Business Finance: Company Features, Cash vs Profit, Corp Governance

This business finance report provides a detailed analysis of key concepts, including the definition and features of a company, the advantages and disadvantages of a public limited company, and the crucial importance of cash for business operations, differentiating it from profit. It further explores the existence and principles of corporate governance, emphasizing transparency and accountability. Finally, the report defines gearing, discussing its advantages and disadvantages, and explains why banks are interested in a company's gearing level. The document is contributed by a student and available on Desklib, a platform offering study tools for students.

Business Finance

Contents
MAIN BODY..................................................................................................................................3
A. Define company and its features. Also explain advantages and disadvantages of a company.
.....................................................................................................................................................3
B. Explain the importance of Cash for a business. Is profit being the indicator that a business
has cash balances. And also explain the difference between the two..........................................4
C. Explain the reason behind the existence of Corporate Governance. Also explain principles
of corporate governance..............................................................................................................5
D. Explain Gearing and also explain its advantages and disadvantages of gearing. Also state
the reason behind the banks interest in the gearing level of a company......................................6
REFERENCES................................................................................................................................8

MAIN BODY
A. Define company and its features. Also explain advantages and disadvantages of a company.
A company is termed as body corporate which is an incorporated business which is registered
under the Companies Act. A company can be of any type such as public or private company,
unlimited or limited company, company with share capital, company limited by guarantee, or
community interest company (Borgogno and Colangelo, 2020).
Features of a company are as below:
 Artificial Person: A company is artificial person which is registered under company’s act.
Law grants permission to the company to enter into a contract related to acquire property
or dispose any existing property with the name of the organisation.
 Separate Legal Entity: Company is treated as different from the owner of the organisation
as the person is not individually liable for the operations of the business. Individual
members cannot be sued on the actions performed by the organisation.
 Common Seal: A company is an artificial person thus in order to enter into a contract
organisation have to sign document, that is done by applying the seal on the document.
Any document carrying common seal of the company makes company for such action.
 Limited liability: A company can be limited by shares and limited by guarantee. The
liability of the company is limited to the extent of the amount invested by the investor in
the company. The organisation cannot demand more amount then the amount agreed by
the individual at the time of contract.
Perpetual Existence: Unlike other entities, company is much more stable as it is governed by
law. Life of organisation does not depend on members, employees or shareholders of the
organisation (Kowalski, Lee and Chan, 2021).
Advantages and Disadvantages of Public Limited Company:
Advantages:
 Availability of funds: One of the advantages of a public company is that it can raise
money by selling their shares in the market. Share of a company is equal to the ownership
of that company. A private company manages funds from banks, FII or individual
investors which is need by the organisation in order to provide finances for the business
operations. Public company raises funds from primary or secondary market with the help

of public offerings. It helps businesses to adopt capital intensive techniques which are
pretty much costlier than labour intensive techniques (Tirskikh, 2019).
 Availability of Financial Data: It is obligatory for the public companies to file quarterly
and annual accounts of the company on their website that is to be used by the
stakeholders of the company. It facilitates the analyst in analysis as the data is readily
available on various sources.
Disadvantages:
 Increase in government interference: A public company is registered under the company
act is prone to government agencies interference as it is directly related and responsible
for public dealing and investor of the company are also the general public.
 Adherence of Global accounting standards: Companies are required to prepare the
financial accounts in reference to the International Financial Report Standards (IFRS) or
Generally Accepted Accounting Principles (GAAP). A report is issued by the company
which is addressed to the stakeholders of the company.
B. Explain the importance of Cash for a business. Is profit being the indicator that a business has
cash balances. And also explain the difference between the two.
Cash is considered as lifeline for any business as it helps in managing its working capital
requirements as well used in the payment to the creditors of the organisation. Cash management
helps organisation in managing the finance for the investment, financing or business activities.
Business have to generate cash from its business activities that is used to cover its expenses and
repay to its investors (Qiu, 2022).
Profit is measure to ascertain that the business operations and those activities will lead
business to success. It can be concluded that profit is not the cash and cash is not he profit. There
may be chances that a company lack cash but have a significant amount of profit. To succeed in
business, it is essential to have both profits as well as cash flows.
Profit are the net income earned by the organisation by performing their business activities. It is
the amount which is derived after deducting all the expenses from total income earned during the
specific period. It mainly consists of two profits such as gross profit and net profit (Jessel and
DiCaprio, 2018).
Gross profit: It is the amount which is derived after deducting Cost of Goods Sold (COGS)
or cost directly associated with the rendering of service manufacturing of product.

Gross Profit = Revenue – COGS
Net Profit: This method is used by the firm to know the actual profitability of the
organisation it is derived after deducting all the expenses such as general and administrative cost,
sales, research and development cost, tax payments and interest expenses. Formula to derive Net
profit is as follows:
Net Profit = Net Sales – COGS – Operating Expenses – Taxes – Interest expenses
Where,
COGS: Cost of goods manufactured
Revenue: Total Sales of the years
Operating expenses: Research and development cost, administrative cost, employee costs
Taxes: Income, payroll taxes, federal tax levied by the government.
Cash is the Net cash available after deducting cash outflows from the business operations.
Cash Flow includes operating activities, investing activities and financing activities.
Investing activities: These activities are associated with the total investment maid during the year
and total earning from the investment over the period of time is considered in Investing activities
(Bollaert, Lopez-de-Silanes and Schwienbacher, 2021).
Operating activities: It includes activities which are related to the business operations and
occurs most of times in a year. It includes activities such as paying off expenses, funding
working capital and revenue generation.
Financing Activities: It mainly includes activities which are related to generation of funds
from different sources such activities include, Dividend payment, share purchases, debt issuance
and its repayment.
At last total positive or negative of the activities is ascertain to know the actual net cash
inflow / outflow of the organisation.
C. Explain the reason behind the existence of Corporate Governance. Also explain principles of
corporate governance.
In business Corporate Governance refers to set of rules and regulation that are the practiced by
the management in the course of business. There are various Corporate governance model
organisation have to selected any of them which needs to be selected by the organisation to
implement in the organisation. It describes the rules and responsibilities that are directly or

