You are on page 1of 6

1) Demand and supply:- Wage rates of workers depends upon demand

and supply force in labour market. If the labour is in short supply, the
workers will offer the services only if they are paid well. On the other hand,
if the supply is more then workers available might get ready work at
cheaper rates.2) Bargaining Power: Where labour unions are strong
enough to force the hand of employers, the wages will be determined at a
higher level in comparison to other units where unions are weak.3) Cost
of living:- Wages of workers also depends upon the cost of living of the
worker so as to ensure him a decent living wage. Cost of living varies under
deflationary and inflationary pressures. Where labour unions are strong
and employer do not show enough awareness, here wage are adjusted
according to cost of living index numbers.4) Condition of product
market:- Degree of competitions prevailing in the market for the product
of the industry will also influence the wage level. For eg if there is perfect
compition in the market the wage level may be at par with the value of net
additions made by the workers to the total output, but may not reach this
level in case of imperfect competition in the market.5) Comparative
Wages:- Wages paid by the other firms for the same work also influence
the wage levels. Wage rates must also be in consistent with the wages paid
by the other firms in the same industry so as to increases the job
satisfaction among the workers.6) Ability to Pay:- Wage rates are
influenced by the paying ability of industry or firms to its workers. Those
firms which are earning huge profits may afford to pay high wages and can
provide more facilities to its workers in comparison to the firms earning
comparatively low profits.(7) Productivity of labour:- Higher
productivity will automatically fetch more profit to the firm, where in turn
workers will be paid high wages in comparison to other firms with low
productivity.(8) Job Requirements:- If a job require higher skill,
greater responsibility and risk, the worker placed on that job will naturally
get higher wages in comparison to other jobs which do not require the
same degree of skill, responsibility or risk.(9) Govt. Policy:- Since the
bargaining power of the workers is not enough to ensure fair wages in all
industries, the Govt. has to interfere in regulating wage rate to guarantee
minimum wage rates in order to cover the essentials of a decent living.(10)
Goodwill of the company:- A few employers want to establish
themselves as good employer in the society and fix higher wages for their
workers. It attract qualified employees.In addition there are other
important factors which affect the individual differences in wage rates.
These are:1). Worker’s Capacity and Age2). Educational qualification.3).
Work experience.4). Promotion possibilities.5). Stability of employment6).
Demand for product.7). Profits earned by the organisation.8). Hazards
involved in work etc.

Companies use debt and equity financing to leverage capital


expenditures, project development and operational expansion. Without
leveraging company's financial growth is limited to retained earnings.
For this reason debt and equity financing are often times considered
vital to business expansion. Both debt and equity financing have
advantages and disadvantages associated with them. This article will
illustrate both forms of financing then come to a reasoned conclusion
as to when and why each form of financing can be valuable.
Debt Sources of Financing:
Debt financing includes collateralized bonds, debentures, bank loans,
and lines of credit. Generally debt financing comes with an interest
rate somewhere between 3-8% depending on the type. For this reason
debt financing can be less expensive than equity finance depending on
the expectations of the equity financiers. Debt financing may not
always generate enough capital to perform intended business projects
and goals as this type of financing tends to be more conservative in its
lending requirements.
Equity Sources of Financing:
When using equity as a source of financing a company is seeking
capital from investors through the issuance of shares. These shares
can be common or preferred i.e. having voting rights or priority in the
case of company liquidation. Equity financing can also take the form of
employee stock options which replace direct pay in the form of a
corporate benefit. In the case of common and preferred shares, equity
financing can be variable based on stockholder expectations and type
meaning the higher the expectations, the higher the cost of financing.
Advantages and Disadvantages of Debt and Equity Financing:
In business, both debt and equity financing have their advantages.
Debt financing from financial institutions is subject to formal approval
from lenders and monitored by organizations that rank the quality and
credibility of corporate bonds. For this reason, debt financing can not
only be a source of cheaper leveraging, but also an indicator of how
viable a projects and goals actually are in terms of how convinced
lenders and analysts are about the quality of the debt.
On the other hand, in a competitive market place, venture capital and
equity financing can mean the difference between innovation, market
share and a competitive edge. Often, such ventures can have more risk
and therefore demand more return on investment making the financing
more expensive. Nevertheless, if a business can garner

