What does "Pro Rata" Mean?
Pro rata is a Latin phrase that means “in proportion to.” The term is more often applied in situations related to business, financing, and the law. Basically, the phrase pertains to an amount that is a fraction or a share of another bigger amount.
In a business setting, companies sometimes indicate a part-time employee’s salary as pro rata. This usually means that the amount a part-time employee gets will be a fraction of what a full-time employee would typically receive. For example, a full-time employee is required to work for 40 hours a week to receive $3,000 US Dollars (USD) every week. If a part-time employee only works for 20 hours a week, then he only receives $1,500 USD, a portion of the full-time salary.
Pro rata can also be applied when computing for costs. Suppose a rental fee for a product is $48 USD for the whole day, which consists of 24 hours. That means a person should pay $2 USD per hour if he is only going to rent it for a short while. Shareholders can also calculate the profit division according to the same concept. Usually, a shareholder receives an amount of profit based on the number of shares he bought and amount of total profit.
Aside from the profits, shareholders and business partners can also use pro rata in terms of liability. If ever the company or the partnership is in a financial crisis, the partners are only accountable for the amount of money they have invested. This is why investing is a risky business; while putting in much money can reap great profits, it can also cost much when the company experiences a setback.
Creditors can also apply the concept of pro rata when debtors go through insolvency, or the failure to pay back loans as the deadline passes. The creditor can agree to being paid in a percentage of the amount he has lent. In situations involving several creditors, the money is distributed accordingly among them.
Pro rata can also be applied in pension plans. Retirees receive a monthly allowance in proportion to two possible factors: the salary received while employed or the number of years employed. Situations involving refunds can also use the concept of pro rata. For example, if a university student drops out of a class and asks for a refund, he can only receive a portion of the total cost he has initially paid.
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