indirectly implemented by the organisation. It ensures that the organisation follows transparent
and appropriate decision making process (Liu, 2020).
Corporate governance assures the return as it follows set of rules and regulation
associated with the organisation. It distinguishes between role of the manager and role of
manager that helps in effective decision making. It ensures transparency in the business
organisation and makes sure that the investors earn a significant amount of profit.
Good Governance principles are explained as below:
 Capacity and Competencies: The following principles ensures the professional skills of
the employees and managers of the organisation. It helps in improving the existing skills
as well as in developing new skills. Managers are self-motivated and inspired to improve
their performance.
 Openness and Innovation: This principle helps in finding out new and innovative ways of
solutions to the existing problems. A climate is creative that is favourable to the business,
it helps the business to improve at much faster rate.
 Long term Orientation and sustainability: Every business is continued with the view of
continuing for a long period of time. Sustainability of a business is affected by the
community in which it is conducting its business operations. A long term perspective is
taken into consideration while these development activities are carried.
 Sound Financial Management: Management have to take care of cost incurred during the
process of manufacturing. It is because the profitability of an organisation can be
increased by decreasing the cost incurred. Various budgets are prepared with the view of
increasing sales and it also helps in determine the amount of funds required by the
organisation to achieve the set target.
 Accountability: Every individual in the organisation is responsible for their acts
separately or collectively. Various steps are taken against improper administration and
against action of local authorities (Kusano, 2019).
D. Explain Gearing and also explain its advantages and disadvantages of gearing. Also state the
reason behind the banks interest in the gearing level of a company.
Gearing is the ratio which studies the difference between the debt equity mix of the organisation.
It states the extent to which an organization is using debt or equity in their normal functioning of
the business organisation. For example, in case of company uses high equity then the company is

said to be highly geared. Various ratios are included in gearing such as debt-service ratio, debt
equity ratio, etc. This ratio is used to measure the risk associated with the business organisation.
Creditworthiness of any organisation is determined by the amount of liabilities taken by the
organisation and mix of liabilities used. In case an unsecured loan offered by a lender is
supported by the guarantee by a person whose creditworthiness is proved (Brassell and
Boschmans, 2019).
A high gearing ratio states that the company is using more debt to equity. Debts taken
from the creditors are much riskier than the debts taken by the owners. The liability taken from
the creditors needs to be paid in a specific period of time, while there is no compulsion of
payment to the business owners. Lenders and investors scrutinize companies gearing ratio in
order to give loans or before making any investment in a company. It specifies any risk
associated with the business concern and also states its financial position. A business concern
with a lot of borrowings is prone to make a default because if there is an increase in interest rates
then the company may suffer bankruptcy.
Debts are used by the business concern for the business expansion activities or expanding
other activities that leads to increase in the sales of the organisation which ultimately boosts the
earning and profits of the business concern (Tran, 2020).
Companies compare their gearing ratio with the other companies of the same industry to
determine the actual position of the business in the market. A company which have a more than
50% gearing ratio is at high risk as compared to the other that are less risky and are termed as
less geared organisations. Companies that work on the capital intensive technology or having a
lots of fixed assets are likely to have highly geared as compared to the companies which uses
more liabilities and have fewer assets.

REFERENCES
Books and Journals
Bollaert, H., Lopez-de-Silanes, F. and Schwienbacher, A., 2021. Fintech and access to
finance. Journal of corporate finance, 68, p.101941.
Borgogno, O. and Colangelo, G., 2020. Data, innovation and competition in finance: the case of
the access to account rule. European Business Law Review, 31(4).
Brassell, M. and Boschmans, K., 2019. Fostering the use of intangibles to strengthen SME access
to finance.
Jessel, B. and DiCaprio, A., 2018. Can blockchain make trade finance more inclusive?. Journal
of Financial Transformation, 47, pp.35-50.
Kowalski, M., Lee, Z.W. and Chan, T.K., 2021. Blockchain technology and trust relationships in
trade finance. Technological Forecasting and Social Change, 166, p.120641.
Kusano, M., 2019. Recognition versus disclosure of finance leases: Evidence from
Japan. Journal of Business Finance & Accounting, 46(1-2), pp.159-182.
Liu, X., 2020. A visualization analysis on researches of internet finance credit risk in coastal
area. Journal of Coastal Research, 103(SI), pp.85-89.
Qiu, M., 2022. Development and Transformation of Inclusive Finance in my Country's
Commercial Banks. Academic Journal of Business & Management, 4(1).
Tirskikh, M., 2019. Essays in macro-finance (Doctoral dissertation, University of London:
London Business School).
Tran, D.V., 2020. Bank business models and liquidity creation. Research in International
Business and Finance, 53, p.101205.