitable when its bottom line is positive meaning that the difference between revenues or the inflows and the expenditure or the outflows is positive. This is the cardinal rule under which any corporate functions and usually, most corporates increase their bottom line through increased revenues and cutting costs that result in more top line growth (increased revenues) and better bottom line growth(as a result of increased top line and decreased expenditure).
During recessionary times (like the one that is now underway in the world, corporates find it difficult to grow their top lines because of sluggish demand, consumer purchases and spending decreasing because of lesser disposable incomes, and an overall bearish sentiment that results in lesser revenues.
In this scenario, corporates usually focus on cutting costs as a means to sustain their bottom line growth. Remember that the bottom line can grow even in the absence of more profits by cutting costs and rationalizing expenditures which reflect in the income statement as decreased expenses and hence, additions to the bottom line.
This brings us to the strategies that corporates pursue during recessionary times to increase their bottom lines. These strategies usually entail cutting costs wherever and however possible.
As salaries and benefits given to employees are a major source of expenditure to corporates, layoffs are the typical reactions to recessions. Apart from layoffs, the other strategy that the corporates pursue is through rationalizing the costs, which means that no salary hikes, no bonuses, and a trimming of employee benefits. These are typical reactions to a no growth or a slow growth external environment.
Further, many corporates cut down on costs by focusing their energies on critical and performing operations and activities. This usually results in shuttering of loss making business units and phasing out of activities where the costs are high and the revenues are less.
Moreover, corporates also resort to increasing profitability that can actualize by increased profitability, greater returns on existing processes through efficiency, and a focus on getting more bang for the buck, which means that corporates employ strategies that are intended to extract more revenues from the operations and reduce costs from the same.
Increased productivity is usually actualized through innovation, automation, and increased demands on employees to spend their time productively.
Among the three methods:
It needs to be mentioned that among these strategies, the best companies usually combine elements from all the three to actualize more profitability.
We have discussed how corporates react to decreased revenues by cutting costs. The key aspect about these strategies is that they all focus on cutting slack or trimming the costs.
An example would be an overweight person who has to be fit if he or she has to remain in contention for work and healthy living. This means that this individual has to cut the extra fat and generally lead a healthier life by cutting down on excess consumption.
Similarly, the bottom line for corporates to better their bottom lines is through trimming the flab and increasing the fitness of the organization.
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