The question, “What is the bottom line?” has entered the lexicon of business as a near metaphysical given. It is so frequently applied to events calling for tough decisionmaking that it seems advisable to take a closer look at its meaning. The phrase signals a no-nonsense approach to business thinking, where presumably decisions are made without sentiment, but with skeptical, hardheaded realism. To some extent its widespread use reflects homage to business nomenclature applied to non-business areas. Just possibly, it may indicate the triumph of Milton Friedman’s sense of the importance of the “no free lunch” awareness of economic factors in economically troubled situations. It also suggests William James’ tough-minded thinker has entered the business world. In symbolic terms the phrase “bottom line” is often presented as the cultural expression of the need for intelligent cash management in a tight economy, where competition for investment and consumer dollars is fierce.

Whatever its explanation or sources, the “bottom line” has become a social and political metaphor for modern times. Consider this sampling of news headlines in the past decade:

As an exposé of accounting practices of American business: The Bottom Line is the title of a rather decent and recent 1987 text by Grace W. Weinstein.

As the raison d’être for the Olympics boycott: “The bottom line,” the President told senior aides at a White House meeting, “is that if the Soviets are not out of Afghanistan, we are not going.”

As to why drafting women in the Army would be a mistake: an American general declares that “The bottom line is a fourth floor in a VA hospital for girl paraplegics. I just don’t want to see gals on the front lines.”

As to the advisability of nuclear fuels: “Nuclear Power: What’s the Bottom Line?”

As to the superiority of one hamburger over another: “The bottom line is that double cheeseburgers are better at McDonald’s!”

Such illustrations can be multiplied one-hundredfold. Indeed in business, emphasis on bottom line thinking is not metaphorical, but literal. It refers to the summaries on profit-and-loss statements and balance sheet tallies in general. Industries that rarely worry about the bottom line—usually labor intensive rather than capital intensive industries, or service oriented rather than product oriented organizations—are now making it a major consideration in the assessment of individual and group performance. As the popular adoption of the term suggests, the assumption is that anything can be reduced to its bottom line performance—and anyone. Industries and companies and individuals who never felt they had to justify their performance solely on economic results, who in fact evinced a certain disdain for such evaluation, have become aware that the bottom line counts; it may sometime is be the only thing that counts. Industries that never considered themselves businesses, nonprofit organizations, for example, now measure themselves in quantitative terms as they compete for donations.

What does business mean by the bottom line? Simply put, the bottom line may be any of several measurements of stability or growth employed by an enterprise to indicate its relative success or failure, or to evaluate the performance of various sub-segments within a firm. The factors included in this assessment are determined by management based on what it wants the firm to achieve. In other words, the bottom line is a fluid concept; it may be one thing at one time or in one business, and another thing at another time or in another business. Bottom line criteria depend on the overall policy and priorities of management at any given time, and of course, on the nature of the business.

This conceptual relativity is not readily apparent in the popular use of the term. Sometimes it is not even apparent to people who are close to its application, those holding middle management positions. The great majority of workers in business, if they think about the bottom line at all, and most of those in middle management, who probably think about it a great deal, rarely comprehend all of its complexities. This is so despite the fact that middle management personnel are subject to bottom line justifications for decisions made that affect them. Many themselves make decisions in which they must display bottom line awareness and ensure that whatever top management has defined as the firm’s objectives are met in their day-to-day decisionmaking about allocation and resource investment. In its broader application, top managers link short-term bottom line decisions to broader social and political investments and goals. Assessments of risk, opportunity, productivity, and profitability are made, each of which require broad-ranging financial assessments.

E.J. Mishan introduced the idea of applying economic rationality to social decision-making in his seminal work, Cost Benefit Analysis. The difficulty with Mishan’s work is that he failed to acknowledge that one person’s benefit is another’s loss. Decision-making in the social arena usually does gore someone else’s ox. Economic rationality encased in the concept of the bottom line rarely acknowledges this. As a result, bottom line thinking ignores the needs of broader stratum within a society or polity.

