New profit sharing ratio
A new profit sharing ratio!
When a company decides to change its profit sharing ratio, it's usually because of a significant change in the business, such as:
- Changes in ownership: When there's a change in ownership, the new owners may want to adjust the profit sharing ratio to reflect their new stake in the company.
- Changes in business operations: If the company has undergone significant changes in its operations, such as a new product line or a major expansion, the profit sharing ratio may need to be adjusted to reflect the new revenue streams.
- Changes in employee roles: If there have been changes in employee roles or responsibilities, the profit sharing ratio may need to be adjusted to reflect the new contributions of each employee.
To determine a new profit sharing ratio, the company will typically follow these steps:
- Determine the total profit: Calculate the total profit of the company for a specific period, such as a year or a quarter.
- Determine the total contributions: Calculate the total contributions of each partner or employee, including their salaries, bonuses, and other forms of compensation.
- Calculate the profit sharing ratio: Divide the total profit by the total contributions to determine the profit sharing ratio. For example, if the total profit is $100,000 and the total contributions are $80,000, the profit sharing ratio would be 1.25 (100,000 / 80,000).
Here's an example of how to calculate a new profit sharing ratio:
Old profit sharing ratio: 3:2 (Partner A:Partner B) Total profit: $120,000 Total contributions:
- Partner A: $60,000
- Partner B: $40,000 New profit sharing ratio: To determine the new profit sharing ratio, we need to calculate the new total contributions and total profit. Let's say the new total contributions are $80,000 (Partner A: $50,000, Partner B: $30,000) and the new total profit is $150,000.
New profit sharing ratio: 2:1 (Partner A:Partner B)
- Partner A: $100,000 (150,000 x 0.67)
- Partner B: $50,000 (150,000 x 0.33)
In this example, the new profit sharing ratio is 2:1, which means that Partner A will receive 2/3 of the profit and Partner B will receive 1/3 of the profit.
Remember to consult with a financial advisor or accountant to ensure that the new profit sharing ratio is fair and compliant with relevant laws and regulations.