Explanation of Terms and Concepts in Business
The company implies a legal entity formed in accordance with the standing laws that represents association of people working together in a common business enterprise. A good example is Limited Liability Company, sole proprietorship and corporation. Normally, the company is formed under the basis of common business objectives.
Features of a Company
Firstly, a company is defined by a Separate legal entity. Under this a company is subject of law and is separate from people that constitute it. Further, the company has law obligation which encompasses a series of duties that are performed by the company (Ayub et al., 2020). The company has capabilities of owning and dealing with assets because of its legal entity. This feature enables the company to trade on its own assets under the legislations it abides by. It is an incorporated association that is required to be registered under a stipulated company act. For instance, registration of every company is vital requirements towards its formation. Therefore, every company must be registered as an individual entity under the law of the State.
Thirdly, companies have limited liabilities and members comprising of the company are not in any form liable to the debts incurred by the company. However, member’s liability is strictly limited particularly to the unpaid shares of their respective share values. Additionally, some companies are limited by guarantee, in this member liability is determined by amount that is guaranteed. The company has transferability of shares, which are considered transferable in nature. In this, there exists implications of ownership transferability as per the provision made on the article of association. However, there exists a series of restrictions on the ownership of shares in private companies.
Moreover, a company is characterized by perpetual existence since it’s an artificial person. For instance, companies lack lifespan restrictions they can sustain over a long period of time. Accordance of death on member of the company, or insolvency of one member does not affect the initial status and operation of the company. Finally, an additional feature of the company is that it has a common seal. Company directors are also known as the agents of the company, they often work under company’s power. The directors use a common seal which is also considered as signature of the company to sign documents in place of the company. Enforcement of the documents is only attained after ascertaining the existence of the common seal.
Advantages of Forming Public Company
Public company boast an advantage of raising of capital through public issuance of shares. In most cases public company raise their capital through listings which are considered as recognized exchange. Such improves their ability to attain operational capital, it also attracts investors into the company. Secondly, public company have a wider shareholder base and ease of risk spreading. Public company usually offers their shares to the public such provides an opportunity to easily spread risks of ownership since large shareholders is attained (Chia et al., 2020). This mechanism allows investors to trade profitably while retaining portion of stake within the company.
Thirdly, public company enjoy other financial opportunities. For instance, banks are more willing to engage in financial trading with public company dues to company’s ability to better negotiate on most desirable interest rates and payment terms. Public company also enjoy wide scope of growth and expansion. With better ability to raise Capital public company also enjoy scale of growth due to available financial resources pooled within the company. As a factor of expansion, the company can enter newer markets while engaging productively due to available findings.
Disadvantages
The most common limitation on public company is existence of additional limitations. Establishment of public company requires a series of certificate and approvals. Attainment of the requirements tends to be tedious hence disadvantages the process of formation. Increased transparency is a key advocate towards the formation of the public company such acts as limitations towards its formation. Transparency is critical requirements which calls for subsequent auditing of the company’s financial reports periodically. Normally, company’s account is scrutinized by analyst periodically for the purpose of media and attainment of operational capabilities as a result increased transparency especially on financial sector is a prerequisite. As a result, such acts as disadvantage in terms of operational requirement. Finally, public companies are prone to ownership and control issues. Control of public company is technically complex due to accountability issues. For instance, as tussle between shareholder and directors occur, it’s difficult to ascertain who accounts to who. Such results in control and managerial issues.
Cash and Its Economical Influence
Cash play an instrumental role of payment of suppliers and purchases. Every business heavily relies on purchases and supplies, existence of cash highly facilitates payment of the same. Therefore, cash plays a critical role of enabling transaction to facilitate products acquisition. Secondly, cash highly facilitates payment of employees. For instance, employees are critical elements of every organization their role is integral as they enhance realization of business objectives. Payment of same is ascertained dully due to availability of cash.
Additionally, cash is used to settle an important factor of the business known as overheads which include but not limited to electricity, rent and other miscellaneous bills within the business operations (Adjei, 2018). Therefore, cash availability is critical as it enables settling of bills to facilitate smooth operation within the business. Furthermore, cash plays a crucial role if increasing the value of assets to the business. Arguably, more cash reserves within the business implies increase in the value of cash assets. Also, more cash indicate increased liquidity within the business as a factor of growth high liquidity values indicates successful operation in business.
Cash play a vital role of enhancing growth opportunities within the business. For instance, cash availability expands the business scope in terms of opportunities and unlimited range of choices for expansion. Cash enable innovation and inventions of newer products which simultaneously increase growth of the business. Finally, cash importance indicates business ability in terms of operation. For instance, availability of cash has strong implications of growth while lack of positive cash flow in the business acts as an indication of negative and declining growth. Such could act basis of benchmark that would institute positive improvement in terms of business operations.
The profit made in the business is a reliable indicator of cash balances since it portrays the general business success. Every organization and business setup gears towards attainment of profits as its objective. While profit implies the outcome of the business cash is crucial towards the realization of the profit. Therefore, both cash and profit go hand in hand towards the attainment of business objectives. There exists positive correlation between cash flow and profit (Dang et al., 2019), while the later relies on the earlier effectiveness of cash highly plays a huge role towards the later. Additionally lack of profit negativity correlates with cash flow an implication which clearly brings out efficacy of desirable cash flow in the business. As a form if cash balance profit is highly recommended by every business and its existence is highly preferred.