The phrase “bottom line” is also used in many situations involving analysis where no direct choice is actually being made. In these circumstances, the term may simply mean “all things considered,” the assumption being that all things are known and have been evaluated, added and subtracted to come up with a final assessment incorporating all known elements. The assumption usually is that everything relevant has been included in the calculation, and that whatever is said to be “the bottom line” represents the final word on the subject. It may mean “the sum total” (assuming that every pertinent element has been included in the equation) or just “essentially” (assuming that every irrelevant item has been excluded from consideration). In short, the phrase, in its wider cultural usage, carries with it a notion of authority, finality, and definitiveness. There is nothing below the bottom line. When one knows the bottom line, one can act with certainty. The popular nightclub in New York City bearing that name carries that implication: if you’ve made it to the bottom line, as artist or audience, you’ve made it. Look no further.

If we may be permitted a redundancy: what is the bottom line on the bottom line? The phrase carries with it a number of ambiguities that derive in part from its origins in the world of finance. Sometimes the phrase is used when people are being evaluated as commodities, ignoring the fact that people are the assets in a given situation, and must themselves be weighed and evaluated. For example: in assessing the value of one actor or actress versus others, producers consider their “draw value,” factoring this into their decisions to hire them and the bottom line impact of their participation in a project. Similar evaluations are made in the sports arena, as the recent extraordinary increases in salaries and search for free agents makes clear. In these situations, the bottom line conveys the meaning that the current cash value of a human asset has been properly evaluated. The term thus denotes estimates of future worth no less than present fiscal value.

Another widely held application of the term “bottom line” concerns evaluating risk. In business, projections of risk are made to determine whether or not an investment opportunity meets established financial criteria. Metaphorically, the term may be employed to assess risk in any action taken. Presumably, once the level of risk is fixed, a decision to act or not can be taken. The headline on nuclear power mentioned earlier certainly carries that implication, and the story that follows attempts to address the necessity of weighing those risks.

The phrase may also be used to establish boundaries. The implication of the term is that one may go that far (to the bottom line) and no further in pursuing the facts. Use of terms such as “the bottom line is who has the power to hire and fire” clearly conveys this sense. Presumably, once the employer or leader has the answer to that question, he knows how to act.

Where does this emphasis on the bottom line come from? Is it simply that hordes of young people have emerged from business school, with MBA’s they hope will give them a competitive edge in an increasingly competitive baby boom generation? Is it that professional managers who are not properly credentialed are returning to business schools for an “Executive MBA”? Is it that businesses themselves are placing more emphasis on educating employees to understand that they make investment decisions on a daily basis that have financial implications, and that they compete with other groups (inside and outside of the company) for the use of capital?

In the last six years, emphasis on the financial aspects of business management has trickled down to levels that had not previously been particularly concerned with thinking about their contribution to the firm in financial terms. The assumption is that those who make immediate day-to-day business decisions or who are affected by those decisions should be more cognizant of how people who are financially oriented make decisions about investing the firm’s money. As they do, they will become more rigorous in their own decision-making. An example from a newspaper article: “‘We are stressing the bottom line,’ said a spokesman for Columbia Records, who believes that the industry has too long operated on hunches and guesswork. The industry in 1979, he said, ‘has had to change its way of doing things.'” This spokesman assumes that emphasis on financial aspects of decision-making will result in better product investment decisions and the firm will maximize use of its assets.

This point of view became prevalent in the 1980’s. Almost all major corporations, and many smaller companies, now offer in-house seminars on financial management, usually called something like, “Financial Management for Nonfinancial Managers.” Those selected to participate in such courses invariably welcome the invitation; it means they will be exposed to the secret knowledge held by financial executives, and may perhaps learn how to speak their language and move up the corporate ladder. It means that they will know what is meant by jargon with which they previously felt uncomfortable. They may learn to use such jargon to ensure that their opinions and proposals are seriously received. In addition to in-house courses in financial management, many adult education programs in colleges and universities offer such courses, and they are invariably well attended. Sometimes companies pay their employees’ tuition to encourage attendance. Books on the subject sell well.

One of the consequences of bottom line emphasis within commercial life is that the influence of business and financial managers within companies has been enhanced at the expense of individuals directly responsible for innovations in product development and marketing. The number of chief executives with financial backgrounds, always a high percentage, has increased. Within companies, financial executives have found a much broader range of people who share viewpoints. It may not have been their intent, but these financial courses have tended to develop new constituencies within the company, which are more amenable to financial approaches to operational decision-making. Executives who were limited to technical management of company assets, who were confined to recommending action on such matters as long-term financing, capital budgeting, dividends, and valuation, and whose authority was confined to staff and service roles, or to advising the president at best, have become increasingly involved in nitty-gritty aspects of the firm. Education works both ways. Management may have intended that nonfinancial managers would absorb financial thinking as it relates to their decisions about investment of capital, but they found that financial managers also learned about operational roles, and many felt that they could do it better. Because many if not all of the decisions made by operating people (or, in some industries, creative people) have financial consequences, many financial managers began to seek more control over these decisions. They genuinely believed that unnecessary mistakes were being made. But the consequence was that the pressure to justify operational and creative decisions in financial terms increased, and with it the influence of financial executives within companies.

