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Dear Sir/ Mam, I am working with small trading company where owner have offered me to switch to profit sharing plan . Earlier was on salary basis now he is giving me withdrawals to satisfy my daily needs and at the end of year he will calculate the profit and he will share 40% to me after deducting my withdrawals.
I wish to understand ideally what all things to consider while calculating profit. Is it only sales, purchase & fixed expenses OR will have to give rent to him as well ? which he is asking for.

From India, Pune
Dinesh Divekar
Business Mentor, Consultant And Trainer
Profir Sharing Employee
+1 Other


Hi Abhijeet,
It would be better, if you could be more clear. You mean to say that the profit sharing will be 60:40 ratio.
There are various components involved in this profit sharing.
Are investing any money to the company? if Yes then that will be capital investment.
then comes drawings means if you will be taking any money from the company that will also be taken into consideration.
Fixed assets and then your Building, Machinery etc.
Purchase and sales
and other expenses for running the company
salary, rent, debts, bills receivable and bill payable etc...
In short Assets - Liabilities = (Net profit or Net loss) on this you will have to calculate your share.

From India,
Dear Nishu,
Thanks for the info.
At this point of time company is not demanding to invest in terms of commercials or assets .
Building from where we are working and the warehouse is owned by the company , one of the director is proposing that if I am choosing a profit sharing plan then i will have to give rent to them for utilising this space. Which i feel is not correct as I am not running my business , i am part of the company and even i will not have any extra authority in temrs of choosing staff , their increments & appointing new staff etc etc .
I will be getting share only on the business I am taking in into company.
Please suggest

From India, Pune

Is this done verbally, has he given any written confirmation about this partnership thing. Because its better if you ask your employer/partner what kind of partnership he is looking for. If he wants to make you a partner share the profit in 60:40 ration and also want you to pay the rent for his premises then he is asking you to invest in his business monthly and then take the share.
Make the points clear between you two and it should be documented.

From India,
Dinesh Divekar

Dear Abhijeet,
I feel that the arrangement is little messy. Therefore, you need to be little cautious.
We need to have complete facts at hand and then only our opinion can be provided. Let your employer provide the draft of the contract agreement. Erase the personal details from the agreement and upload it here. Proper opinions can be provided thereafter.
Company profits are shared with the investors and not with the employees (except statutory bonus, if applicable). As far as payment of the rent is concerned, it could be a ploy to extract money from you. what if you pay rent and yet do not get sufficient money because of low profit? In this case, there is no liability towards the employer to pay you. Secondly, can you sustain payment of rent?
Please take this call judiciously.
Dinesh Divekar

From India, Bangalore

Dear Abhijeet,

Prima facie, the offer looks like lucrative. But much would depend on what what is your operating gross margin, financial costs etc. As others said, a net profit could be arrived at only after accounting for the gross income, gross margin, operating expenses, transfer to partner's capital a/c towards investment costs and other expenses. Finally you will arrive at possible net profit/loss. Only for argument's sake, What if the business ends up in a loss finally, Does't mean that you should pay from your pocket. To be more clear just list out the Purchases cost of 'x' No.of your product being traded, for the very product what is possible sale price per unit (assuming that this product will not face any problem in selling them) and arrive at the gross sale proceeds. List out what are all your expenses like salary, Elec.bills, conveyance, handling, communication, advt. including rent if any, in cash/cheque/kind and then notionally compute, VAT & other govt.levies, cost of investment, depreciation for equipment and other assets being used for business. Now you will get a net profit before Tax (IT if applicable), then you'll get the Net profit available for sharing by partners. Here you will get a clue who is/which is going to be beneficial, an over all picture. Be frank, if it's ending with a loss you may as well continue with salary option. May be later on you might set up your own business in this line sooner once you are thorough with all aspects of this business.

From India, Bangalore
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