This report discusses the importance of accounting and finance functions, duties, and roles within an organization. It also includes a financial analysis of SKANSKA PLC using appropriate ratios. The report provides insights into financial decision-making and its impact on the organization's performance.
Contribute Materials
Your contribution can guide someone’s learning journey. Share your
documents today.
Financial Decision Making
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
EXECUTIVE SUMMARY This report is about financial decision-making in an organisation that leads to how managers makes strategic decisions for its daily activities.Accounting department records income and expenses, accounts payables and receivables, inventory, fixed assets and other financial tools. The finance department is responsible for managing cash flow that ensures a firm that it has enough funds to meet the day to day activities within the organisation. Firm uses ratio analysis in order to know its financial performance and financial position.
Table of Contents EXECUTIVE SUMMARY.............................................................................................................2 INTRODUCTION...........................................................................................................................1 TASK 1............................................................................................................................................1 Importance of accounting and finance functions, duties and roles within the organisation:.......1 TASK 2............................................................................................................................................5 Financial analysis of SKANSKA PLC with the appropriate ratios:............................................5 CONCLUSION................................................................................................................................9 REFERENCES..............................................................................................................................10
INTRODUCTION Financial decision making Is the process of making decisions related to the finance, liabilities and shareholders equity within the organisation.It the process of decision making which is related to the working capital, investment, dividends and financing which makes a firm healthy. Its provides an organisation to understanding of balance sheet, profit and loss and cash flow statements so that firm can compare its results from expected before. It is important in a firm to make wise decisions that when and how business acquire or manage its funds. A healthy financial decisions helps firm to grow and effects these types of decisions are concerned with long term assets (Bouzguenda, 2018). The company which is selected for this report is Skanska plc. It is a public limited company that engaged in construction. This report covers topic such as functions, duties an roles of accounting and finance department and ratio analysis of the firm in year 2018 and 2019. TASK 1 Importance of accounting and finance functions, duties and roles within the organisation: Overview of the firm:The firm SKANSKA PLC is a public limited company which is working as construction. The firm uses financial accounting for its decision making related to financing, investing and managing accounting. Accounting department:An accounting department is which provides accounting and managing financial support to an organisation. Accounting department records income and expenses, accounts payables and receivables, inventory, fixed assets and other financial tools. The accounting department managing the overall organisation's department to assess financial position of the firm. In SKANSKA PLC, firm's accounting management team manages all records of finance for every department and makes statements so that they can know about the financial performance of the company and liabilities and assets of the firm. To run a business firm needs to data, records, analysis, reports and proper information about its liabilities, assets and profits (Florendo and Estelami, 2019). This information is very important for management to take better decision-making. Accounting prevents the misuse of finance, assets and helps firm to increase the efficiency of overall organisations activities. The functions of management such as 0planning, controlling, organising, motivating and budgetingall functions depends on an efficient accounting system. Accounting helps managers for decision-making by providing 1
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
information such as profit percentage, capital investment position and efficiency of management in controlling activities (Guastello, 2016). Functions and duties of accounting department: Accounting payable:In order to managing relation withsellers it is important that everyone should gets paid on time. Accounting payment ensures that minimum amount of money has to go out for payment. Account receivables:Accounting receivables is accounting for to track all receivables, including outstanding and required collections. Accounting receivables is responsible for tracking and making invoice for collection of payment. Reporting and financial statements:This the primary duty of accounting department to manage all the information and make reports on this in order to know financial position of the firm. It helps SKANSKA PLC to budgeting, forecasting and decision-making processes (Hohn, 2020). Roles of accounting department in SKANSKA PLC: Financialaccounting:Itistheprocessofaccountingthathelpsinrecording, summarizing and reporting all business transactions through some financial statements. These financial statements