Explanation:
This term comes from the latin pró ratá, which means according to the calculated share. This is a concept that sounds more complicated than it is and its application can be easily identified. In business, a pro-rata calculations are used for the purpose of allocating revenues, expenses, capital and many other financial figures to different recipients for the purpose of analysis, sorting, or distribution.In the case of revenues, a pro rata calculation can be used to set a quota for different geographical locations, e.g. the quota for the Hollywood district will be 12.5% of last year’s sales of the Los Angeles state office. On the other hand, expenses can be set by using a pro-rata approach when a budget is being designed, e.g. marketing expenses will be limited to 5% of net revenues. Nevertheless, the most common use of pro-rata in business is the allocation of capital according to shareholders ownership, e.g. if a shareholder owns 20% of the shares of a given company that means he’s entitled to 20% of the total capital of that company.In a nutshell:
- If something is given out pro rata, it typically means everyone gets their fair share.
- Pro rata means proportionally, such as fees that rise pro rata with employee salaries.
- The practice of prorating can apply in many areas, from billing for services to paying out dividends or allocating business partnership income.
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