Importance of Accounting and Finance Functions in Skanska Plc

This study explores the importance of accounting and finance functions in Skanska Plc, a multinational construction company. It discusses the role of accounting in maintaining records, evaluating business performance, ensuring statutory compliance, budget creation, and financial statement filing. It also highlights the significance of finance in investment decision-making, capital decisions, effective fund utilization, dividend decisions, asset management, estimation of cash flows, negotiations with financiers, and financial performance analysis. The study further includes a ratio analysis of Skanska Plc's financial performance.

FINANCIAL DECISION-
MAKING

Table of Contents
INTRODUCTION...........................................................................................................................3
Task 1...............................................................................................................................................4
Importance of accounting and finance functions........................................................................4
Importance of finance function...................................................................................................6
Task 2...............................................................................................................................................8
Ratio Analysis.............................................................................................................................8
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
The study is about accounting and finance functions importance in an organisation named
Skanska Plc. The company Skanska is a multi-national construction company founded in 1984
and having its presence in Nordic region, Europe and USA. It has been ranked as fifth largest
company in the world according to the Construction Global magazine. The ratio analysis of the
company is done through financial statements and a comparison of the company's performance is
done along with causes and reasons discussed for the change in ratios.
Task 1
Importance of accounting and finance functions
Every organisation whether big or small, has given importance to accounting and finance
functions. There are transactions which take place in every organisation and thus it becomes
important for organisations to record those transactions. Thus comes the accountancy function to
play its role. The points for the same can be listed as below:
a) It helps in maintenance of records of transactions happening of the company's products and
services. The cash flow coming and going out of the operational activities can be recorded easily
through accounts and following accounting terms (Syed, 2017). Skanska has many construction
activities going on around the world and thus following a sound accounting policy becomes
necessary to count in the daily transactions happening over raw material, labour and other
activities.
b) It helps in evaluation of business performance. The investors can see the accounts to judge the
standing of the company financially. This also gives an insight into the working capital, its
current assets, liabilities thus focusing on the operational aspect of the company. Investor is able
to assess the liquidity and solvency of the company. The expenses of the company can also be
judged with the accounting records (Cockcroft and Russell, 2018). As Skanska is a big company,
the business performance evaluation is required by investors through the annual report generated
of the company. The investors look forward to the financial statements released and thus make a
decision according to the current and past performance.
c) Statutory Compliance: Laws and regulations of accounting terms help ensure compliance and
thus company is saved from penalties in external audit.

Skanska has appointed its own team of internal audit which do the monitoring of
accounting reports and thus save the company from errors in financial statements.
d) Accounting helps in budget creation and projections of the company. The budget creation
helps to assess the right demand of goods and services which can help by giving the data in
production. This will help in saving costs for the company. The accounting measures also helps
in calculation of right amount of inventory (Syed, 2017). Company is saved from extra costs by
ordering the right amount of inventory. Economic order of quantity achieved through
management accounting can help organisation order the right amount of inventory. Accounting
also helps in forecasting projections which can help company in decision-making.
e) Financial Statements filing like the business registering with Registrar of Companies can be
done through accounting. The entities or organisations are required to file themselves with stock
exchanges with tax filing purposes.
f) Legal hassles are avoided by following accounting rules properly. If a minor detail is left out it
can have an effect financially as well as legally. The tax matters are also looked after so that tax
matters do not arise.
g) Performance analysis: The company can look at the records of assets and liabilities and judge
the performance in financial terms of the company.
h) External communication: Communication of financial information with external parties is
made simple by accounting. The accounting reports can be helpful in influencing in getting loan
from banks as they assess the reports and then decide on the amount of loan (Cockcroft and
Russell, 2018).
The accounting statements reflecting profits are useful for investors to make the right
investment decisions.
I) Internal communication: The financial reporting helps owners to communicate with internal
stakeholders. The information is helpful for employees who own stake in the company and also
get dividends as investors. This record helps in communicating strengths and weaknesses of the
company to the internal stakeholders of the company and used for internal purposes.

