Pro Rata

What is the definition of pro rata and how is it used in business?

Pro rata essentially means allocating something in equal proportions, or ensuring someone is receiving their fair share. It’s a Latin term that translates to ‘in proportion’, and it’s most often used in the world of business finance and salaries.

Pro rata calculations are used in areas such as dividend payments paid to shareholders, interest earned on investments, or working out annual premiums for contracts that are used for less than the full term. This term also often appears on job adverts, describing the salary as pro rata.

Key takeaways from this section:

  • If something is done pro rata, it means it’s divided up or assigned proportionately.
  • Prorating something means working out a reduced cost as a proportion of the whole, such as a discount on an insurance policy that’s used for less than the full standard term.
  • The use of pro rata can apply to things like salaries, dividends, billing for services, and more.

Understanding pro rata

Pro rata is used to ensure fair proportions are distributed, or that fair costs are calculated. This has many applications in business finance, including paying dividends to shareholders. For example, if a company has 100 shares outstanding, and pays out £1 per share, the total dividends would be £100. This overall amount is the absolute maximum and won’t change no matter the number of shareholders, and so the amount owed to each shareholder is worked out pro rata.

So if there are only four shareholders and one owns 50% of the shares, that largest shareholder will receive £50, while the rest is split between the remaining three according to the proportion of shares they own.

1. Pro rata salary

A job advertised with a pro rata salary means you’d be working part time and earning a proportion of an annual salary for the hours you actually work. So if a job has a £20,000 annual salary and you’re working part-time doing 25 hours a week, you’d earn a proportion of that £20,000 according to the pro rata calculation. To work this out, you divide the annual salary by the number of full-time hours, in this case it could be £20,000 divided by 35 full-time hours to give you 571. Multiplying this by the number of hours you actually work, 25, gives you the pro rata salary of £14,275.

2. Pro rata premiums

Pro rata calculations are often used to figure out the amount due for a partial contract term, such as an insurance policy. Most contracts will be on an annual basis, but if a policy or service is only used or needed for a shorter term, the provider can prorate the annual costs to reflect that. Similar to working out a pro rata salary, the cost per days covered in the standard contract term can be used to work out the cost for the shortened contract term.

3. Pro rata interest rates

Pro rata calculations can be used to decide how much interest will be paid out on an investment, such as for bonds or shorter periods. If an investment earns annual interest rates, then a pro rata amount can be calculated for shorter periods to see the amount earned. For bonds, pro rata calculations are used to work out accrued interest for the period the holder has them.

Pro rata FAQs

How does pro rata work?

The essence of pro rata is working out the proportion of a whole, whether that’s to calculate salary owed, the cost of a truncated contract, or dividends on shares.

What does pro rata salary mean?

A pro rata salary is when you receive a proportion of a full-time salary for the part-time hours you’ve worked. So the salary per hour is worked out for the full-time role and then applied to the number of hours you’ve actually worked.

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