a return on capital greater than the cost of goods and services


including equity costs, then those projects become profitable.
Depending on the type of business, competitive ventures requiring
excessive equity financing may simply be unnecessary, impractical or
not in accordance with the goals of the business owners. In other
words, not all businesses are designed to rapidly expand and yield
growing profits on an annual basis. Businesses that simply intend on
yielding a steady profit on an annual basis may benefit more from debt
financing because of its structured and cost effective nature.
In the case of Equity financing, businesses that lack credibility, start
ups and rapidly expanding businesses however may make positive use
out of equity financing not only because it may be the only source of
capital around but because it can provide the leverage necessary to
accomplish the corporate vision.
Summary:
Financing is a form of leverage not uncommon to most businesses in
one form or another. Smaller businesses tend to use less, fixed or no
equity financing due to corporate goals, cost of financing and business
size. Contrarily, large high-powered industry leaders and high growth
firms may find it essential to raise capital through equity financing to
accomplish annual forecasts, corporate goals and owner objectives.
Each form of financing has its advantages and disadvantages as this
article has illustrated, but in the end financial leveraging is something
that may be required for business survival and profitability regardless
of cost.

Advantages and Disadvantages of Debt Financing

Experts indicate that debt financing can be a useful strategy,


particularly for companies with good credit and a stable history of
revenues, earnings, and cash flow. But small business owners should
think carefully before committing to debt financing in order to avoid
cash flow problems and reduced flexibility. In general, a combination of
debt financing and equity financing is considered most desirable for
small businesses. In the Small Business Administration publication
Financing for the Small Business, Brian Hamilton listed several factors
entrepreneurs should consider when choosing between debt and equity
financing. First, the entrepreneur must consider how much ownership
and control he or she is willing to give up, not only at present but also
in future financing rounds. Second, the entrepreneur should decide
how leveraged the company can comfortably be, or its optimal ratio of
debt to equity. Third, the entrepreneur should determine what types of
financing are available to the company, given its stage of development
and capital needs, and compare the requirements of the different
types. Finally, as a practical consideration, the entrepreneur should
ascertain whether or not the company is in a position to make set
monthly payments on a loan.
No matter what type of financing is chosen, careful planning is
necessary to secure it. The entrepreneur should assess the business's
financial needs, and then estimate what percentage of the total funds
must be obtained from outside sources. A formal business plan,
complete with cash flow projections, is an important tool in both
planning for and obtaining financing. Lindsey noted that small
businesses should choose debt financing when federal interest rates
are low, they have a good credit history or property to use as
collateral, and they expect future growth in earnings as well as in the
overall industry.

Like other types of financing available to small businesses, debt


financing has both advantages and disadvantages. The primary
advantage of debt financing is that it allows the founders to retain
ownership and control of the company. In contrast to equity financing,
the entrepreneurs are able to make key strategic decisions and also to
keep and reinvest more company profits. Another advantage of debt
financing is that it provides small business owners with a greater
degree of financial freedom than equity financing. Debt obligations are
limited to the loan repayment period, after which the lender has no
further claim on the business, whereas equity investors' claim does not
end until their stock is sold. Furthermore, a debt that is paid on time
can enhance a small business's credit rating and make it easier to
obtain various types of financing in the future. Debt financing is also
easy to administer, as it generally lacks the complex reporting
requirements that accompany some forms of equity financing. Finally,
debt financing tends to be less expensive for small businesses over the
long term, though more expensive over the short term, than equity
financing.

The main disadvantage of debt financing is that it requires a small


business to make regular monthly payments of principal and interest.
Very young companies often experience shortages in cash flow that
may make such regular payments difficult. Most lenders provide
severe penalties for late or missed payments, which may include
charging late fees, taking possession of collateral, or calling the loan
due early. Failure to make payments on a loan, even temporarily, can
adversely affect a small business's credit rating and its ability to obtain
future financing. Another disadvantage associated with debt financing
is that its availability is often limited to established businesses. Since
lenders primarily seek security for their funds, it can be difficult for
unproven businesses to obtain loans. Finally, the amount of money
small businesses may be able to obtain via debt financing is likely to
be limited, so they may need to use other sources of financing as well.