Importance of finance function
The importance of finance in any organisation is prominent. The points can be listed as below:
a) Investment decision-making: The company's finance function decides where the company
can get profitability through investment. The decisions related to working capital management,
capital budget decision, buying of assets etc. are able to be taken by finance function. Decision
of investment in projects is also done by financial management tools like net present value and
internal rate of return (Ugoani, 2020). These methods help company in making the better
investment decision in projects by assessing the cash flows in the project which would be more
suitable in profitability.
Skanska being a construction company has projects in line with different investment
portfolios. The company's finance function has to assess the options through financial
management methods and check the profitability of the option. Finance department of the
company has made profitable decisions for buying assets and other machinery too.
b) Capital decisions: The finance function helps realize the capital decisions like raising of
capital, the possession of capital and how much more capital would be required to raise. The
finance function thus helps in calculating the need of capital and requirements to raise capital by
identifying suitable measures through money and capital market means (Conley, Gonçalves and
Hansen, 2018). It can be done by launching of IPO to gain money through public access, issuing
of bonds and scrip or through use of debt measures like loan from creditors or banks. Thus, the
finance function has to identify which mode would be best to choose which balances the
leverage as well as the working capital of the company.
Skanska Plc has a sound finance function which lists down ways which would suit the
company's financial and operating leverage . The fund sources are compared along with their risk
factors and the costs involved. The best source of financing which suits the business needs of the
organisation are evaluated.
c) Effective utilisation of funds: Finance function monitors how much fund is to be allotted,
how much funds remain spare within the organisation and where to adjust those spare funds. As
Skanska is a construction company, there are projects which can utilise less amount of funds
remaining some funds as spare. These funds can then be adjusted in those projects which are

ongoing and require more of funds. Adjustment of funds is also a tool used in fund utilisation by
finance experts of the company.
d) Dividend decisions: The decisions as to how frequent and in how much quantity the cash is
returned to owners comes under dividend decisions. Finance function decides how much balance
is to be retained and how much amount is to be paid as dividends (Ugoani, 2020).
Skanska has many investors and thus the dividend decision has to be taken at time proper
which does not give a waiting time for the investors. The percentage of dividend to be given and
amount to be retained is also decided by the finance function.
e) Determination of asset management: The finance function concerns with the cash flow and
non-cash activities. The function has to find out how much cash is stored in non-liquid assets.
Also the process of maintenance of assets in a cost effective manner is a function of the finance.
Skanska has a number of assets which are non-liquified like machinery which the finance
function has to assess the value. Also costs going in the maintenance of these fixed assets have to
be controlled by them in an effective manner.
f) Estimation of cash flows: The finance manager has the responsibility to ensure adequate cash
flow as per requirement of the company. For smooth operation of the company, this is required.
The cash flow and their sources are identified and estimated by the company (Conley,
Gonçalves and Hansen, 2018).
Skanska has a number of fund sources and they can be creditors, suppliers and other
account receivables. The cash may come right away on supply of goods or it may take some time
. Finance function has to keep in account that cash coming in future has the same value it has in
the present, it may require a need of charging of interest.
h) Negotiations with outside financiers: Finance function has to negotiate to get required finance
on time and a line of credit has to be thought of for example banks or creditors who can lend on
less rate of interest to the organisation. Time has to be given for long term financing.

I) Financial performance: Wisdom and efficiency of financial planning is necessary for finance
manager. The company performing as per the financial resources allocated is necessary to be
judged and also to check on the department wise progress that the funds allotted are used to their
optimum utilisation. This gives an idea of which department has been performing up to the mark
and whose performance needs to be improved.
Task 2
Ratio Analysis
Ratios 2018 2019
ROCE=EBIT/Capital
employed
600/(4470-
645)=0.1568=15.68%
675/(8070-
2220)=0.1153=11.53%
Net profit margin=net
profit/revenue*100
600/4800*100=12.5% 675/6000*100=11.25%
Current ratio=Current
assets/Current Liabilities
1515/645=2.34 2070/2220=0.93
Debtors collection
period=365/Net credit
sales/Average accounts
receivables
365/4800/(900/2)=34.24 365/6000/(1200/2)=36.5
Creditors collection
period=365/Net credit
purchases/ Average accounts
payable
365/2700/(570/2)=38.54 365/4800/(2100/2)=79.86