A generally conservative trend was set in motion. The small scale investment decision had been an area in which financial people had not really participated. This began to change as emphasis on financial management of resources became the norm within companies. People began to think through decisions that would have been made on the basis of instinct, “feel,” or knowledge of the market and to anticipate demands for financial “proof” of the correctness of even the most obvious decisions. Analysis began to displace gut feeling and unwarranted time and effort began to be spent on projecting alternative results of even small scale investment decisions. Sometimes figuring out how to present a “gut feeling” decision in financial terms became a difficult undertaking. Decision-making was slowed as entrepreneurial initiatives dwindled.

There is an inherent risk in “shoot from the hip” decision-making. The risk of excessive control is less self-evident. The most obvious consequence of an overly controlled environment is that a large part of the energies of the productive elements in a firm becomes focused on nonproductive activity, which is what financial justification of creative decisions is. Productivity is curtailed. The marginal improvement in decision-making may not warrant the effort expended. In the latter part of the 1980’s, these consequences inspired efforts to restore innovation and productivity to American business.

Some businesses have conventionally relied on human instinct and creativity, supported by after the fact formal analysis. Nonessential goods and services, in particular, have been a refuge for such creative types. The fashion industry, the cosmetics industry, books, records, and films all come to mind as examples of such “glamour industries.” At their best, an unfettered creative impulse can be almost miraculously at one with the whims of the buying public. It is likely that emphasis on the bottom line has little place in industries such as these. How do you project and quantify human judgment in matters of taste? What makes a “hit”? Can the success of a design or a recording group be predicted? People in the mass market paperback business will tell you that in budgeting, they “assume” that they will have at least one winner among the numerous titles they publish. Otherwise they couldn’t justify their budgets. Should this be counted on? Is this “bottom line” thinking?

Bottom line emphasis breeds caution and homogenization in decision-making: safe decisions rather than exciting, dangerous, but potentially more profitable ones. Emphasizing the need to prove out the level of risk, the game is mechanized. As a result, it is probably true that fewer errors are made. It is also probably true that fewer unexpected successes occur. The key word here is unanticipated, as the code word of major companies became “no surprises” either on the positive or the negative side. With the emphasis on developing the ability to predict and control income growth came gray and unsurprising results.

Whether or not this trend has been wholly unfortunate is open to question. But certainly there is misunderstanding of the operational consequences of the term “bottom line”—not necessarily a misunderstanding among top management, but among line managers who are in the end responsible for the decisions that ultimately comprise whatever is the bottom line. As any good financial analyst will admit, there are many bottom lines. There are no universally agreed upon notions of success and failure. In strict financial terms, management may choose to emphasize profit related to sales (which is what most people in business think is meant by the bottom line). But management may decide to emphasize gross profit margin, profit before allocations, or net profit margin as the bottom line measure. Management may also emphasize the relationship of profit to investment, focusing on the rate of return on assets, either pre- or post-taxes. Management may elect to measure the efficiency with which a firm uses its resources by measuring turnover or earning power. There are many standard financial ratios by which top management may elect to measure its financial progress. “The goal remains the same: maximizing the firm’s assets. That is the real bottom line. The investment decision is an important component of that goal, but it is one of several components.

An imperfect understanding of the bottom line among middle management is inherently dangerous. Overemphasis on the profit goal narrows corporate strategies and sometimes even works against national goals, such as full employment, controlling inflation, and growth. If profit is the primary goal, as it usually is in American business, a business tries to produce what the market can absorb at prices that guarantee the requisite profit established, or to produce the product at the cheapest possible price for labor. In other business cultures, in Japan, for example, the goal might be to employ as many people as possible and to keep them employed—to maintain productivity at the expense of profit. Different decisions would thus be made about pricing levels, production goals, and capital (equipment and technology) purchases. Generally, in the United States, the quicker the profit goal is expected to be met, the less risk is involved; the longer the firm must wait for its return on investment, the riskier is the investment. An overly cautious firm, with sophisticated financial controls, might elect to make only short-term investment with low capital risk; or under extreme circumstances, to defer investment decisions entirely. We witnessed a great deal of this sort of cautionary spirit in the 1980’s, with a consequent loss of leadership in key industries to the Europeans and Japanese.

