Stockholders’ equity is the value of stockholders’ stake in a company. Its total amount includes the money stockholders have contributed to the company and the profits the company has retained that it hasn’t paid out as dividends. A company typically grows its stockholders’ equity as its business grows. If your company has accumulated sufficient stockholders’ equity, it can reduce the amount by either paying a dividend to stockholders or buying back stock from stockholders. Both of these options return money to stockholders and reduce your company’s stockholders’ equity.
1. Determine your company’s stockholders’ equity balance from your accounting records. In this example, assume your stockholders’ equity balance is $10 million.
2. Determine the size of a dividend to pay to stockholders based on your company’s dividend policy, and declare, or announce, the dividend to stockholders. You reduce your stockholders’ equity on the date you declare a dividend. For example, assume you declare a $1 million dividend to stockholders.
3. Determine an excess amount of cash you have available with which you can repurchase stock. Then buy back shares of stock from stockholders equal to that amount money. The shares you repurchase are called treasury stock. For example, assume you buy back $500,000 of stock from stockholders.
4. Subtract the amount of dividends you declared from your stockholders’ equity balance. In this example, subtract $1 million in dividends from $10 million to get $9 million.
5. Subtract the amount of the repurchased stock from your result to calculate your reduced stockholders’ equity balance. Continuing the example, subtract $500,000 from $9 million to get $8.5 million in stockholders’ equity.
- Make sure your company is in a strong financial position before you distribute money to stockholders and reduce your stockholders’ equity. Make sure the money couldn’t be used to generate stronger returns in your business.