profit sharing

Examples of profit sharing in the following topics:

• Management in Different Types of Business: For-Profit, Non-Profit, and Mutual-Benefit

  • A for-profit business is an organization engaged in the trade of goods, services, or both to customers with the goal of earning profit to increase the wealth of the business's owners.
  • In contrast, a non-profit organization is legally prohibited from making a profit for owners.
  • This means managers must motivate by community-building and a sense of shared accomplishment.
  • A mutual-benefit non-profit corporation can be non-profit or for profit.
  • For example, a manager of a for-profit company may be able to motivate employees through bonuses for sales targets or profit sharing.

• Objective, constraints and alternatives

  • These include profits, utility, sales, market share, income, growth,...With in a firm different individuals may have different objectives.
  • The CEO may want to maximize profits while the Vice president of engineering may want to minimize the cost per unit and the person in charge of marketing may want to maximize the growth in sales or market share.
  • Constraints may be technology, quantity of factors of production, quality of factors, profits, utility, sales, market share, income, growth, social institutions, values, law or a myriad of other possibilities.
  • For instance, a firm may try to maximize market share (objective) subject to the constraint that they earn a 12% return on capital investment.
  • Alternatively, a firm might try to maximize the rate of return on capital subject to the constraint that they maintain a 20% market share.

• Survival

  • Survival is closely linked to new product development, profit, sales, market share, and image.
  • All business enterprises must earn a long term profit.
  • Just as survival requires a long term profit for a business enterprise, profit requires sales.
  • Again, pricing strategy is one of the tools that is significant in creating and sustaining market share.
  • Pricing plays a significant role in attracting and retaining market share during tough economic times.

• Profit Margin

  • Profit margin measures the amount of profit a company earns from its sales and is calculated by dividing profit (gross or net) by sales.
  • Profit margin is one of the most used profitability ratios.
  • Net profit is the gross profit minus all other expenses.
  • The gross profit margin calculation uses gross profit and the net profit margin calculation uses net profit .
  • Companies need to have a positive profit margin in order to earn income, although having a negative profit margin may be advantageous in some instances (e.g. intentionally selling a new product below cost in order to gain market share).

• How Corporations Raise Capital

  • However, corporations must make interest payments even when they are not showing profits.
  • Although common shareholders have the exclusive right to elect a corporation's board of directors, they rank behind holders of bonds and preferred stock when it comes to sharing profits.
  • But others pay little or no dividends, hoping instead to attract shareholders by improving corporate profitability -- and hence, the value of the shares themselves.
  • Companies whose stock prices rise substantially often "split" the shares, paying each holder, say, one additional share for each share held.
  • Some corporations, especially electric, gas, and other utilities, pay out most of their profits as dividends to their stockholders.

• Repurchasing Shares

  • In a share repurchase, the issuing company purchases its own publicly traded shares, thus reducing the number of shares outstanding.
  • When a company repurchases its own shares, it reduces the number of shares held by the public.
  • The reduction of the shares outstanding means that even if profits remain the same, the earnings per share increase.
  • Repurchasing shares will lead to a corresponding increase in price of the shares still outstanding.
  • If the company has put rights on its shares, it may use them to repurchase shares at that price.

• Ratio Analysis and EPS

  • If preferred dividends total $100,000, then that is money not available to distribute to each share of common stock.
  • If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
  • Gross margin, Gross profit margin or Gross Profit Rate: Gross profit / Net sales
  • Profit margin, net margin or net profit margin: Net profit / Net sales
  • Earnings per share (EPS) is the amount of earnings per each outstanding share of a company's stock.

• Dividend Payments and Earnings Retention

  • The dividend payout and retention ratios offer insight into how much of a firm's profit is distributed to shareholders versus retained.
  • It is the portion of corporate profits paid out to stockholders.
  • This is the most common method of sharing corporate profits with the shareholders of the company.
  • They are usually issued in proportion to shares owned (for example, for every 100 shares of stock owned, a 5% stock dividend will yield five extra shares).
  • If the payment involves the issue of new shares, it is similar to a stock split in that it increases the total number of shares while lowering the price of each share without changing the market capitalization, or total value, of the shares held.

• Market Share

  • If company A sold 600 of those baubles, they have 60% of the market share.
  • Generally, sales growth resulting from primary demand (total market growth) is less costly and more profitable than that achieved by capturing share from competitors.
  • Firms with market shares below a certain level may not be viable.
  • Increasing market share is one of the most important objectives of business.
  • However, increasing market share may be dangerous for makers of fungible hazardous products, particularly products sold into the United States market, where they may be subject to market share liability.

• Profit-Maximization Pricing

  • Profit maximization analysis is the process by which a firm determines the price and output level that returns the greatest profit.
  • Profit maximization is the short run or long run process by which a firm determines the price and output level that returns the greatest profit.
  • Revenue is the amount of money that a company receives from its normal business activities, usually from the sale of goods and services (as opposed to monies from security sales such as equity shares or debt issuances).To obtain the profit maximising output quantity, we start by recognizing that profit is equal to total revenue (TR) minus total cost (TC).
  • The profit-maximizing output level is represented as the one at which total revenue is the height of C and total cost is the height of B; the maximal profit is measured as CB.
  • This output level is also the one at which the total profit curve is at its maximum.