Businesses in which middle managers have a narrow understanding of the term “bottom line” are businesses with potential trouble. Middle managers may react to increased emphasis on investment decisions with concern about profit, pure and simple. They may begin to restrict themselves to choices with limited perceived risk. They may take longer to make decisions, de facto foregoing opportunities in extreme circumstances and in highly competitive environments simply losing out to more aggressive firms. The line of least resistance will be the project that looks like other projects proposed. As this kind of thinking becomes endemic to broad sectors of American business, we massively lose out to companies and countries with a different understanding of management requirements.

A related danger is concurrent with the first. Innovation has become increasingly difficult in bottom line oriented environments. A safe choice has a measurable precedent. An innovative act, by definition, rarely has a precedent. No one can predict with certainty what something new will cost or what it will yield. All the analysis in the world will not change the fact that, in the end, a human being must decide, go or no go. But that decision becomes increasingly difficult as real or imagined risk increases and as the absolute cost of persuading others becomes greater and more time consuming. As individuals are negatively rewarded for innovative proposals, they turn to more predictable efforts that look reassuringly familiar, arouse fewer questions, and make life easier. As the cost of being innovative becomes too high, innovative people may either leave a difficult environment or cease being innovative. This in part may have explained the enormous increase in the I980’s in new businesses in which there is more interest in growth than profit per se, and where accountability is clearer and hence decision-making seems less risky.

Bottom line thinking is characteristic of larger companies. Smaller companies are often preoccupied with survival issues such as cash flow and distribution of resources rather than profitability and market share, except in the most immediate sense. Smaller companies trade off scientific aspects of business planning, including financial management, in return for maximizing use of the creativity and innovation they possess in their human resources. Many small companies have originated from the ideas of an individual or a group of innovators who were uncomfortable within the context of a larger business. Larger companies have tended to trade off unfettered individual creativity, even brilliance, for safe, predictable results, by focusing on control elements such as bottom line justification. As they have lost the ability to respond quickly, they have succeeded in producing more predictable results. Large companies cannot put too much faith in particular individuals; too often management has only the vaguest sense of who is responsible for what results. To protect the company from mistaken assumptions about whose decisions management can trust and whose it can’t, management employs overall, evenhanded caution: every employee must meet certain established guidelines designed to protect the company’s bottom line goal. If a product or a marketing suggestion can’t be shown to have demonstrable benefit, the suggestion can’t be taken.

Smaller companies use the inhibitions of larger firms to their own advantage. In the past decade economic research has shown that smaller enterprises (employing twenty or fewer individuals) have been those that create new jobs and innovations. Between 1969 and 1986, nearly two-thirds of new jobs were generated by businesses with twenty or fewer employees. Commerce Department data shows that young high-technology companies had the highest job growth and sales growth. While this is somewhat removed from the subject of the bottom line, if in fact risk-taking and return on investment are inversely correlated, then one can see how risky vague metaphors can be for the health of the business firm.

A primary characteristic of smaller companies is informal or flexible structures of decision-making. Usually a small number of individuals are involved in decision-making, and the evidence required to take a decision is flexible and depends on the project being proposed. Projects may be pursued beyond the bounds of economic rationality; that is, if common sense dictates that more resources should be invested in a project before it is abandoned, they will be invested. Decisions to cut off work on a project are rarely dependent on fixed rules.

The emphasis on bottom line decision-making in established companies, which have obligations to impersonal stockholders and whose managers have definite profit objectives for which they are held strictly accountable, provides significant opportunities for smaller companies. Small companies often rely on substantial investment of donated labor and deferred profit expectations. Simply put, principals in the firm usually work long hours for which they receive no monetary compensation, and often underpay themselves for the hours for which they are paid. Such principals rarely have to hold themselves accountable to impersonal stockholders, and any profit can be re-invested in the ongoing enterprise rather than shared with stockholders concerned about short-term financial payoffs. New opportunities can be pursued without elaborate justifications to managers who may not even be directly involved with operational aspects. Accountability in small businesses, in short, is generally held to a minimum. Primary accountability is to suppliers, who do have the ability to shut down a business by cutting off goods or materials for production.

