What’s your bottom line?

Oft heard in a commercial negotiation, is the customer asking the supplier for his bottom line. We all know what that means. It is the price below which the supplier will not go. Or perhaps I should say, the price at which he tries to secure the business.

And when the haggling finishes, the two parties shake on the deal. Frighteningly, there are no end of implied terms around the transaction, from basic ones like the supplier having the goods in question through to the fact that (in Britain anyway) the supposition is that both parties are talking British Pounds and again in most B2B conversations, if the goods attract VAT, then that’s on top of the agreed price.

Even I (an accountant – sorry) nearly came a cropper – I was buying a domain name from a Dutchman. There was much toing and froing on the price – after all every domain by definition is unique and benchmark pricing is not obvious. But it wasn’t until late in the conversation and close to paws touching, that it occurred to me I was bidding him euros and he was expecting the number in question in sterling. It was resolved – at a time when there were more euros to the Pound than today – so could have been disastrously expensive.

But it is worse for accountants. What is the ‘bottom line’ for a business? The phrase ‘bottom line’ in business is an alternative to ‘profit’.

A traditional Profit & Loss Account might look something like:

 

Sales (aka Turnover, Revenues, Income)   £x
Cost of goods sold (£x)
Gross margin (aka Gross Profit, Margin)   £x
Expenses (aka Overheads, Costs) (£x)
Net Profit (aka EBITDA, Net Margin, PBIT)   £x A
Less: depreciation (aka Amortisation) £x  
          interest paid £x  
Net profit before tax (EBT, PBT)   £x B
Tax (£x)  
Profit after tax (aka Retained Earnings, Income) (£x) C

 

So let me ask you, what’s the bottom line, here? Is it at (A) where you have factored in all your costs , or (B) where you add the cost of using money (Interest) and the cost of using equipment (depreciation), or is (C) after the government – over which you have no control – has taken its 0.454kg of flesh?

I think bragging rights go for the largest number – so if someone says ‘I’m making a million a year’, it is probably somewhere around (A) that they’re doing their sums. But if you are buying the business then you probably need to be a (C)  because that’s the only piece that’ll be yours at the end of the day?

The problem is it is not defined. But then nor are many of the terms accountants use. If you look at all the aliases I’ve listed – and even then they are but a sample -you can see confusions abound.

I was once engaged to help a British Millionaire buy a marina in the South of France. My French is poor but it was clear from the first moment I looked at the paperwork that the vendors quoted ‘Income’ for the business  was the total sales, but had been heard by the buyer to be the profit (wherever that fell on my P&L above – in his mind) – the deal didn’t happen. Worse, it was apparently my fault!

I don’t want a rigid accounting code in this country as they do for instance in Germany, but I think as an accountant I should remind everyone relying on a ‘bottom line’ to be warned by that useful piece of street law – ‘buyer beware’.

Please leave a comment - we all like them