includes balance sheet, profit and loss account and cash flows. Management accounting:Management accounting is the process of managing and preparing reports about the business activities that helps firm's mangers to take short term and long term decisions. It helps in identify the business goals by analysing, measuring, interpreting and communicating change information to managers. In SKANSKA PLC its helps managers to analysing and communication of financial information. It is essential to build picture of financial records for planning and controlling of the company. Tax function:Tax Accounting is related to transactions those are deals with the preparations of tax returns and tax payments. Tax accounting is used by businesses, corporations and various entities. It helps in income, deductions, donations, gifts and any other investment losses and gains (Northwood and Rhine, 2018). An an construction business, it is important to record or maintain all tax related information because it effects firm's profitability directly. Under this, managers of the company refers to some methods and rules for preparation of tax returns and some other statements required for tax compliance. 2
Auditingfunction:Auditingreferstoassessingtheallfinancialstatementsand performance of any company for assuring that firm's financial statements are truthful and accurate.Audit is done to identify the financial statements of the company for checking accuracy that is done by an organisation. In SKANSKA PLC, firm's managersuses this tool for assessing its financial performance that given data is accurate or not and to identify actual profitability of the company (Oehler, Horn and Wedlich, 2018). Finance department:Finance department refersto that which is managing fund, responsibleforacquiringfundandinvestingitonorganisationsactivities.Thefinance department is responsible for managing cash flow that ensures a firm that it has enough funds to meet the day to day activities within the organisation. In context to SKANSA PLC, firm's finance managers are managing the fund how and where it has to use and where the firm has to invest.Financemanagementconcernedwitheffectiveplanning,organizing,analysing, controlling and budgeting within the company(Ross III and Coambs, 2018). The finance department provides company for financial management that necessary to make strategic decisions. This helps firm to know investment options which are beneficial for it, operating life cycle and its portfolio management. In every firm the finance department plays a vital role in order to measuring performance, formulating some solutions for risk management and evaluate return on investment. Functions and duties of finance department in SKANSKA PLC: To prepare the budget:Finance department plays vital role in preparing the budget before actual providing money to other departments that helps every department to manage their cost. Finance department uses past records for preparing better budget. Through budget they are assessing expected budget from actual performance. Financial management:In this function finance department managing fund from capital market at a very low cost. Finance department analysing the all resources of funds and makes a better financial composition of the company. In this structure, it helps firm to decrease overall cost of capital of the organisation. Management of investments of company:After creating financial structure, finance managers invest money in debenture holders and shares money in best projects that is beneficial for the company which gives highest return on investments (Shtudiner, 2018). For this activity managers has to take decisions, these decisions can be taken by the 3
assessment of capital budgeting and investment analysis techniques. Capital budgeting techniques includes payback period, average rate of return, internal rate of return etc. Management of taxes:managers of finance department plays vital role in managing taxes. Tax can be direct or indirect. Finance department is looking towards amendments and changes in laws of tax and also creates better corporate relations with the government by paying tax on the time. Management of financial risk:It helps in firm to measuring the financial risks that can be happen in the company. For decreasing losses of funds finance managers makes good plan and also takes helps from debt collectors and insurance companies for decreasing financial risk. Merger and Acquisition decisions:for creating brand value finance department take helps of marketing department for merger and acquisition actions. Merger and acquisition helps firm to reducing competition and creating better brand value. Finance department provides money for acquisition that can help firm in long run profitability (Walter, 2016). Roles of finance department in SKANSKA PLC: Investment function:In this function it helps finance team to making corrective decisions regarding investment means it helps managers in making higher profits. Finance department working with risk management and in order to decrease cost of capital so that it can help firm to increase profits. Managers assessing better investment option which gives high return at minimum time by some investment techniques and capital budgeting. financing function:It is a part of finance department the activity refers to planning and controlling of financial resources. In any business financing function managing the funds for acquiring and utilization of fund within the organisations activities. It locates decision making for strategic planning in organisation. It is the process of funding in business, making purchase and investments. It the function used by businesses for acquiring fund and managing it in firm's operations. In SKASNKA PLC, firms managers manage the fund for business activities so that it can help in production and make profitable to company. Dividend function:Financial managers are responsible to decide a specific dividend policy which helps firm to maximise its value. Dividend Is paying on the shares as a 4
