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Pro Rata: Definition, Uses, And How To Calculate It?

Pro Rata

Pro Rata is a Latin term that means “proportionally.” In business, pro rata is a fair and equitable distribution method. With the use of this method, each concerned party receives a share that is proportional to their entitlement and contribution. This ensures that there is fairness in the company’s distribution process. Based on a party’s proportionate participation in business, the pro rata is used to calculate the reimbursement amount.

In this article, you will mainly learn about what is pro rata in business and how to calculate pro rata distribution using the formula. You will also learn about the ways in which pro rata works for businesses and how this formula helps in distributing reimbursements for participation. Finally, we will share with you the major uses of the pro rata distribution formula. Hence, to find out more, read on through to the end of the article.

What Is Pro Rata?

According to Wall Street Mojo,

This method is especially useful for calculating gains and payments for short-term or partial periods. In addition, it can be applied in various scenarios where proportionate distribution is necessary, including computing hourly wages, expenses, investment profits, and other liabilities.

If the company gives out something on a pro-rata basis, it will basically be assigning the amount or reimbursement to one person as per their share out of the whole amount. This type of calculation has a variety of applications in business finance, as it can be used to evaluate the appropriate portions of any amount of capital.

How To Calculate Pro Rata? – Formula

How To Calculate Pro Rata - Formula

Here is how you can calculate pro rata distribution for any given amount:

Pro Rate Share = Number of “True” Items in place / Maximum Quantity Possible

Therefore,

Pro Rata Distribution = Pro Rata Share x Quantity of Related Item

To effectively use the formula, here are the things you can do:

1. Gather Necessary Data

If you want to calculate pro rata, you will mainly need to gather three data points – the number of “true” items in place, the maximum quality of total items, and the quality of related items. 

Consider a situation where a tenant pays rent for 15 days in October. Hence, the number of “true” items in the rent is 15. However, the maximum quantity of total items amounts to 30 (the number of days in September). The quantity of related items, in this case, is $600, which is nothing but the monthly payment of rent.

2. Calculate Pro Rata Share

To calculate the pro rata share, you will have to divide the number of “true” items in place by the maximum quantity of total items. Using the same example as above, you will need to calculate 15/30 (for the month of September), and you will get 50%. This percentage is the portion of rent that the tenant owes to the landlord.

3. Calculate Pro Rata Distribution

To calculate pro rata distribution, you will need to multiply the pro rata share with the quantity of related items. In the example, the pro rata share came out to be 50%, and the quantity of related items is the monthly rent’s monetary value, which is $600. Once you multiply both, you get 50% of $600, that is $300. This is the amount of the rent that the tenant owes to the landlord.

How Does Pro Rata Work?

How Does Pro Rata Work

According to Investopedia,

Pro rata calculations can be used in many areas, including determining dividend payments, which are cash payments by corporations paid to shareholders. In insurance, pro rata is used to determine the amount of premium due for a policy that only covers a partial term. Allocating the appropriate portion of an annual interest rate to a shorter time frame can also be done via pro rata.

Basically, you can evaluate the proportionate allocation of a fixed amount. If you know how to calculate this figure, you can easily solve issues related to the payment of dividends. Apart from that, it will be helpful for you to determine insurance premiums or calculate part-time salaries. It can help you to determine fair distribution of a fixed amount in hand.

When To Use Pro Rata?

According to Indeed.com,

Pro rata is practical for business purposes regarding expenses, revenue allocation, capital and other financial scenarios that involve giving or receiving money from one individual or entity. Businesses use pro rata to ensure they accurately and fairly analyze and distribute financial figures. Businesses may also use pro rata when calculating the salary of a part-time employee.

The following are the major uses of pro rata distribution in business processes:

  • Businesses use the pro rata method to pay out dividends or cash payments to shareholders in the organization.
  • It helps to allocate the right portion of yearly interest in case the time range is less than one year.
  • The system also helps to discern the total amount of an insurance policy premium after paying for a partial insurance term.
  • It also helps to calculate the salary of a part-time employee as compared to what that employee would make with a full-time salary.
  • You can also divide certain expenses of businesses among a certain number of stakeholders within a set period of time.
  • The system helps to calculate loan payments on a monthly basis as compared to annual payments.
  • Based on the work and needs of different departments, you can plan a project budget to incorporate expenses.

Wrapping Up

Pro Rata means everyone gets their fair share – everyone gets their share as per the input they have put into the work. It basically works in sharing dividends with investors based on the proportion that they have invested in the business. This technique has applications in many areas, from billing for services to allocating business partnership income.

You can calculate the pro rata amount of an item by dividing the instance of that item by the maximum quantity of that item. You can then apply the ratio to any related item to find the same proportion. Do you have any more to add regarding the application of the pro rata system? Share your thoughts and ideas with us in the comments section below.

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Soumava Goswami

Inspired by The Social Network, Soumava loves to find ways to make small businesses successful – he spends most of his time analyzing case studies of successful small businesses. With 5+ years of experience in flourishing with a small MarTech company, he knows countless tricks that work in favor of small businesses. His keen interest in finance is what fuels his passion for giving the best advice for small business operations. He loves to invest his time familiarizing himself with the latest business trends and brainstorming ways to apply them. From handling customer feedback to making the right business decisions, you’ll find all the answers with him!