Government now recognizes that smaller companies are the bedrock of entrepreneurialism in the United States. For the most part, as a company has increased in size, it has become more difficult for it to innovate in any area other than its products. Larger companies, finding it difficult to increase market share and improve profitability, have turned to acquisition in lieu of innovation as a means of developing new businesses and entering new markets. Again, the merger mania that resulted in a cascade of takeovers in the 1980’s was a reflection of such bottom line thinking. There is a danger in this sort of growth, which takes place in lieu of internal development and creativity. Larger companies have increasingly attempted to spur internal innovation by establishing risk venture groups within the parent company, groups presumably exempt from the normal profit requirements of the company and given a specified time to reach an acceptable level. The results have been mixed, since the specified time frame to innovate varies so dramatically from firm to firm and, indeed, even within a single firm as overall conditions change.

Generally, risk venture is not well handled by a large company, which does not like to behave like a bank. Corporate executives who have been innovative in established contexts are rarely able to come up with new ideas on command. Divorced from their ongoing enterprises, for them innovation sometimes simply will not happen. Ideas usually develop out of the imaginative extensions of people in the midst of their ongoing work. But again, bottom line thinking stimulates cumbersome procedures that prevent innovation or risk.

One conventional mechanism large companies employ to encourage new development is sometimes effective; that is, management simply increases its volume demands on an ongoing division and leaves it to the division to decide how to meet those demands. In certain circumstances, the result is innovation. The problem here is that large companies, especially in times of radical business fluctuations, are notoriously impatient when it comes to results. Many times an effort that might have worked, given time, is killed early in anticipation of failure; sometimes a self-fulfilling prophecy is at work. At the commercial level, the problem of the bottom line is uniquely a problem of large-scale business.

At the upper reaches of industry risk is difficult and failure disastrous. The innovating impulse shrivels in direct relationship to the demand for profitability in excess of inflationary spirals. But the world of the tried-and-true product is invariably crowded, thus leading to intensified competition for market share as a means of protecting profitability rates. Demands for bottom line thinking are ultimately curbed by the inability of conservative policies to spur growth and innovation while satisfying profit demands. Innovation involves potential risks usually far in excess of the prudential philosophy of money management. The dialectic of corporate survival and growth, profitability and prudence, stability and innovation, are not so much clarified as disguised by the metaphorical uses of the bottom line.

The bottom line started as a metaphor for prudent financial management and has ended as a myth disguising a zero growth economy—the very outcome the metaphor sought to overcome. In larger terms, it heralds the passing of the swashbuckling entrepreneur, willing to risk all and doubt everything, in favor of cautious money managers willing to risk nothing yet secure in their belief of the wisdom of corporate headquarters. It is no accident that the phrase “bottom line” derives from the language of accounting rather than the Protestant work ethic. The shift from owner to professional management indicates the degree to which large business enterprises have become captive to their accounting departments. Instead of supplying data measuring how a business is progressing or regressing, financially-oriented professional managers now supply the myths by which corporations should be run.

The language of the bottom line signifies the dominance of a utilitarian ethic that perceives business survival in narrow terms unconnected to the national commonwealth. Profit margins are maintained as rates of economic growth burrow to zero levels, large firms take over smaller firms in an attempt to compensate for their failure to innovate internally. Competition for investment and consumer dollars intensifies. In fact, only when risk is seen as a desirable consequence of business dynamism will innovation regain its rightful place in American industry. At such a point, the myth of the bottom line will appropriately yield to the reality of multiple sources of business creativity or, simply put, to multiple bottom lines.

Until such a revision in business ideology takes place, reductionism and determinism will rule supreme. There is a strange sense in which the notion of the bottom line is actually the commercial adaptation to the vulgar Marxist idea of economic determinism. It has all the glamour of the tough, utilitarian notion that “ultimately” all things are determined by economic forces and relations of production. And yet it does so without the sting of moral turpitude that Marx himself conveyed by the cash nexus. But whether as criticism or celebration, a tenderhearted appeal to revolution or a tough-minded faith in the established economic order, the hardheaded aims of bottom line thinking has failed in its purpose. Given the fallacies of a blatant reductionism in economics and a fatuous utilitarianism in psychology, this might be a good time to retire the bottom line to an accounting pasture—whence it originally came.