A company is a legitimate body established by individuals to partake in or run a business. When a company is registered under the Companies Act, it is referred to as an incorporated association (Hannigan, 2018). A firm is also an artificial person because it only exists in the eyes of the law and cannot act independently (Hannigan, 2018). The company operates via natural persons known as directors as an artificial entity. It can only be bound by documents that bear its signature since it has a legal personality. As a result, the law allows for a common seal with the company’s name etched on it as a signature substitute (Hannigan, 2018). A firm is also a legal entity that exists independently of its members. In other words, a corporation is not accountable for the debts of its members and vice versa.
Moreover, a company has a perpetual existence i.e., it is a stable type of corporate entity that can only be dissolved by the laws that created it. According to Hannigan (2018), the company’s survival is independent of the stockholders’ death, insolvency, or retirement. Hannigan recognizes that a corporation is a limited liability entity, with its liability limited by either shares or guarantees (2018). When shares limit a company, the members’ liability is restricted to the unpaid value of the shares. Comparably, when guarantees restrict a company’s liability, the company’s authority is restricted to the quota members may channel to the corporation’s capital in the event of a winding-up. Furthermore, because a corporation is a distinct legitimate body from its members, it enjoys the right to acquire, use, and discard assets in its name (Hannigan, 2018).
Advantages of a Public Company
The opportunity to generate capital for capital-intensive activities through the public is a clear advantage of a public firm. Public firms have a limitless number of options for obtaining capital such as allowing the general public to buy the company’s stock ((Ghonyan, 2017). Another distinct feature is that its shareholders’ liability is restricted to the number of shares they own in the company (Ghonyan, 2017). Furthermore, most public companies are listed on stock exchanges, so their shares are easily transferred hence shareholders gain from increased liquidity. According to Ghonyan, being a public corporation boosts the corporate’s trademark orientation (2017). Its stock exchange listing also enhances the company’s brand position and reputation. Additionally, the corporation publishes its statutory details and reports to preserve more openness due to the public’s involvement (Ghonyan, 2017). The transmission of information is critical in determining the present financial situation.
Disadvantages of a Public Company
First, while flexibility is always an asset for any business, public corporations have no such advantage. Every public corporation is constrained by rules and regulations, resulting in a lack of operational flexibility (Ghonyan, 2017). Second, establishing a public corporation necessitates a significant financial, time, and procedural investment (Ghonyan, 2017). Besides, suppose the firm’s shares are to be placed on the stock exchange, the company will engage legal and investment professionals which would incur additional costs. Third, public firms are constantly scrutinized by analysts and the general public, necessitating strict adherence to international accounting standards (Ghonyan, 2017). Financial reports for public corporations are structured as the globally accepted book-keeping guidelines stipulate. Finally, maintaining confidentiality is difficult since shareholders and the general public have access to vital business records of public corporations.
The Importance of Cash
Cash is a company’s lifeblood, and it ought to create adequate coinage from its activities to offset its withdraws while having adequate disposable cash to pay shareholders and enlarge. While a corporation’s income can be engineered, its bankroll explains its actual financial orientation. Furthermore, cash management refers to how a corporation handles its operations and its financial investments. A business should control its financial position while creating cash from its activities to have adequate money at its disposal to offset its instant and extended demands (Soboleva et al., 2018). It’s critical to understand that if a company doesn’t generate enough revenue to satisfy its needs, it will struggle to carry out ordinary tasks such as paying suppliers, replenishing raw materials, and paying staff.
The importance of cash to a company cannot be overstated. Cash, for example, is essential for better planning and decision-making. Consistent cash flows assist in the development of a healthy cash reserve, making it easier to plan. Proper planning aids business managers in forecasting cash flows and keeping track of expenditures (Soboleva et al., 2018). Cash helps businesses stay afloat by preventing bankruptcy and satisfying responsibilities i.e., paying workers and operating expenses. Businesses that remain solvent are more likely to satisfy their long-term debt obligations. Furthermore, cash is essential for handling business crises resulting in a stronger financial position for the company. Finally, businesses require cash to expand and capitalize on opportunities when they arise. Firms should regularly prepare cash flows, sort late payments, and estimate cash flows for success.
Profit is the major sign of the general success of the firm, while cash is required to continue and conduct the daily business operations. The cash balance is the difference between the revenue collected and the costs incurred within a given financial quarter. It is worth mentioning that a company can make money but not have enough cash flow. On the other hand, a business can have a steady cash stream yet still fail to earn profits; therefore, profits do not reflect cash levels (Nariswari & Nugi, 2020). Profit is the income that is less than all of the business’s expenditures during a certain period, whereas cash is the income that flows (in and out) after the business over time. Insufficient profits can harm a company’s cash flow.
Corporate Governance
Corporate governance is a global concern because companies play an essential role in supporting economic development and social advancement. The business is the driving force behind the global expansion, and it is increasingly responsible for providing jobs, commodities and services, and infrastructure. Solomon defines corporate governance as the system by which firms are managed by the board of directors (2020). The shareholders’ only duty in administration is to elect the board of supervisors and bookkeepers and ascertain that a satisfactory administrative structure is in play. Improving transparency and accountability within current processes is at the heart of good governance (Solomon, 2020). Contrarily, poor governance causes a company to fail to fulfill its objectives and collapse resulting in financial losses.
Additionally, the fundamental aim of corporate administration is to advance productive, progressive, and prudent management that will ensure the corporation’s lengthy success. Corporate administration also lays the groundwork for effective, victorious, and long-standing entities that promote the community’s welfare by availing wealth, employment opportunities, and answers to immediate obstacles (Solomon, 2020).