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
profitability to shareholders in order to issue bonus shares. Dividend decision considers the percentage of earning which firm has to pay to its shareholders in cash term known as dividends. Workingcapitalfunction:Workingcapitalmanagementisthesetofactivities performed by firm in order to manage its day to day expenses. Working capital term refers to difference between firm's current assets and current liabilities. Firm's financial team helps it to manage its assets and liabilities so that it can evaluate business financial position. To manage working capital leads to managing liquidity, managing account receivables,managinginventory,short termdebt,accountpayablesetc.Managers oversee its working capital for assessing its short term financial health and liquidity of the company. TASK 2 Financial analysis of SKANSKA PLC with the appropriate ratios: Financial analysis is the process ofevaluating business performance, projects, budgets and other financial transactions in order to determine firms performance. Financial analysis used to know that whether the entity is liquid, solvent, profitable or not. In SKANSKA PLC, it is done by its finance professionals by ratio analysis technique and other methods that makes by using of financial statements or reports (Warmath, Piehlmaier and Robb,2019). Financial analysis is used to determined economic trends and build long term plans for business activities and helps company to identify the investment. It helps investors to deciding on investing their funds in a specific company. Ratio analysis is the comparison of terms which is mentioned in the financial statements of a business. Return on capital employed:Return on capital employed (ROCE) refers to financial ratio that is used in assessing firm's profitability and capital efficiency. In other words, this ratio helps firm to understand how well it is render profits from its capital. In context to SKANSKA PLC, it is uses when the managers analysing financial profitability performance. It is an indicator use ton know company's efficiency because it helps to measure profitability after factoring resources in order to achieve profitability. It shows firm's return on their investments in order to increase its capital profit. 5
Return on capital employed Particulars20182019 Net profit600675 Capital employed38255850 Result15.6911.54 As per above calculation its shows that return on capital in year 2018 that was 15.69 % that is decrease by 11.54 % in 2019. this ratio shows how the firm efficiently using its capital in order to generate profits. But in year 2019 firm has decreases its return percentage than 2018 that shows company's less efficiency to manage its capital in the year. Firm has generated 15.69 % operated income in 2018 but in 2019 it was 11.54 % that is not enough because higher the profits means favourable to the firm in order to its capital efficiency. Net profit margin:The net profit margin concerned with to firm how much net income is generated in thepercentage of revenues. It is the ratio of net profits to revenues for a company or business(Zopounidis, Doumpos and Niklis, 2018). Net profit is generally expressedinpercentagebutsometimesitrefersindecimalsalso.Incontextto SKANSKA PLC, firm uses this ratio to know its profits on its overall sales that helps firm to know its actual performance. In order to net profit margin firm compare its current year profit from its last year profits that helps it to know whether firm has done decline or growth. Net profit margin Particulars20182019 Net profit600675 Sales48006000 Result12.511.25 According to the above calculation of SKANSKA PLC, it shows firm's net profit margin of two years that is 12.5 % in the year 2018 but in 2019 it was decreased by 11.25 %. it shows relationship between net profit after tax and net sales. Higher the ratio means higher the profit firm gains. But in 2019 firm gains less profit then 2018 that can be reason for less sale or more 6
cost in the year. Generally, profit exceeds of 10% is considered as excellent and firm has gain 11.25% that is not bad but it is less than its past performance. So, firm has to take care of its resources in order to achieve better sales. Current ratio:It is used to determined the firm's ability to pay its short term debts that includes account payables and wages of employees. Current ratio in the firm calculated by dividing current assets by current liabilities. It tells higher the result has stronger the financial position of the business. Mainly small business owners should focus on this in order to pay daily wages or liabilities. It also called as working capital ratio because working capital also refers by current assets and current liabilities. Current ratio Particulars20182019 Current assets15152070 Current liabilities6452220 Result2.350.93 As per the above calculation of current ratio of the company it shows 2.35 in year 2018 and 0.93 in 2019 that is less than last year. This helps investors to know about firms liquidity and how easily it will able to pay its liabilities. The higher the ratio shows stronger position of the company or vice versa. Ideal current ratio shows 2:1 that means 2 assets available over the 1 liability. In 2018 it has 2.35:1 that shows firms better financial position but in 2019 it shows 0.93:1 in this liabilities are more than assets that means firm has less liquidity to pay its liabilities. Average receivable days / Debtors collection period:In accounting debtors collection period is indicates the average time which is taken to collect the payment of debts. A minimum period of time shows more efficiency of the firm. It shows the number of days in which business receivables converts into cash. It is calculated by dividing the average debtors by total net credit sales period and multiply by the days in the year. It is important for companies that heavily on receivables for cash flows. It gives firms specific financial gain if its getting payments in more fast manner. Debtors are those, who are owes money 7
