Financial Decision Making: Role of Accounting and Finance Departments

This document provides an overview of financial decision making and the role of accounting and finance departments. It discusses the importance of these departments in managing financial capital and evaluates the performance of Skanska Plc through ratio analysis. The document also includes calculations of various ratios to assess liquidity, operating performance, and profitability.

Financial decision
making

INTRODUCTION...........................................................................................................................2
MAIN BODY..................................................................................................................................2
TASK 1............................................................................................................................................2
Overview of Skanska Plc.............................................................................................................2
Define Accounting and Finance department...............................................................................2
Importance of Accounting and Finance department....................................................................3
Role of accounts department.......................................................................................................3
Role of finance department..........................................................................................................4
TASK 2............................................................................................................................................5
Calculate the following ratios......................................................................................................5
Comment on the performance of Skanska Plc.............................................................................6
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10
1

INTRODUCTION
Financial decision making is a vital part of organisation of every sector and relies on
management. It could be described as a mechanism by which the financial manager of a business
decides a need for funding to carrying out more operations, and also the allocation of funds for
various activities (Alsharari and Al-Shboul, 2019). The decision-making process must be carried
out in an appropriate manner. Owing to some kind of mistake, there might be a variety of
difficulties in the future. The plan estimate is focused on SKANSKA plc that is based on United
Kingdom and was established in 1984. Essentially, this is a construction firm that carries out
massive civil projects. The business uses a number of accounting management methods to help
manage its activities. The report is divided into two sections; the first task is to provide details on
the position and responsibilities of the finance and accounting departments. Various types of
management accounting practices and their functions is for better strategic planning are listed
throughout the report. These departments play a significant role in the successful management of
its financial capital. Essentially, the performance of a company relies on how well the accounting
department conducts its functions. Both divisions have their own responsibilities and duties.
However, the accounting and finance divisions are interconnected. Second task is based on ratio
calculation which helps the managers to perform their overall performance as well as
profitability for future decision making process.
MAIN BODY
TASK 1
Overview of Skanska Plc
Skanska Plc is a construction firm headquartered in the United Kingdom. Skanska Plc
began in 1984 and their current business plans is to extend its activities to other European
countries within next ten years. With the help of Skanska Plc’s financial statements, managers
able to evaluate their performance and decision made on the basis of it
Define Accounting and Finance department
Accounting department is a part of the management of company which is responsible for
financial reporting, managing the general accounts, paying expenses, billing clients, payroll,
expense accounting, financial analysis, and more. The accounting and finance department has
been at the heart of every company and is essential for keeping the effective financial analysis
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and marketing control required to sustain all business operations (Bakhtavar, Yousefi and
Jafarpour, 2019). The Finance Department is an essential part of an entity that is accountable for
managing funds, distributing funds inside the entity and coordinating the spending of funds on
different assets. It concerns the holding of accounts for all transactions, the use of double-entry
accounting system and the preparation of final accounts that are sufficient for fulfilling the
different legal criteria for statutory reporting, the trading platform and tax authorities. Financial
accountant has to report financial officer who is responsible for this work.
Importance of Accounting and Finance department
Accounting and financial management are so critical when it comes to managing their
companies. If they really don't know where all the funding is flowing from, there was a very
good risk for an individual who might lose control of the company. Businesses have a greater
growth opportunity when balancing their revenue and expenditure. Plus, there is greater access to
plans which can help businesses withstand unforeseen financial recessions. The company's
director would be where accounting professionals and small businesses can monitor the profits
and expenditures of a business' day-to-day operations. The accurate record helps the managers to
evaluate company's financial performance will help a business monitor its financial situation and
understand its cash flow. Holding a correct financial report helps to obey essential business rules.
Reaching at a tiny detail may have big consequences for corporate tax management.
Role of accounts department
Financial accounting: It is most important role of account department because without it,
organization unable to perform their operations. It is the method of tracking, summarising and
documenting the economic activities of an organisation via financial statements. Such statements
like statement of income, balance sheet, statement of cash flow and the statement of retained
earnings. It gives stakeholders with a summary of review and evaluation of the financial health
of shares issuing companies. It allows creditors to determine the financial stability, profitability
and solvency of companies. In an accounts department, organization needs to hire professional to
fulfil this role and prepare financial statement for the further analysis.
