Financial Decision-Making: Importance of Accounting and Finance Functions

This article discusses the importance of accounting and finance functions in financial decision-making. It explores the roles and duties of these functions and their impact on company performance. The case of SKANSA PLC, a construction company planning to expand in Europe, is used as an example.

FINANCIAL
DECISION-MAKING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Accounting and finance function ................................................................................................1
TASK 2............................................................................................................................................5
Ratio analysis of the company and analysing the performance.................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Financial decision making means the decision taken by the manager to fix the financial
problems in all the organization, it also help in the allocation of funds and borrowing of the funds
for the investment decisions. Through this company can borrow money from various sources
through which they raised their funds such as by issue of the capital, by borrowing form others
in form of debenture, bonds and loans. Their main purpose is to use the optimization of the
capital structure properly. These decisions are important for the long term growth and increase
their efficiency, all this decisions are very important for the expansion and solve the problem of
the financial issues (Brown, Farrell and Weisbenner, 2016). This report is based on the
company name SKANSA PLC, it is a construction company which is started in 1984, they are
planning to expand their operation in the Europe in next 10 years. In this reports, there is the
importance of finance and accounting functions and their duties and roles and ratio analysis with
their competitor to know the exact performance in the market.
TASK 1
Accounting and finance function
In the SKANSA PLC, the use of the accounting and finance team is very important for
making decisions and for planning, reporting and control the short and long term strategy for the
maximization of the profits. They also help in merger and acquisition management of the cash
and risk management,.
Finance functions- It is the most important part of the financial management because it
consider all activities that include control and planning of the resources and allocation of wealth,
it involves many function like acquiring and utilization of the funds for increase the operation. It
is the lifeblood of the regular activities of the finance decisions . In SKANSA PLC, this
decisions help manager in making investment decisions in the management of working capital
and management of the cash. It also help them I increase of revenue, profit and save costs. This
functions also help in making financing decision which is depend on the equity and borrowed
funds and dividend decisions also to maintain balance between the profit which is retained by
them for paying dividend to the shareholders.
Accounting functions- Accounting functions refers to the system of the financial that
help in the recording of the financial information ,help in financial analyses of the company and
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reporting of the transactions in the books of accounts. They also help in the preparation of the
budgets and financial projections. They also help in the reconciliation of the two financial
systems. Accounting department is very important for both internal and external users because in
the external clients they provide the financial statement information for making decisions and for
the owner it show the performance of their company. In SKANSA PLC, they help in summarize
of all information and communicate this to the interested parties and management, they help in
making the systematic record and protection of business assets and analyses the position of the
company inters of liquidity and efficiency (Bruch and Feinberg, 2017).
Importance of accounting and finance functions
 Record keeping- the main function of accounting is to record the transactions in the
proper way to maintain its systematic. In SKANSA PLC, for the expansion they have to
record of every transactions in the ledger and then final accounts is made to find out
adequate profit and loss.
 Communication of results- Accounting department help in communicating the financial
transactions to different parties of all the business. It is benefit for the investors, creditors
and employees.
 Meeting legal requirements- Accounting help in recording of all financial statements
in such a way that enable the owner to fill the income tax return and sales return.
 Identify the need of the finance- Finance functions help in to meet the adequate funds
for the regular working of the business like maintenance cost, salary to staff, raw
material. In context to SKANSA PLC, they maintain their regular working capital
through this functions.
 To expand, modernize and diversify- every business wants to grow their business in
other countries for the long term benefit . In SKANSA PLC, manager of this organization
wants to expand their business in Europe so there is the need of finance function.
 Investment- In every business different types of funds are raised which mean they have
to invest them in such a way that business get higher returns, and cost of funds is lower
than return on investment.
 Identify the sources of funds- In every business there is the need of the funds for
running. Through finance functions owner look at different areas for the funds raised. In
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SKANSA PLC, there is also need of the funds for expansion they borrow from the
shareholders and creditors.
Roles of the accounting function
 Money out- Accounting function helps in the organization in making payment to the
creditors or to the selling party. In SKANSA PLC, there is different employees in this
department which have different work for the payment and keep the bills paid.\
 Payroll- In this function there is the record of all financial statements for the employees
salaries, wages, bonus and deductions. It means amount is paid to workers for the work
they have done for the entity. In context to SKANSA PLC, they have to paid wages to the
employees on the contract basis ( Dincer, Şenel Uzunkaya and Yüksel, 2019).
 Reporting- the main role of the finance department is to recording of all financial
transactions in the form of profit and loss, balance sheet and budgets. In SKANSA PLC,
they help in prepare of the financial statements for the better analysis of the company
performance.