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
from the business. It is important for organisation to assess the debtors collection period because it affects the working capital directly. Average receivable days Particulars20182019 Account receivables9001200 Annual total sale48006000 Result68.44 days73 days According to this calculation it is about firms collection period from its debtors. In 2019 firm has average collection period of 68.44 days but in 2019 it has 73 days that means payment was made late. Lower the period shows firms efficiency in order to collect payments from its customers and convert its debtors into cash or vice versa. In 2019 firm receives its payment from customers by exceeding days that shows firm's less efficiency to maintain its debtors and its loose collection policies and less cash for the regular business activities. Average payable days / Creditors collection period:Creditors collection period refers to average numbers of days business takes in order to pay suppliers for goods or services. It is calculated by dividing creditors from number of payment days and multiply by total number of days in the year. Creditors are shown in balance sheet by account payables or trade creditors in liabilities side. If creditors collection period increasing by normal trading that means the business is not paying to suppliers as efficiently that should happen. It can be reason of less liquidity available in business. If days ratio lower an usually it shows suppliers are being paid early and reducing the cash amount or liquidity quickly manner (Eroğlu, 2020). Average payable days Particulars20182019 Account payables5702100 Cost of goods sales39005250 Result53.35 days146 days According to the above calculation ofSKANSKA PLC, this is about firms average payable period that shows in year 2018 it has 53.35 days and that was increased by 146 days in 2019. 8
higher the payment period means firm was not paid its liabilities on the time. This can be reason for firm has manages its debts and cash flows in effective manner and firm has plenty of cash to pay its short term liabilities. CONCLUSION From the above report it has been concluded that financial decision-making isthe process that is related to the working capital, investment, dividends and financing which makes a firm healthy. For financial decision- making firm using financial statements, balance sheet and cash flows as an element. Every firm has accounting department and finance department in order to managing its different activities. Accounting department helps firm to record and manage its financial statements for operating its daily activities. And finance department helps firm to manage its funds for better investment decision and strategic decisions. To know about the company's financial position it uses ratio analysis for comparing its current performance from its past performance. Financial analysis used to know that whether the entity is liquid, solvent, profitable. 9
REFERENCES Books and journals: Bouzguenda, K., 2018. Emotional intelligence and financial decision making: Are we talking about a paradigmatic shift or a change in practices?.Research in International Business and Finance.44.pp.273-284. Eroğlu, Ş., 2020. Are Movers More Egalitarian than Stayers? An Intergenerational Perspective on Intra-Household Financial Decision-Making.International Migration Review.54(1). pp.120-146. Florendo, J. and Estelami, H., 2019. The role of cognitive style, gullibility, and demographics on the use of social media for financial decision making.Journal of Financial Services Marketing.24(1-2). pp.1-10. Guastello, S. J. ed., 2016.Cognitive workload and fatigue in financial decision making. Springer Japan. Hohn, S., 2020.Financial decision making in late adulthood(Doctoral dissertation, Queensland University of Technology). Northwood, J. M. and Rhine, S. L., 2018. Use of bank and nonbank financial services: Financial decision making by immigrants and native born.Journal of Consumer Affairs.52(2). pp.317-348. Oehler, A., Horn, M. and Wedlich, F., 2018. Young adults’ subjective and objective risk attitude in financial decision making.Review of Behavioral Finance. Ross III, D. B. and Coambs, E., 2018. The impact of psychological trauma on finance: narrative financial therapy considerations in exploring complex trauma and impaired financial decision making.Journal of Financial Therapy.9(2). p.4. Shtudiner, Z. E., 2018. Risk Tolerance, Time Preference and Financial Decision-Making: Differencesbetween Self-employed People and Employees.Time Preferenceand Financial Decision-Making: Differences between Self-employed People and Employees (October 19, 2018). Walter,C.,2016.ThefinancialLogos:Theframingoffinancialdecision-makingby mathematical modelling.Research in International Business and Finance.37.pp.597- 604. Warmath, D., Piehlmaier, D. and Robb, C., 2019. The impact of shared financial decision makingonoverconfidenceformarriedadults.FinancialPlanningReview.2(1). p.e1032. Zopounidis, C., Doumpos, M. and Niklis, D., 2018. Financial decision support: an overview of developments and recent trends.EURO Journal on Decision Processes.6(1-2).pp.63- 76. 10