Management accounting: In the account department, management accounting plays
essential role which helps the managers to make decisions. Management accounting allows
managers to make judgments inside an organisation. It is also known as cost accounting,
managerial accounting is the method of defining, evaluating, interpreting and transmitting
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guidance to stakeholders to actually facilitate company's objectives. It is a method of defining,
evaluating, interpreting and transmitting guidance to stakeholders to help achieve company
objectives. Management accounting requires the quality of financial reporting for internal
purposes used by management to make key business decisions (Cescon, Costantini and Grassetti,
2019). Management accounting covers many areas of accounting, including inventory pricing,
budgeting, planning, and a number of financial assessments.
Tax function: This is another role of accounts department which performed by the
organization and it includes all the actions related to tax. Many big corporations will also have a
tax department associated with all tax matters. This could be done by financial
officer / auditor or perhaps the financial manager in a smaller business. Along with daily
basis tax auditing and management, all actions taken by a corporation would have tax
consequences, which need to be defined and incorporated into decision making process and
investment arrangements. Not only tax transections seem to be accounted for, but cash has to be
granted access at the correct time to be billed to the authority. Taxes therefore have an effect on
cash planning and budgets. Tax avoidance is unconstitutional and most nations still have anti -
tax avoidance legislation. It is also the responsibility of tax department to ensure that certain laws
are compliant with. A big international corporation would have tax managers, many of whom are
auditors and others are lawyers and accountants. The opinion of the Council will also be obtained
on elements of tax law which are ambiguous.
Auditing function: In an organization, auditing function plays very critical role and ensure
the stakeholders regarding that recorded or presented data is accurate or not. Auditing is
mandatory for large size organization such as Skanska Plc. It helps in evaluating data and make
sure that accounts department follow every accounting standard and legislation.
Role of finance department
Investment function: In a finance department, finance manager determines where to
locate the business's funds (Hariyati, Tjahjadi and Soewarno, 2019). All the investment decisions
are relating to the management of operating capital, capital budgeting, merger, purchase or
leasing of properties. Investment decisions must produce sales, generate income and save costs.
In this function, finance manager made all the decisions regarding future investment and select
most suitable options to spend which maximise better returns with low risk.
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Financing function: This function plays very essential role in finance department where
accountant manage all the transections related to finance and make sure that everything is
recorded in accurate manner on daily basis. In this function, managers prepare different reports
which contain different information about organization. With the help of income statement
managers of the company is able to evaluate profitability of the organizations and compare it
with previous year performance. On the other side, balance sheet shows overall assets and
liabilities of the firm that represent financial position.
Dividend function: In order to satisfy their shareholders company offer dividend and in
finance department management evaluate that how much dividend is required to pay per share to
maximise their shareholder’s value (Hausmann, Kokkinaki and Leng, 2019). It is the duty of
finance manager to settle on an optimal dividend strategy that maximises the market value of
a company. It is common practise to pay daily dividends in the event of success. Another option
is to give bonus shares to current shareholders.
Working capital function: In an organization, it is necessary to have that much cash and
liquidity to fulfil the company's obligations. A company will raise funds through equity and debt.
It is also the duty of financial officer to assess the debt or equity. It is essential to maintain a
decent mix of equity and debt. Working capital management is a large feature. Successful
execution includes the management and coordination of many activities within the organisation,
including the management of short-term acquisitions, the granting of credit to consumers and the
processing of credits, the management of inventories and the management of payables. Working
capital acts as an indicator of how well a business runs and how stable financially in short term.
The working capital ratio, that divides assets to cover its short term obligations, shows whether a
corporation has sufficient cash flow to cover their short-term obligations and expenditures.