 Financial control- In this role, accounting departments help organization in avoiding the
errors, fraud and theft. Through this accurate financial statements is provided with main
laws and regulations. In SKANSA PLC, through this financial control helps the
organization in avoiding theft, errors.
Duties of accounting function
 Accounts payable- In this duties they have to maintain the good relationship with the
supplier in regards to the payment on time. Their duties is to keep an eye on saving the
money in all activities. For example- if the discounts is provided by the vendor then
accounts department should use the money for the payment so there is no late charges in
included.
 Budgeting- In this duty, accounts department helps in preparation of the budget for the
revenue and expenditure which is used for the future for the purchase of fixed assets. In
SKANSA PLC, there is the preparation of different budget for making the estimated
plan.
 Internal reporting- It means finding the accurate value by calculate the profitability, by
using data of different product lines and stores also. Management can improve their
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financial results by different aspect of business. In context to SKANSA PLC, they can
improve the financial statements by using different aspects.
Roles of finance function
 Strategic planning and budgeting- By the help of finance department they can make
strategic decisions for increase the growth of the business and help in determine the
objective of the business. In SKANSA PLC, finance department help in capital spending,
raising capital and provide budget for the market campaigns.
 Cash flow management- Through the help of finance department, there is the proper
management of the cash flow because through this they maintain the liquidity by paying
the suppliers and employee on time. In SKANSA PLC, finance manager help in maintain
the arrangement of the funds for maintain the credit line (Grohmann, 2018).
 Profit planning and cost controls- In this duty, finance manager maintain the
profitability through the use of planning tools and determine the profitability of
individual goods. In context to SKANSA PLC, they maintain their planning and use
various cost control measure for reduction in the costs to increase the revenue.
Duties of finance function
 Regulate Various accounts on a daily basis- In the finance department, various types of
accounts are fall in this, they make the regular recording of the all transactions as per the
policy, they also do the balancing of the books at the end of financial year. In the
SKANSA PLC, they play a important role in maintain the books of accounts for the
decision taking (Kumar, Krovi and Rajagopalan, 2017).
 Financial advice- In the organization, financial department provide financial advice on
the performance. Because most of the decisions are based on the financial position of the
business. In SKANSA PLC, they help in providing advice to the employee and employer
regarding the action that is taken in serious manner.
 Financial controls- In the organization, they check the accuracy of work by using
regular reconciliation by compare the financial situation with the information in the
reports. In context to SKANSA PLC, manager can easily check the accuracy by proper
use of the information and cash.
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TASK 2
Ratio analysis of the company and analysing the performance
Ratios computation along with key formulas 31-DEC-2018 31-DEC-
2019
Return on capital employed = net profit/Capital Employed
×100
= 600/ 3825 x
100
= 15.69%
= 675/ 5850
x100
= 11.54%
Net Profit Margin = Net Profit ×100
Sales Revenue
= 600 / 4800 x
100
= 12.5 %
= 675/ 6000
x 100
= 11.25 %
Current ratio = Current Assets
Current Liabilities
= 1515 / 645
= 2.35
= 2070 /
2220
= 0.9324
Creditors collection period = Trade Payables ×365
Credit Purchases
= 570 / 3900 x
365
= 43.34
= 53.35 Days
= 2100 /
5250 x 365
= 127.75
= 146 Days
Debtors collection period = Trade Receivable ×365
Credit Sales
= 900 / 4800 x
365
= 68.43
= 68 Days
= 1200/ 6000
x 365
= 73 days
Calculation of capital employed
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Particulars 2019 2018
Total assets 8070 4470
Less: Current liabilities 2220 645
Capital employed 5850 3825
Return on capital employed – It is the financial ratio which is used for assessing the
profitability and efficiency. This ratio help the company in generating the profits from its
working capital. It is formed by the capital employed and EBIT, it is known as operating profit
which is come from its core activity without interest and tax, capital employed means subtracting
current liability from total assets, it gives shareholder equity with long- term debt. It helps the
company in using their working capital to generate profit (Roa, Garrón and Banurag.larboza,
2019).
In the ratio analysis of the SKANSA PLC, In 2018 the value of return on capital
employed is 15.69 and in 2019 is 11.54. from the above ratio it has been interpret that company
is generating low sales and they generate less income than of capital investment. Higher ROCE
leads to higher yield in the profit because if the ratio is low or same with their competitor than it
is the loss for the company. Therefore it is the advice for the company to increase their sales
through proper capital employed.
Net profit margin- It is the ratio which is expressed in the percentage of net profit and
sales after removing all expenses. It is used to find out the profitability ratios in the specific
period, this describe the way for transform revenue into profits. It measures the value of profit
that is obtain in per dollar. It helps in find out the net income which is generated from revenue.
