Financial Decision Making: Importance of Accounting and Finance Functions

This document discusses the importance of accounting and finance functions in financial decision making. It explores the roles and duties of the accounting and finance teams. Additionally, it provides calculations of key ratios for Skanska plc.

FINANCIAL DECISION
MAKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
TASK 2............................................................................................................................................7
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
Financial decision-making is the process related to liabilities, assets, equity, debts, etc.
that influence company's position, revenue, market share, etc. In current era, it is essential for
company to take important financial decisions that it can gain competitive advantages to tackle
problems effectually. The chosen company in present report is Skanska plc. that is planning to
expand operations in EU. Case study will include importance of accounting and finance
functions along with duties of respective department. Additionally, it will show calculations of
important ratios of mentioned company that can improve performance of organization.
TASK 1
Accounting and finance plays a crucial role in business that assist management to take
strategic decision in effective manner. Skanska plc. would be after utilizing it's all functions as
contributes in success of company. It helps firm to track income & expenditure, provides
quantitative information to investors, management, etc. which can be utilized in business
decision-making procedure.
Importance of accounting functions
There are basically two types of functions of accounting that provides importance to
business practices which includes historical and managerial activities.
 The foremost function is to record the financial transaction and maintaining journal to
keep remember all (Functions of accounting, 2021). It will assist Skanska plc, to get all
details of its transactions at one place that can neglect miss management in company by
avoiding omission of crucial data for making policies.
 Accounting provides brief of complex data that aid firm to be in position to take review at
all essential part of organization with more concentration (Gackstatter, Müller-Stewens
and Möller, 2019). It also allows firms for identifying and evaluation relevant and
irrelevant information so that time & efforts can be saved.
 Formation of plans is also exerted to make creation and modification for controlling
financial procedures in turn to receive better productivity and quality performance of
Skanska plc.

 Communicating crucial monetary details to all areas formulates positive environment
among different users that aid to adopt effective decision-making (Arnaboldi, Busco and
Cuganesan, 2017).
 Skanska will be able tor reflect its monetary position of business at any point of time. In
addition to this, through this statements firm can gain better reputation in market which
will increase its creditworthiness.
 Accounting gives guidance to management in taking important decision regarding
optimization utilization of resources. It is exerted to through identifying acquisition and
presentation of scare resources.
 Another importance that can enable company to meet its legal requirements under
provision of various legislation such as companies Act, sales & income tax, etc. as it all
needs financial statements of company for instance annual accounts and many more
(Ugoani, 2020).
 The biggest function of accounting in Skanska plc. will attain is help in preparation of
budgets. It provides road map to company for carrying forward all its business practices
in effectual pattern. For example- the mentioned firm will get proper budget for its
operation department in turn standard cost can be taken into consideration while
conducting its actual business activities.
 Cost Control become difficult for company without usage of accounting. It evaluates
company's all financial details that enable firm to focus on comparing its estimates wit
current expenditures (Boyle, 2020). With respect to this, suitable course of actions can be
taken to avoid irrelevant expenses that can enhances profitability and stability of
organization.
 Employees performance through prepared budgets, reports and other related documents
can be exerted that in turn will permit firm to assess workers efforts (Gallardo‐Albarrán,
and Inklaar,2020). Additionally, forecasting on the basis of past data is becomes possible
with usage of accounting. Prevention of errors and frauds via identifying weakness of operation structure. Skanska
plc. can do this by adapting feedback mechanism in its business practices regarding
improving effectiveness in lacking areas.
Roles and duties of accounting team