TASK 2
Calculate the following ratios
Ratio analysis is a quantitative approach to gain insights into liquidity, operating
performance and profitability of a business by analysing the financial reports such as the balance
sheet and income statement. The analysis of ratios is the key component of the financial
accounting (Lee, Hyun and Jung, 2019). Ratio analysis is a valuable management method that
can enhance the interpretation of financial results and patterns over time and include key
organisational success metrics. Managers could use the ratio analysis to define the weaknesses
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and strengths from which approaches and programmes can be established. Evaluate liquidity or
short term financial stability and long term solvency. Short-term solvency is the willingness of a
corporation to fulfil its short-term financial obligations. Below mentioned calculation is based on
the financial information of Skanska Plc for the period of 2018 and 2019. With the help of ratio
analysis, organization is able to understand the overall performance of the company throughout
the period and make future strategies accordingly. Ratio’s calculation mentioned below:
Ratio Formula 2018 (£’000) 2019 (£’000)
Return on Capital
employed
= Operating profit /
Total assets – Current
Liabilities * 100
= 750 / 2325 * 100
= 32.62 %
= 975 / 2850 * 100
= 34.21 %
Net Profit Margin = Net Profit / Net
Sales * 100
= 600 / 4800 * 100
= 12.5 %
= 675/ 6000 * 100
= 11.25 %
Current Ratio = Current Assets /
Current Liabilities
= 1515 / 645
= 2.35
= 2070 / 2220
= 0.9324
Debtors Collection
Period
= Receivables / Sales
* 365
= 900 / 4800 * 365
= 68.43 or 68 Days
= 1200 / 6000 * 365
= 73 days
Creditors Payment
Period
= Payables /
Purchases * 365
= 570 / 4800 * 365
= 43.34 or 43 Days
= 2100 / 6000 * 365
= 127.75or 128 Days
Comment on the performance of Skanska Plc
Return on capital employed:
ROCE is a financial ratio that determines profitability and effectiveness of the overall
investment capital employed by organization (Paudel and et.al., 2019). Increased ROCE would
mean a high effective use of the overall capital funds and ROCE would be higher than cost of
capital. If it is not, the company will be less productive and will not generate value for
shareholders. Monitoring of ROCE is a valuable technique for measuring earnings across
organisations, based on the amount of capital invested. That wasn't enough to concentrate on
EBIT by itself to determine which company is a worthwhile option. Investor needs to look at the
investment and recognise ROCE. Most consider ROCE to be a fairly reliable method than ROE
for forecasting the future profits of the company due to various existing debts and expenses.
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As mentioned above, the ROCE ratio of Skanska Plc was 32.26% in 2018 and 34.21%
in 2019 which shows the growth in ROCE. High ROCE is beneficial in meaning that perhaps the
company produces more profits of capital investment made in the organization. A higher
percentage of ROCE is beneficial, meaning that the entity produces more revenue than a single
pound of capital invested inside the business (Pelz, 2019). The lower ROCE proportion
contributes to lower yields. A business with less financial resources but the same profits as its
rival firms would have higher returns on the net amount of capital invested. Accordingly, in the
sense of Skanska Plc, this increase implies that the ability of the business to generate a return on
the total capital employed by the company has increased over the time.
Net profit margin: This ratio defines how efficient a business is to make money from every
pound of sales. This is one of most important profitability indicators. It covers all factors that
have an effect on productivity status of company, whether under management control. The
higher the number, the more effective the organization is in terms of cost reduction.
In this regard, based on the evaluation of ratios of group Skanska Plc, it was evaluated that
perhaps the net profit margin of company in 2019 was just 11.25 % and in 12.5 % in 2018. Here,
this decrease in net profit margin implies that the actual output of Skanska Plc in turning its total
sales into profit decreased over the given period. In order to improve their efficiency, the
organisation should focus on this element. In context of organization, the sales volume must be
raised and overall cost / cost of the corporation should be decreased.
Current ratio: This is the liquidity ratio which is used to assess the company's liquidity
status, consider the relation between all the current assets and current liabilities. Simply put, this
method is used to assess whether or not certain current liabilities can be paid while using the
current asset (Setiawan, Rahmawati and Widagdo, 2019). This ratio is not only calculated to
assess liquidity problems, and also to decide to use of operating resources. Entirely, the liquidity
state of company will be desirable if the output is higher than 2. The current ratio provides
guarantees to consumers and other involved stakeholders that the company may or not have
difficulty paying off their short-term obligations or liabilities by utilizing liquid money and other
liquid assets. This ratio helps managers to think about the potential cash flow plan to fix current
liquidity problems. Bank agreements are likely to result to overdrafts or talks with vendors to
delay such payments.
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From the above ratio calculation, reflecting the current ratios of Skanska Plc, it was
estimated that current ratio for the year 2018 was 2.34, which decreased to 0.9324 in 2019,
indicating a large decrease in this ratio. This significant decrease throughout the ratio is a
negative sign of the liquidity position of Skanska Plc. This decrease in current ratio suggests that
company's ability to meet its shorter-term liabilities has been significantly reduced. Corporation
should give priority to this aspect, as it can have a long-term impact on the ability of Skanska
Plc to succeed on the market. While this implies only the shorter-term stability situation of the
organization, the failure of such a ratio result could lead to unfavourable financial situation for
the organisation.