Corporate Governance
Corporate governance is vital elements that purposefully exist with a desire to facilitate attainment of desirable business environment comprising of trust, accountability and transparency. The key objective of attainment of effective business environment is to foster sustainable long-term investment, business integrity as well as financial stability while effectively advocating for growth and inclusivity within the business community. Additionally, the major reason for existence of corporate governance is to streamline business environment towards achievement of sustainable heights which will stimulate the growth and development of the business. Such environment provides vast opportunity for profitability.
Principles Of Good Governance
The key principles of good governance entail but are not limited to the following.
Firstly, accountability. According to this principle the code advocates for accountability of the company’s board of directors towards all respective shareholders of the company. Similarly, accountability should be administered in accordance with the guiding laws which also acts as a guide to decision making process among the board of directors. Additionally, the laws act as monitor and evaluator of all activities performed by the executive bodies. The second principle is fairness. This principle obligates the company actions and aims at safeguarding the shareholder’s rights while advocating for equitable treatment. The principle stresses out that board of directors should offer all respective shareholders an open opportunity to attain most desirable redress in the event of violation of their rights within the company.
The third principle is transparency. Under this the company is obliged to avail timely, accurate disclosure of data regarding all material facts regarding all activities that are not limited to financial situation, environmental and social aspects, operational performance, ownership of the company structure and company governance. Also, the company has obligation of providing shareholders with free access to the identified information regarding the company at whichever time they deem needed. Finally, responsibility. Under this rule, the company is fully entitled to recognize the rights of all interested parties allowed by the law in place. The company is also entitled to advance and cooperate with such individuals to attain developmental objectives as well as financial stability. This principle is formulated with a fire objective of respecting the rights of parties and encouragement of such parties to engage with the company towards positive development. The principle also expands the company’s scope in terms of material and financial support due to engagement of external parties protected by the company’s law.
Gearing as a Form of Business Operation
Gearing is one of the most essential forms of business operations. It entails the relationship that exists between the company’s debt and equity. Also, it implies the ratio of company’s debt to equity and indicated as (D/E). Further, gearing implies the degree in which a firm’s operations Aare funded by lenders in relation to the shareholder. Its implications indicate the company’s financial leverage. Additionally, gearing implies the relative proportion which exist between the company’s debt and equity which is mainly depended upon by the company to facilitate its operation sustainably.
Advantages of Gearing
Firstly, gearing highly prevents dilution within the company. For instance, the desire of shareholders not to dilute ownership though excessive issuance of shares results in gearing. This plays an important role as it limits additional selling of shares to newer shareholders. Secondly, gearing improves company’s ability to raise cash. Gearing highly enables the company to raise large amount of cash inform of loans from lenders to meet their financial requirements. According to (SHROTRIYA, 2019), gearing adequately improves companies’ ability to us debt to increase earning of equity shareholders. It also helps company to acquire additional cash at a fee chargeable as loan interest. Also, as financial instrument gearing enables the company to meet its financial obligations through coordination with banks. Gearing highly enhance Return on Equity of the company. This is most critical element of the company, to increase its ROE. Under this company’s utilizes new debt to buy back the shares from investors in an attempt known as balance sheet manipulation.
Disadvantages of Financial Gearing
However, gearing has been associated with a sharp increase in company’s debt. While gearing is overly reliant on debt equity ratio, a rise in debt subsequently implies an increase in company’s liability for example increase in the amount of loan. In fact, the subsequent risk of bankruptcy is highly common and associated with high gearing. When company borrows more than it can repay, it risks insolvency such highly limits its ability to finance the debt which in turn could lead to selling of the company assets to finance the debt. Also, gearing could result in cash flow decline. A stoppage in selling of shares limits the company ability to trade its shares such directly alters the company’s ability to internally meet the financial obligations as a result occurrence of financial strain that could result in cash flow decline which could jeopardize the entire operations within the business. Furthermore, gearing highly result in higher degree of financial leverage which renders company highly susceptible to downtowns which is characterized by a low business cycle (Bianchi et al., 2018). Such occurs when the debt is comparatively higher as compared to shareholders equity hence limiting the company ability to trade positively.
Conclusion
A company is defined by a Separate legal entity. Under this a company is subject of law and is separate from people that constitute it. Further, the company has law obligation which encompasses a series of duties that are performed by the company. Companies have limited liabilities and members comprising of the company are not in any form liable to the debts incurred by the company. Moreover, a company is characterized by perpetual existence since it’s an artificial person. Finally, an additional feature of the company is that it has a common seal. Corporate governance is vital elements that purposefully exist with a desire to facilitate attainment of desirable business environment comprising of trust, accountability, and transparency. The company has obligation of providing shareholders with free access to the identified information regarding the company at whichever time they deem needed. Finally, responsibility, the company is fully entitled to recognize the rights of all interested parties allowed by the law in place. Gearing is one of the most essential forms of business operations. It entails the relationship that exists between the company’s debt and equity. Gearing highly prevents dilution within the company. For instance, the desire of shareholders not to dilute ownership though excessive issuance of shares results in gearing. It improves company’s ability to raise cash. Gearing highly enables the company to raise large amount of cash inform of loans from lenders to meet their financial requirements. of the company. However, gearing has been associated with a sharp increase in company’s debt. Gearing highly result in higher degree of financial leverage which renders company highly susceptible to downtowns which is characterized by a low business cycle.
References
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Shrotriya, V. (2019). Gearing: A Measure to Enhance Earnings of Equity Share Holders.