Business Finance

Table of Contents
Define a Company. Explain its features and explain the advantages and disadvantages of forming
a public company.............................................................................................................................3
Discuss the crucial importance of cash to a business. Is the profit that a business makes a reliable
indicator of its cash balances?.........................................................................................................5
What is the reason for the existence of Corporate Governance? Discuss some principles of good
governance as described by the Corporate Governance Code.........................................................6
Define Gearing and explain its advantages and disadvantages. Why might a bank be interested in
a company’s level of gearing?.........................................................................................................8
Reference.......................................................................................................................................10
Define a Company. Explain its features and explain the advantages
and disadvantages of forming a public company.
A company refers to a legal entity that is created by a group of people to involve and run a
business enterprise or industrial venture. It is an association consisting of people that have a
corporate legal status or entity, and it is apart from its stockholders or members and has a unique
authentication that is used for its signature (Grundmann and Falko Glasow, 2018). A company
does not have a natural thing or body. It operates apart from its shareholders or owners. Thus, a
company can be regarded as an incorporated association that has a distinct legal existence
including a common seal and perpetual succession.

Features of a company

There are lots of noticeable features that differentiate companies from other businesses.
However, the features of a company are described below:

1. Incorporated Association: Under the company act, a company must have to be

registered or incorporated. To form a company, a minimum of 7 members are required.
However, this also varies by county.
2. Artificial Person: A company is called an artificial individual or person. It is formed
through the consent of the law and is not a real person.
3. Distinct Legal Entity: The corporation, unlike a partnership business, is separate from
the people that make it up. According to section 34(2), the association of person (AOP)
becomes a corporate body by the stated name in the memorandum (Grundmann and
Falko Glasow, 2018).
4. Limited Liability: As the company indicates a separate entity, so company’s members
are not liable for the company’s debt. Hence, members’ liability is limited to the value of
the shares they own or the amount of the guarantee (Grundmann and Falko Glasow,
2018).
5. Transferability of Shares: A public limited company’s stakeholders or shareholders can
transfer their shares according to the articles of association's rules. However, there may
be some limits on the issue of shares in the case of a private limited corporation.

Advantages and disadvantages of establishing a public company

The advantages and drawbacks of developing a public company are stated below:

Advantages Disadvantages
1. Limited Liability: In a company, the 1. Difficulties in Forming: Public
members’ liability is limited to the companies forming procedure is quite
share values that they own. Members' difficult compared to other
personal property cannot be connected organizations. Some legal formalities
to the company's debts. This benefit need to be accomplished before
entices people to put their money into starting a public company (Ghonyan,
the business, and it motivates the 2017).
owners or stakeholders to take 2. Nepotism and red-tapism are also exist
additional risks (Ghonyan, 2017). in a public company which is a great
2. Large Scale Manufacturing or threat for the organization.
operation: Because of the abundance 3. Lack of flexibility and secrecy.
of huge financial resources and other
technical advancements, companies
can conduct a large production
process. As a result, they can be able
to make the product more efficiently
at a lower price.
3. Society’s Contribution: Public
companies are also necessary for the
welfare of society (Ghonyan, 2017).
These companies are established to
serve the people of society.
Discuss the crucial importance of cash to a business. Is the profit
that a business makes a reliable indicator of its cash balances?
Cash is considered the lifeblood or main essence of a business. a business must have to generate
cash from its overall activities or functions to meet the entire expenses and pay the shareholders
as well as expand the business. Cash, often known as money, seems to be the most liquid asset,
as it may be utilized straight away to carry out economic transactions such as purchasing, selling,
paying off debts, and satisfying immediate demands and requirements (Hendrawaty, 2020). Cash
is recognized as a payment reserve and a means of meeting financial needs. If a company does
not generate enough cash to satisfy its needs, the company will struggle to conduct its everyday
activities, such as purchasing raw materials, paying suppliers, paying wages to the employees, or
making any investments. However, the company should also have adequate cash on hand to
satisfy its investors and pay dividends (Hendrawaty, 2020).

Profit is regarded as the main indicator of the business as the success of the business depends on
the profit that is earned. On the other hand, cash is needed to maintain and operate all the
business activities. Without cash, a business cannot operate its daily activities and thus cannot
make the revenue let alone profit (Nason and Patel, 2021). Cash balance is the amount that a
business receives after deducting all its cash out at a specific time. In the contrast, profit is the
balance that is acquired from subtracting expenses from the revenue earned.

Therefore, both profit and cash balance are necessary indicators for a company to determine its
overall growth and expansion. If an individual wants to analyze the financial condition of the
business as an investor, stakeholder, or owner, he must understand and analyze these two metrics
and their interaction with each other (Nason and Patel, 2021). For example, a company may gain
profit by having a negative cash balance to bear the expenses, as well as a company, may fail to
generate profit by having a positive cash balance. So, both cash balance and profit are essential
to run a business for the long term. Hence, in a growing or startup business, a sudden product
growth can generate profit for the business while also can create a cash balance crisis. So, we can
say that a business that makes a profit is not a reliable indicator of its cash balance.
What is the reason for the existence of Corporate Governance?
Discuss some principles of good governance as described by the
Corporate Governance Code.
Corporate governance is the combination of practices, rules, processes, or systems by which a
company or organization is controlled and directed. Corporate governance is generally involved
in handling several stakeholders’ interests for example shareholders, suppliers, customers,
community, or the government (Effross, 2019). It indicates the business relationship among all
its stakeholders. Corporate governance has an impact on how a company's goals are established
and achieved, how risks are assessed and monitored, and how internal evaluation or performance
is improved or optimized. Corporate governance, however, serves as a set of policies or rules that
define the responsibilities and accountabilities of stakeholders to work and resolve the inherent
conflicts of the corporate structure. It also ensures the transparency of the firm and thus keeps the
shareholders’ interests safeguarded (Farrar and Hanrahan, 2017).
Principles of Good Governance
1. Accountability: Groups or individuals of the company who take action on a specific
issue and involve in decision-making must have to be accountable for their actions and
decisions. Accountability requires mechanisms that must be present and effective
(Effross, 2019). These allow investors to question and evaluate the acts of the board of
directors and its committees.