Debtors’ collection period: It simply refers to the average period usually in the days that a
company recover its credit purchases amount for a particular period of time. In an effort to
control productivity and utility of credit terms and the collection process, the company calculates
this ratio. If ratio is high, it means that company invests more days collecting credits or
commercial receivables. In this regard, the low ratios indicate that credit policies of company or
the collection mechanism are functioning very well.
As shown in the above calculation, the debt recovery cycle of Skanska Plc is 68 days in
2018 and 73 days in 2019 (Stanley, 2020). This indicating an increase in collection period which
is not a positive indicator for company as the organisation needs more time in 2019 instead
of 2018 to retrieve the sum of accounts receivable. This will result in a negative position of
capital expenditures within the company. The increase in ratio can have a direct effect on short
term liquidity position of the corporate entity.
Creditors’ payment period: This ratio clearly shows actual time period that a business
organisation usually takes to make payments to its commercial or creditor-party accounts.
Generally, a business company does not undertake all transactions of cash; the large portion of
an entity's transaction is credit-based. That ratio is calculated on the basis of average sales of
credits and trade creditors balance within the days the entity normally pares to its business
creditors. The shorter period points to a better liquidity position of the enterprise as the
corporation needs less time to pay creditors. While the longer length of the average payable
period indicates that the company has insufficient liquid capital or money to pay all its short-
term fees and trade creditors.
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CONCLUSION
It was concluded on the basis of analysis that financial decision-making within a corporation
or a firm system is a key aspect, as it enables the identification of the productivity of enterprise
and survival of the organisation. It takes a wide range of factors and strategies to promote
sounder decision-making. Executives must consider different aspects of financial decision
making in order to meet the goals and objectives of the organisation within a given timeline. It
also involves the calculation and analysis of ratios that enable executives to assess the actual
success of company over even a given timeline and to make decisions about the future of various
ratios of performance. Stockholders and other main parties can also use company's financial
ratios to better determine the viability of investing money in the form of securities or through
other ways in a business.
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REFERENCES
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accounting using the criteria of “convincingness”. Pacific Accounting Review.
Bakhtavar, E., Yousefi, S. and Jafarpour, A., 2019. Evaluation of shaft locations in underground
mines: Fuzzy multi-objective optimization by ratio analysis with fuzzy cognitive map
weights. Journal of the Southern African Institute of Mining and Metallurgy, 119(10),
pp.855-864.
Cescon, F., Costantini, A. and Grassetti, L., 2019. Strategic choices and strategic management
accounting in large manufacturing firms. Journal of Management and
Governance, 23(3), pp.605-636.
Hariyati, H., Tjahjadi, B. and Soewarno, N., 2019. The mediating effect of intellectual capital,
management accounting information systems, internal process performance, and
customer performance. International Journal of Productivity and Performance
Management.
Hausmann, N., Kokkinaki, O. and Leng, M. J., 2019. Red Sea palaeoclimate: stable isotope and
element-ratio analysis of marine mollusc shells. In Geological Setting,
Palaeoenvironment and Archaeology of the Red Sea (pp. 725-740). Springer, Cham.
Lee, J., Hyun, E. and Jung, J. Y., 2019. A Simple and Efficient IQ Data Compression Method
Based on Latency, EVM, and Compression Ratio Analysis. IEEE Access, 7, pp.117436-
117447.
Paudel, L. and et.al., 2019. Extractive ratio analysis NMR spectroscopy for metabolite
identification in complex biological mixtures. Analytical chemistry, 91(11), pp.7373-
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Pelz, M., 2019. Can management accounting Be helpful for young and small companies?
Systematic review of a paradox. International Journal of Management Reviews, 21(2),
pp.256-274.
Setiawan, A. S., Rahmawati, D. and Widagdo, A. K., 2019. Owners Ethnicity And Strategic
Management Accounting. Jurnal Akuntansi, 23(2), pp.160-176.
Stanley, C. R., 2020. Molar element ratio analysis of lithogeochemical data: a toolbox for use in
mineral exploration and mining. Geochemistry: Exploration, Environment,
Analysis, 20(2), pp.233-256.
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