 This department is responsible for various types of administration practices that ensures
proper functioning of business. There are different groups that has unique responsibility
from each other (Saud, Chen and Haseeb, 2020). The billing group assembles
information for creating invoices so that customers can ascertain proper data of their
activity with company.
 Accounting team in Skanska plc. will as well epsonsible for formulation of budget that
can provide assistance in planning for expenditures that enterprise need to incur for
upcoming year. For example- the organization is planning to expand in EU so it would be
beneficial if it has estimated budget for expenditures that may have to incur for
establishing in other nation. It will aid to obtain ways for sources of funds in prior stage
in turn can achieve established goal in desire way.
 Preparation of Financial statements also lies in accounting part of firm. This is crucial for
any scale of organization for making better decision-makings through identifying
company's present position. Internal reporting through providing considerable value by calculating profitability of
various products, customers, sales regions, etc. In aspect of this, Skanska plc.
management review payables, payrolls, credit providing and taxes that are crucial for
smooth functioning of firm.
Importance of Finance Functions
 The primary finance function in firm is to identify funds requirement. With help of
analysed need Skanska plc. can make financial planning. It comprises assessing sources
through which firm can get funds at lower rate of interest that can increase both
productivity and profitability (Haini, 2021). Additionally, it includes systematic process
of framing financial policies in relate to procurement, investment and administration.
 Another purpose of this department is forecasting cash inflows and outflows that assist
business to acquire projection of organisation future based on anticipated receivables and
payables. Skanska plc. can evaluate shortcomings in its cash balances that can save it
from insufficient cash for operation.
 Organization uses this to raise funds as it is important for meeting obligations of business
to have enough liquidity. This is done through by pattern of debt and equity. For instance
- In expanding business the mention firm will need liquidity so it can arrange it in firm of

debt & equity depends on feasibility of their terms & conditions that leads in objectives
fulfilment.
 Allocation of financial resources in the best manner so that need of business's each area
can be consummated (Chiu, 2021). Ensuring that funds are utilized in optimized way
which will reduce over consumption or exploitation of important resources.
 Investment of Skanska plc. surplus in safest way can increase profitability and confidence
of taking risk. It is evaluated that organization should invest by studying pros & cons
properly which reduces possibility of losing fund. The most important function that is
exerted through investment appraisal techniques such as net present value, average &
internal rate of return, portfolio tools.
 Disposal of company's profits among shareholders is as well part of financial function.
Skanska plc. can make strategic decision on the basis of retained profit regarding
innovation, expansion, diversification, etc.
 The department also play function of making sure that it is into correct acquisition and
merger which can assure business good amount of profitability (Chemmanur, Hu and
Wei, 2021). Complex valuation of securities is exerted by this area of business purpose.
 Tax planning is critical activity of company that need to be done with proper focus so that
it can be protected from being included in fraudulent activities. It contributes majorly in
framing company's reputation among stakeholders like customers, suppliers, vendors, etc. Financial control through budgetary & non-budgetary techniques which is utilized for the
purpose of managing income and expenditures so that corrective actions can be taken.
Duties of Financial team
There are several roles of this team that plays an important role in deciding company's
position in market against its competitors.
 Financial planning & growth team analyses from accounting & utilizes market trends to
derive Skanska plc. Future performance e in context of productivity, profitability, etc.
This provides insight of upcoming issues and opportunities that can be grabbed or tackle
in the best way.
 Risk management attempts to assess internal changes by identifying, evaluating,
segregating and overcoming (Manzoor, Wei and Sahito, 2021). Additionally,
identification of external forces that can impact mentioned firm's performances. In order

to minimize and control this actions Skanska plc. Finance team adapt proper risk
management strategy for effective operations of company.
 Capital budgeting part of finance department uses various options to evaluate available
investment. It comprises analysis of profitability, market share, customers segment, etc.
In essence of Skanska plc. this department plays import role in assessing details of EU
factors that influence growth of business in both positive & negative way (Ziolo, Bak,
and Cheba, 2021.).
 The basic role of lower and upper level employees of this department is to make
assurance of funds for immediate requirements of business concern.
 Managing public relation is another duty of finance team and deal with investors,
shareholders, and other type of stakeholders that have interest in financial position,
sustainably, wealth management, customers relationship management of firm, etc. in
order to get support from investors on continuous basis it formulates different strategies
that can enhance interest, loyalty, etc. in addition to this, optimizing & managing banking
and credit relation also lies within duties of company.
TASK 2
Calculating ratios of Skanska plc. of the two years are a follows:
It is essential for understanding financial statements of Skanska Plc. This is termed to be
crucial for any type of organization as it helps company in identifying recent trends of market,
capacity of firm in dealing competition, etc.
Return On Capital Employed (ROCE)
It aids to identify and measure company's ability of generating profits in terms of capital.
The purpose for computation of this ratio differs from person to person (Return On Capital
Employed, 2021). The basic reason are assessing return on equity, assets, capital & invested
employed (Rashid, 2018). Potential capacity of firm is identified at several levels in terms of
capital. Skanska Plc. can know how much operating profit it is getting through its operational
practices. This can give details of value regarding profits generating £1 of company. Investors
tend to support business in case of favourable trend related ROCE.
Particulars Formula 2018 2019
Operating profit 750 975

