Hi,

I work for a Sales company. And we pay our managers a bonus of 10% on the net profit of their divisions. (Accrual Accounting... and corporate costs are allocated to the divisions).

But they are not accounting oriented people, so one of their problems understanding is if they get paid 10% of their net profit for their division, how do I explain in layman's terms that the other 90% of net profit is not going to the owners.

It's easy to explain when one of the divisions is negative, does anyone know how to properly explain it so they will understand (even if all divisions are profitable) that 90% is not going to the owners. (IE, there are fixed assets to pay for, etc, etc).

Thanks

Ken

Well, from what I read the managers get paid a fixed rate (paid by hours or yearly salary) and they get a bonus of 10% of net sales profit from their division? Just tell them that they get a bonus off how much they sell or however their division gets their profit; the more profit they earn the higher the bonus they receive will become. Since they get an income from hours or fixed salary its just a bonus from their hard work and tell them that :D. Hope this helps.

A simple Income Statement would be:

Sales 100,000
Less: Expenses related directly to the sales (also known as Cost of Goods Sold) 25,000

Gross Profit = Sales – COGS = 75,000 (this is what they get 10% of)

Then there are the rest of the expenses:
Bonus to the managers (10% of 75,000 which is 7,500)
Rent Expense 5,000
Utilities 2,500

Total Other expenses = 7,500 + 2,500 + 5,000 = 15,000


Therefore….we now have:
Gross Profit 75,000
Less: Other Expenses 15,000
Net Income Before Taxes 60,000 (the owners would then pay taxes on the 60,000 and keep the rest for themselves, or reinvest in the business, or whatever)