Speaking of ROCE, also meaning Return on Capital employed is a ratio for calculating and
assessing profitability of the company. This is calculated as EBIT divided by capital employed.
EBIT refers to the earnings before income and tax for a company. EBIT also called as
operating income is a metric of assessing how much a company earns from the operations.
Interest and taxes are not regarded here. It can be calculated by subtracting operating and other
expenses plus cost of goods sold from revenue also termed as net profit (Kim and Im, 2017).
Capital employed is the denominator in formula calculated as current liabilities
subtracted from total assets.
In 2018,company registered a ROCE of 15.68% bu this declined to 11.53% in 2019 thus
signifying less return to the company in amount of capital employed. Although, it can be seen
that met profit has increased but it has not been enough to increase the ratio. The total assets
have increased considerably but so have the current liabilities too. The company needs to
increase its operational efficiency with maximum usage of assets to gain more returns. This is
also significant from the investor point of view. Investor is able to know how much is the
company able to generate returns as per the investment.
Net profit margin is calculated as net profit divided by revenue and multiplied by 100. It depicts
how much profit company has been able to convert from the revenue in percentage terms. This is
also essential from the investor's point of view as this is the bottom line they judge as for
investment. This shows how much company has been able to generate operational efficiency by
controlling on the cost of goods as well as the operational expenses (Kim and Im, 2017).
Speaking of the company, company registered a net profit margin of 12.5% in 2018 but it
declined in 2019 to 11.25%. Although the net profit increased for the company but it has not
been able to match up as per sales. Company needs to lessen its operating expenses and decrease
on cost of goods by negotiating with suppliers which can bring the costs down of purchases thus
increasing net profit. Investors also assess whether the company is able to control its operating
costs from this ratio.

Current ratio is also known as liquidity ratio. It is got by dividing current assets by current
liabilities.
Current assets are those which can be converted into cash within a period of one year.
They can also be known as short-term assets (Otekunrin and et.al., 2018). They can be in the
form of cash in hand, cash at bank, accounts receivables etc.
Current Liabilities means the short-term obligations the company has to fulfill within a
period of one year. They are account payable and accruals in the form of cash etc.
This ratio shows how quickly the company is in a position to fulfill its short-term
obligations with help of its current assets. If a company has to liquefy its assets how quickly it
will be able to generate money and pay its investors. Investors look for this ratio while doing
investment.
Current ratio registered for 2018 is 2.34 and has declined to 0.93 in 2019. The ideal ratio
considered for current assets is 1:1 that is current assets are equaling its current liabilities.
Although very few companies can have such a ratio, but a ratio between 1 to 3 is preferred by
investors. Company registered such a ratio in 2018 but the ratio fell below 1 in 2019 which is
not a good sign for the company. It is seen that there has been a rise in current assets for the
company which is a good sign but the components which have shown an increase are inventory
and accounts receivable. These two components are not instant cash as they will take time to get
converted into cash. The company's cash in hand has also significantly declined which should
increase as it is the actual liquid asset at the moment. Current liabilities have also shown an
increase significantly of which trade payable is the main component. Company has to however
see that they are paid on time to maintain business relationship with the creditors (Srinivasan,
2018).
The ratio is closer to 1 but needs to be more in current assets quantification to make it an
ideal ratio.
Debtors' collection period is also known as accounts receivable period. Any company while
doing trade with distributors and suppliers can not always get payments instantly. The company
can supply the goods in exchange of invoice for the amount payable by the other party at a later
stage. This period is known as the accounts receivable period. The accounts receivable are
counted in current assets and are likely to fulfill in a short period of time. The debtors collection

period should not be long as company will need money for operations and time extension can
cause a delay in collection. The ratio is denoted in days.
For 2018, company's collection period was approximately 34 days which has registered a
slight increase to 36 days in 2019. Although the lesser period is there for accounts receivables,
the better it will be for the company's operations. Investors also judge through this ratio that a
company with less of accounts receivable will be more in a position to give back money in case
of liquefaction. Also, this shows company' efficiency to get money back within time period to
have enough money for operations (Otekunrin and et.al., 2018).
Creditors collection period also known as accounts payable period denotes the time
taken by company to give back money taken from its creditors. This is the money taken by
company from creditors for keeping its operations going or additional capital required for setting
up new business plant. This credit time as is said, should be utilized fully by the company to
perform operations and gain revenues. Generally, companies sometime want an extension in this
period for using credit for a longer time but this may not be well for a long-term relation with
creditors. It has to be managed in a way that company utilizes credit period judiciously and pays
back on time its dues so that future assistance can also be taken from the creditors. Also, a long
term credit can pile up interest issues (Srinivasan, 2018).
Speaking of the company, the collection period for creditors was 38 days in 2018 but
increased to 79 days in 2019. Company has to check the ratio to win over creditors' confidence in
the company. The period should not be much high. It can give a negative impression also to the
investors that company is not having sufficient capital to pay back creditors on time.
CONCLUSION
It can be concluded that accounting and finance function are two pillars supporting organization
each in its own way. Their importance can be judged in a large organization more so because of
transactions being more and the number of clients being more. The ratio analysis through
financial statements give an insight in the company's financial standing and is of utmost
importance to investors who are the potential stakeholders of the company.

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