It is the important factor for financial health (Shi, Wang, Dinçer and Yüksel, 2019).
From this ratio has been interpreted that net profit margin of the year 19 is 11.25
percentage and in 2018 it is 12.5 percent which mean there is decrease in the net profit
percentage. By decline in the net profit means that overall profit is declined. In order to increase
its performance they have to increase their sales and reduce the expenses.
Current ratio- It means the percentage of the current assets and current liability, it is the
technique used to manage the current assets through which all the current liabilities are paid off.
It is not only used in the quick assets but help in determine the operating capital. The standard
ratio of the current ratio is 2:1. if the ratio is greater than 2, it implies that they have sufficient
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cash to pay the liabilities easily. Form this manager is able to make future strategy for the
liquidity issues.
By the analysis of the current ratio it means that the ratio determine for the year 2018 is
2.34 and 2019 is 0.9324. it states that there is decline in the ratio which mean there company is
not able to meet its short term liabilities and their liquidity is also reduced. Their ratio is also not
as per standard norms which mean there efficiency to maintain current assets is not proper. There
is unfavourable financial circumstances arrive by decrease in current ratio.
Average- receivable period – it refers to the period that is taken by the enterprise for the
collection of al debts because if the company collect all debt in a short period of time then it is
very efficient for the company. It help the enterprise in comparing the actual period with the
expected period . When the days of the collection is large, it means entity is not able to collect
money from the receivables. If the ratio is less then company policanurag.lies is working well
(Skimmyhorn, Davies, Mun and Mitchell, 2016).
From the analysis of the average receivable period it states that the average receivable
period in year 2018 is 68 collection period and 2019 it is 73 days. Increase in this ratio is not a
good indicator for the company SKANSA PLC, because their collection period is increase which
mean they are not able to collect as much money from the debtor. This directly effect the
liquidity of the corporate entity. From these there is decrease in the working capital of the
business also (Sonnenberg, 2018).
Creditors collection period- This ratio covers the timespan for the organization to make
payment to the creditors. The liquidity of the company is increase by reducing in the days of
payments. Because as soon as they make payments they company is working with more efficient
. If organization is occur more payable period than they have to focus on working capital and
management of the cash.
From the above analysis it has been seen that the payable period of the year 18 ans 19 is
53.35 and 146 respectively which means there creditors are increasing and they are not paying
their creditors in less spam of time (Wang, Wang, Gao and Wei, 2019).
CONCLUSION
From the above analysis it has been concluded that financial decision making is very
important for recording the financial transactions in the income statement and balance sheet. It
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helps the manager in taking the decision for the expansion of the business. This report covers the
duties and roles of finance and accounting function and analysis of the ratio for the given period .
REFERENCES
Books and journals
Brown, J. R., Farrell, A .M. and Weisbenner, S .J., 2016. Decision-making approaches and the
propensity to default: Evidence and implications.Journal of Financial Economics.
121(3), pp.477-495.
Bruch, E. and Feinberg, F., 2017. Decision-making processes in social contexts.Annual review of
sociology.43, pp.207-227.
Dincer, H., Şenel Uzunkaya, S. and Yüksel, S., 2019. An it2-based hybrid decision-making
model using hesitant fuzzy linguistic term sets for selecting the development plan of
financial economics.
Grohmann, A., 2018. Financial literacy and financial behavior: Evidence from the emerging
Asian middle class.Pacific-Basin Finance Journal. 48. pp.129-143.
Kumar, N., Krovi, R. and Rajagopalan, B., 2017. Financial decision support with hybrid genetic
and neural based modeling tools.Decision Science. 103(433).
Roa, M .J., Garrón, I. and Barboza, J., 2019. Financial decisions and financial capabilities in the
andean region.Journal of Consumer Affairs. 53(2). pp.296-323.
Shi, X., Li, J., Wang, F., Dinçer, H. and Yüksel, S., 2019. A hybrid decision-making approach
for the service and financial-based measurement of universal health coverage for the E7
economies.International journal of environmental research and public health. 16(18),
p.3295.
Skimmyhorn, W .L., Davies, E. R., Mun, D. and Mitchell, B., 2016. Assessing financial
education methods: Principles vs. rules-of-thumb approaches.The Journal of Economic
Education. 47(3), pp.193-210.
Sonnenberg, S. J., 2018. 22 The Economic Psychology of Financial Decision-Making and
Money Management in the Household.CENTRE FOR DECISION RESEARCH,
UNIVERSITY OF LEEDS, UK, p.354.
Wang, R., Wang, J., Gao, H. and Wei, G., 2019. Methods for MADM with picture fuzzy
muirhead mean operators and their application for evaluating the financial investment
risk.Symmetry. 11(1), p.6.
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