Total assets – current
liabilities
4470-645 8070-2220
Return on capital
employed
Operating profit/Total
assets-current
liabilities *100
750/(4470-645)*100
19.6
975/(8070-2220)*100
16.6
Net Profit Margin (NPM)
NPM is calculated to know how much net income is created as percentage of revenue
received. It assists stakeholders to get aware firm's ability of formulation profits from sales. It is
generally concerned with the end outcome of company that evaluates its efficiency of obtaining
profits from its revenue gained from sales of products or services (Ratio analysis, 2021). This is
said to be indicator of financial health of organization. Current practices are working according
or not can be assessed through increase & decrease in NP. It is usually published in quarter, half-
yearly or yearly reports attracting investors attention for longer duration.
Particulars Formula 2018 2019
Net profit 600 675
Sales 4800 6000
Net Profit Margin Net profit/Sales*100 600/4800*100
12.5%
675/6000*100
11.25%
Current Ratio
It permits organization to compare firm's current assets with liabilities. This is generally
calculated to know company's capability of paying its short term debt by ensuring enough
liquidity. Less than 1 it is perceived to be dangerous or lack of availability of cash that can result
into ineffectiveness of operations, higher duration for collection and payment period that provide
barrier in achieving company's goal. Short term solvency can as well measured through this
mode of ratios.
Particulars Formula 2018 2019
Current asset 1515 2070

current liabilities 645 2220
Current Ratio Current assets/current
liabilities
1515/645
2.3 times
2070/2220
0.93 times
Average Receivable Days
It is measurement of company's capacity of collecting its account receivable. It is an
important part of organization as liquidity is partly dependent on this area. This reflects how well
firm monitor and control its credits policies related to customers. It is advised to compare this
ratio with competitors to be able in finding competitive advantages. The quality of clients is
judged by computing & analysing this course of action. It should be managed and tracked to any
trends or pattern.
Particulars Formula 2018 2019
Receivables 900 1200
Sales 4800 6000
Average Receivable
Days
(Receivables/Sales)
*365
(900/4800)*365
68.43
(1200/6000)*365
73
Average Payable Days
It represents averages time needed by company to pay its bills to its creditors, suppliers,
vendors, etc. Skanska plc. can use this ratio to show that its cash outflow are effectually
managed. There are various types of people who are interested in analysing this ratio to know
that how well company can pay their funds back (Lisek, Luty and Zioło, 2020.). In order tor
represents its financial position better organizations try to attain this in positive manner so that
creditworthiness can be maintained in industry.
Particulars Formula 2018 2019
Payables 570 2100
Purchases 2700 4800
Average Payable Days (Payables/Purchases) *
365
570/2700*365 2100/4800*365

77.05 159.68
Interpretation on company's performance on the basis of ratios
Return On Capital Employed
2018 2019
15%
16%
16%
17%
17%
18%
18%
19%
19%
20%
20%
Return on capital employed
From the above calculation it can be interpreted that Skanska plc. is capital intensive or
not. The ratio will help firm to understand how perfectly firm is creating profit from £1 million
capital employed. It is always assumed that organization will be able to gain more than
mentioned figure. The ideal ratio for any sector is 10%. The Skanska plc.'s ROCE ratio in 2018
and 2019 is 19.8% & 16.6% respectively. From the interpretation it can be seen that that figure
has fallen down which is negative sign (Etchill and et.al., 2017). The interested stakeholder for
this are investors, customers, analyst, competitors, etc. The higher the quantitative relation better
would be stakeholders' perception for mentioned firm. This metric is very beneficial in taking
decision regarding investments as investors expectations are highly co related with return on it.