Businesses should be run with integrity, purity, and transparency. Therefore, corporate governance enables acknowledging and protecting stakeholder rights and democracy through legitimate representation and involvement. In a broader sense, corporate governance is essential in maintaining a dynamic balance between society’s needs for order and equality and the efficient production of products and services (Solomon, 2020). Furthermore, corporate governance promotes responsibility in exercising power, protecting human rights and freedoms, and maintaining a well-organized corporate structure.
Principles of Good Governance
Accountability, responsibility, fairness, and openness are the four basic governance principles. According to Solomon, the corporate governance code promotes an effective body accountable for governance that is separate and independent of management (2020). The body encourages leaders to be accountable, effective, and efficient to achieve results. Furthermore, the body should act with probity and integrity (Solomon, 2020). Other significant characteristics of the management body are transparency, open leadership, and accurate and timely information dissemination. Additionally, good governance ensures suitable all-inclusive governance which respects and defends the rights of all stakeholders (Solomon, 2020). In terms of power-sharing, representation, and involvement, the corporation should adhere to democratic norms. Decisions are made based on the majority’s wishes and their rights and interests. To summarize, inclusive approaches are critical in maintaining society’s order and security.
Moreover, according to the corporate governance code, institutions must be controlled and managed following the mandate given by their founders and society (Solomon, 2020). The company should take its broader duties seriously to promote long-term prosperity. Information on choices, policy implementation, and results is made available to the public, making it easier to follow and contribute to the community’s sustainability. Furthermore, the institutional governance structure should create an environment where people contribute to innovative solutions (Solomon, 2020). Corporate governance recognizes the importance of society in creatively resolving problems. The framework also recognizes the government as the only organization to which society has delegated authority to wield coercive power within the bounds of the law.
Gearing
The gearing ratio is the relationship between a company’s debt and equity, indicating how much of a company’s activities are funded by lenders rather than shareholders. It compares some owner equity to cash borrowed by the business to determine a company’s leverage. The gearing ratio benefits company stakeholders in various ways. For starters, the gearing ratio aids in determining an organization’s creditworthiness. When considering whether or not to offer credit to a company, lenders and investors look at its gearing ratio. Second, according to Kunle et al., leverage is utilized as a risk indicator since organizations with high leverage are more vulnerable to economic downturns than enterprises with low leverage (2017). Additionally, investors utilize gearing ratios to gauge whether a corporation is a sound funding. Lenders or bankers are more likely to finance corporations with a solid ledger and a low gearing ratio.
Comparably, the gearing ratio offers some disadvantages for significant actors in the corporate world. First, gearing ratios exaggerate both gains and losses, producing a deceptive sense of the company’s financial status. If investment returns are lower than gearing costs, they will not service its debt. Second, high gearing ratios attract capital risks, which means the investment may underperform, resulting in a financial loss if forced to sell (GEZER & KINGIR, 2020).
Furthermore, legislative risks affect gearing ratios i.e., changes in tax legislation and regulatory frameworks can reduce the tax benefits of gearing. It is also vital to remember that changing the gearing ratio causes changes in interest rates and fees, which affects the cost of borrowing (Omar et al., 2020). Firms should borrow less, invest in various high-quality activities, and examine their financial status frequently to mitigate the dangers of gearing.
Banks are financial entities that borrow and lend money; thus, they are often interested in the gearing levels of businesses for various reasons. For starters, banks evaluate a company’s gearing ratio as it shows the corporation’s level of risk (Krichene, 2017). A business with too many arrears is susceptible to non-payment or bankruptcy, especially when the arrears attract variable borrowing rates. Banks frequently use gearing ratios to compare companies in the same industry. The comparison reveals a clear picture of the company’s activities and profits. Furthermore, banks use gearing ratios to advise firms on financial stability, debt management, and the use of debt to improve earnings and profits. Leverage, or gearing ratio, is vital to banks and top management since it aids in making the best financial and investment decisions.
Reference List
Gezer, Y. and Kingir S., 2020. ‘Expected of debt capital and gearing: return, risk, and impact on the value of the firm’s equity’, Aydın İktisat Fakültesi Dergisi, 5(1), pp. 25-33.
Ghonyan, L., 2017. Advantages and disadvantages of going public and becoming a listed company. Web.
Hannigan, B., 2018. Company law. Oxford University Press, USA.
Krichene, A., 2017. ‘Using a naive Bayesian classifier methodology for loan risk assessment: evidence from a Tunisian commercial bank’, Journal of Economics, Finance and Administrative Science.
Nariswari, T. N. and Nugi M. N., 2020. ‘Profit growth: impact of net profit margin, gross profit margin and total assets turnover’, International Journal of Finance & Banking Studies (2147-4486), 9(4), pp. 87-96.
Omar, A.R.C., Ishak, S. and Jusoh, M.A., 2020. ‘The impact of Covid-19 Movement Control Order on SMEs’ businesses and survival strategies’, Geografia, 16(2).
Soboleva, Y.P., Matveev, V.V., Ilminskaya, S.A., Efimenko, I.S., Rezvyakova, I.V. and Mazur, L.V., 2018. ‘Monitoring of businesses operations with cash flow analysis’, International Journal of Civil Engineering and Technology, 9(11), p.2034.
Solomon, J., 2020. Corporate governance and accountability. John Wiley & Sons.