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SmartCoin: Information, Eligibility Criteria, Interest Rates, Review & More

Smart Coin brings the easiest opportunity for people with low levels of income to afford short-term personal loans. Whether you are self-employed or a salaried worker, you can take short-term personal loans from this app-based loan service that works with RBI-registered NBFCs. However, what are the eligibility criteria for getting a smart coin loan? Is it safe? What do other customers who have taken loans from them have to say about Smart Coin? Calm down, I know you have all of these questions. But, once you give this article a read, you will learn about all that you need to know. So, without any delay, let us start. What Is A Smart Coin? No, it is no cryptocurrency; the name might make you think of it as a cryptocurrency, but in reality, it is an app-based consumer lending platform. The platform partners with RBI-registered NBFCs to offer short-term loans to salaries, individuals, and freelancers. Their vision is to address different concerns in the consumer loan sector in India. Although it started as a small lending corporation, its vision of micro-lending is evolving towards a larger dream. Their full suite offering will include gold savings, insurance, and more. They have more than 1 crore customers across India and more than 1700 CR disbursed in loan amount. SmartCoig gives you small amounts of loans for a short-term tenure. You can take loans of 1000 rupees to 70000 rupees that last for a tenure between 91 days to 270 days. But the loans come with a minimum interest rate of 20% and a maximum interest rate of 36%. Also, the platform is based on a patented algorithm, which helps the customers to do risk assessments before availing of their loans. The seamless online application of the Smartcoing app makes it easier for borrowers to get a loan. Once their application is deemed eligible, the money will be transferred to their account instantly. Read More: How To Get Personal Loan On Bajaj Markets? What Are The Offerings Of Smart Coin? So what does the SmartCoin platform offer to its borrowers? Here are the different offerings of the smart coin lending software – Instant Personal Loan Now, you can get a loan within an instant. With smart coins, customers can get instant personal loans in their smartphones within a few minutes. Yes, the process is digital, but your security is not compromised. It is completely safe. All you need is for your application to get approved. Gold Rewards Not only loans but you can also be rewarded based upon how good of a borrower you are. Once you repay your loans timely and refer the platform to your friends for similar use, you will get gold rewards. Is not that amazing? Gold Savings The platform also offers 99.95 pure digital gold helping you to save and grow your saving. You can save a minimum of 10 rupees on 24K  with the gold savings offerings of SmartCoin. It is undoubtedly one of the best opportunities for those looking for a reward savings option within a lending platform. Credit Score Your credit score can put a good impression on your financial graph. That is why you need to have a good credit score. Smartcoin lets you check your credit score from the Credit Score Bureau for free. This is what you need to stay disciplined financially. Why Should Take Smart Coin Loans? My point exactly. You can take loans from other lenders or lending partners. But why smart coin? Go through the points to know the benefits of taking loans from SmartCoin – This a collateral-free loan-providing platform: In other words, you don’t have to provide any collateral when applying for loans in Smart Coin. So, if you are thinking of borrowing some money, you don’t have to arrange money to pay collateral when applying for loans. Repeat loan is easier with Smart Coin: If you have repaid your loan and want to avail of another loan from smart coin, they don't need you to submit the documents again. Once you have submitted your documents, it stays with them, and you can apply for a repeated loan without resubmission of your documents. The easy application process for borrowers: most banks and loan providers make the application process way too hectic. Going through all that difficult process only to get your application rejected is exhausting. But, with smart coins, the process is quite simple. They require only some minimal documents for the application. Direct Fund transmission: The application needs only a few minutes to be approved. Once approved, the fund gets transferred to the borrower’s account directly. As a result, you don’t have to wait around for days or weeks to get your loan approved and transmitted during a crisis. Who Is Eligible To Use Smart Coin App? If you want to avail of a loan from Smart Coin, you need to fulfill the below-mentioned eligibility criteria - Applicants need to be at least 23 years old to apply for a loan. The loans are only available to Indian residents. People who can apply for a loan are usually salaried individuals, business owners, and support executives. Applicants should have a minimum monthly income of 15000. Documents You Need To Apply For Smart Coin Loans You need the below-mentioned documents to apply for a loan at the Smart Coin platform – Bank statement Selfie of applicant Address Proof PAN card How To Use Smart Coin App? So, how to use the Smart Coin App?  Here are the simple steps that you need to follow for that – First, go to your App Store or Google Play Store to download the app on your smartphone. Users can log in to the app using their Facebook or Google accounts. Now, they have to fill in the application for the loan. Now, they must upload the documents required for the approval of the loan. Once the application is approved, users will get the fund transmitted directly to their bank account. You should follow these steps to get your loan funded in your bank. However, if you need more help, you can contact us through smartcoin customer care number ( Toll Free: 91483 80504). Read More: StashFin Personal Loan Review – Interest Rates, Loan Amount, Eligibility, And More Bottom Line So, that was all the important info you needed to know on Smart Coin. This article can help you install, use and apply for loans on Smart coin. You can use the how-to-use section for smartcoin login also. Hopefully, this article was helpful. However, if you have more queries, please let me know in the comment section. I will get back to you ASAP. Read Also: FlexSalary: Information, Eligibility Criteria, Interest Rates, Review & More Dhani Loans & Services Limited – Background And Services NIRA Instant Personal Loans: Are They Really Instant?