The measures that can be taken to improve this situation is selling outdated assets of firm that
will outcome in more availability regarding liquidity for operations.
Net Profit Margin
With help of this investor can assess that it is generating well enough profit from is sales
or no. the respective ratio of Skanska plc. For the year 2018 and 2019 it is 12.5% & 11.25%
respectively. It is showing decreasing trend from previous year. The average ideal margin for this
particular ratio is 10%. From this it can be evaluated that company is above the average but its
ability is declining from prior duration which reflects bad position of firm (Nariswari and
Nugraha, 2020.). There are various stakeholders that utilizes this margin which compressors
analysts, investors, creditors, customers, suppliers, vendors, etc. The increasing ability also tends
to enhance attraction towards company's investments. By analysing this ratio it can be analysed
that mentioned organization need some modifications. The measures that can be taken for
improvement can be boosting sales so that revenue can be generated comparatively more.
Reduction of irrelevant cost can also result into increase in revenue of firm.
Current Ratio
2018 2019
10%
12%
14%
Net Profit Margin

There are several parties that show their interest in studying this that comprises lenders,
vendors, etc. The higher ratio more is liquidity available with firm. The ratio under 1 indicates it
needs to liquidate is current assets for meeting short term obligations. Greater than 2 indicates
that organization's asses are two times more than its current liabilities. Specific firm has current
ratio in 2019 is 0.93 times and for 2018 is 2.3 times. This is also reflecting downfall in Skanska
plc. efficiency in dealing with its present obligations. There are various ways in turn company
represents this by publishing in annual reports and many more. It allows firm to establish better
goodwill in industry to enhance its options for sources of funds. The practices that need to
conduct for modifications involves delaying in purchases of capital assets, avoiding personal
withdrawals, selling unnecessary assets that is not giving return can result in better outcome of
enterprise.
Average Receivable Days
2018 2019
0
0.5
1
1.5
2
2.5
Current ratio

It is utilized to evaluate efficiency of collecting funds from customers. Skanska plc. May
utilizes this to know how many times it's receivables are converted into cash. This is basically
computed for annually, monthly, quarterly basis (Purwanti, 2019). Skanska plc.'s particular ratio
in 2018 is 68.43 & in 2019 is 73. This is going in upward direction which is favourable indicator.
The higher ratio greater would be efficiency of business in collecting funds. Safe investment is
predicted when firm's this specific ratio is tighter. There various pattern through which stable and
positive trend can be maintained. Lower collecting period alerts firm to reform its credit policies
for good outcomes. The methods through improvement in company;'s account receivable can be
exerted is positive customer relations, taking initial deposits or advances. Effective billing
system, sending timely reminders, etc.
Average Payable Days
2018 2019
66
67
68
69
70
71
72
73
74
Average receivable Days

The large type of companies conducts its operations partly on credit basis. Stakeholders
that pay attention in firm's this ratio is analysts, creditors, vendors, etc. The current performance
of Skanska plc. On the basis of account payable ratio in 2018 & 2019 is 77.05 and 159.68
respectively. It is reflecting upward directional growth in this specific ratio. From this it can be
interpreted that higher ratio is not beneficial for respective firm. It indicates that fund are utilized
for free cash flow & working capital. This may tend to spoil its relations with creditors, suppliers
and vendors. Moreover, policies should be framed effectively to overcome these issues. The
other activities that can make changes in this position are improving stock & credit control,
negotiating payment terms with suppliers, etc.
CONCLUSION
From the above report it can be concluded that financial decision are essential for any
type of company. The importance of accounting functions in Skanska plc. are recording financial
transactions, communicating important monetary information, preparation of budget, guidance in
taking strategic decision, etc. Current report has also explained role of accounting team such as
internal reporting, preparation of financial statements, payrolls, etc. Additionally, it has given
2018 2019
0
20
40
60
80
100
120
140
160
180
Average payable Days

emphasis on functions of financial that are identify financial requirements, sources of raising
funds, etc. along with duties which includes capital budgeting, managing public relation, etc.
Further report has shown calculations of ratios such as account payable and receivable days,
current ratio, net profit and ROCE. From the interpretation it can be summarized that the
performance of company is good in terms of efficiency of dealing with issues.

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