2. Fairness: Equal treatment is referred to as fairness which means all shareholders should
be treated equally for their shareholdings. The Companies Act of 2006 protects this in the
United Kingdom (CA 06). However, the rights of other groups must also have to be
recognized and valued. The interest of minority shareowners should be equal to those of
majority shareowners.
3. Transparency: Transparency denotes the openness or willingness of the company to
deliver clear and accurate information to its stakeholders as well as shareholders (Effross,
2019). According to a good corporate governance principle, all the stakeholders must be
informed about the firm’s activities including the blueprint of the future and the risks
associated with the business strategies.
4. Responsibility: The company's Board of Directors (BOD) is given authority to act on its
behalf. As a result, they must bear full responsibility for the authorities granted to it and
the authority it wields. The Board of Directors is in charge of supervising the
management of the company's affairs, as well as appointing the CEO and reviewing the
company's performance (Effross, 2019). It is expected to perform in the company's best
interests when doing so.
Thus, by conducting good corporate governance, companies can lessen their cost of capital and
thus improve their decision-making ability.
Define Gearing and explain its advantages and disadvantages. Why
might a bank be interested in a company’s level of gearing?
A company's gearing indicates the amount of liability or debt that it employs to finance its
operations in relation to its equity capital. Hence, the gearing ratio refers to the portion of the
financial leverage that shows the level to which a company’s operations are funded or subsidized
by equity capital rather than debt (Schmidlin, 2018). Hence, A corporation with a high gearing
ratio has a high debt-to-equity ratio, which raises the risk of financial disaster for the firm.

There are some benefits and some disadvantages of gearing that are given in the following:

Advantages

 Wealth Accumulation: The gearing ratio enables faster wealth building by investing a
bigger sum than the investor might have invested with their own funds.
 Less Income Tax: Interest and other expenses of gearing might be tax-deductible, and
thus could minimize the taxable income. If the borrowed funds are utilized to invest in an
earnings asset, these charges are normally tax-deductible (Edwards and Turnbull, 2020).

Disadvantages

 Capital Risk: If compelled to sell, the investment may not execute as predicted
subsequent to a capital loss.
 Risk of interest rates and loan cost: The change of the interest rates and other fees may
differ the cost of loans. Hence, there are some other charges that will be included if the
borrower asks to dismiss a loan.

Bank’s interest in the level of a company’s gearing

An investor or lender always inspects the gearing ratio of a company to identify the risks that
are associated with the company. A company having a large amount of debt may face
bankruptcy or economic failure specifically when the loans include variable interest rates.
Hence, if the company invests properly, debt can be helpful in expanding the operations of
the business as well as enhancing the profit (Edwards and Turnbull, 2020).
Therefore, a low gearing ratio indicates that a company or firm is financially established and
stable. And all debts are not bad at all. on the other hand, a high gearing ratio means a high
amount of debt to equity. Thus, it is necessary that the company is efficiently managing its
debt levels. A bank, however, might be interested in the gearing ratio of a firm to determine
how a company is managing its debt and thus how efficiently it is performing (Schmidlin,
2018).
Reference
Campbell, R.L. (2017). The legal framework of business enterprises. Concord, On: Captus Press.

Cornelis De Groot, Jurist (2019). Corporate governance as a limited legal concept. Alphen Aan
Den Rijn: Kluwer Law International, Cop.

Edwards, P. and Turnbull, P.W. (2020). Finance for Small and Medium‐sized Enterprises.
International Journal of Bank Marketing, 12(6), pp.3–9.

Effross, W. (2019). Corporate governance : principles and practices. New York: Wolters
Kluwer Law & Business.

Farrar, J.H. and Hanrahan, P.F. (2017). Corporate governance. Chatswood, Nsw: Lexisnexis
Butterworths.

Ghonyan, L. (2017). Advantages and Disadvantages of Going Public and Becoming a Listed
Company. SSRN Electronic Journal.

Grundmann, S. and Falko Glasow (2018). European company law : organization, finance and
capital markets. Cambridge ; Portland Or.: Intersentia.

Hendrawaty, E. (2020). Examining The Excess Cash Holdings As An Indicator of Agency

Problems. International Business and Accounting Research Journal, 4(2).

Nason, R.S. and Patel, P.C. (2021). Is cash king? Market performance and cash during a
recession. Journal of Business Research, 69(10), pp.4242–4248.

Rick Stephan Hayes and John Cotton Howell (2020). How to finance your small business with
government money : SBA and other loans. New York: Wiley.

Schmidlin, N. (2018). The art of company valuation and financial statement analysis : a value
investor’s guide with real-life case studies. Chichester, West Sussex: John Wiley & Sons.