Financial Decision Making and Ratio Analysis

This report discusses the concept of management accounting and its various techniques, including budgeting, costing, standard costing, and more. It explores how management accounting plays a crucial role in financial decision making and controlling. The report also evaluates the performance of SKANSKA PLC using accounting ratios, such as return on capital employed (ROCE) and net profit margin. It highlights the importance of accounting ratios in measuring profitability and financial performance.

FINNACIAL DECISION
MAKING

Table of Contents
TASK-1 FINANCIAL DECISION MAKING................................................................................3
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................4
Management accounting technique.............................................................................................4
Evaluation....................................................................................................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................1
TASK-2 RATIO ANALYSIS..........................................................................................................2
Calculation of ratios.....................................................................................................................2
Performance of SKANSKA PLC................................................................................................3
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................9

TASK-1 FINANCIAL DECISION MAKING
INTRODUCTION
SKANSKA PLC is one of the famous construction company of the world and the UK. It was
started in 1984. It operates its function in many country including Sweden, Norway, Finland,
Denmark, Poland, Romania US and various other. The number of employees in the company is
approximately 32463 with an operating income of SEK 7.8 billion (Skanska UK in brief, 2021).
It performs its business operation in the field of construction project. It is counted as top
construction project handling company. Like other company, the role of accounting and finance
function also plays an important role in SKANSKA PLC too.
Accounting function refers to the function that is concerned with recording of financial
transactions along with preparation of financial statement. Likewise, finance is also an important
function that is concerned with financing activity of the company. through the performance of
this function an adequate availability of the money is being g ensured in every department of the
company (Pretorius, 2020). Performance of accounting function would enable the company
including the SKANSKA PLC to have an analysation of the financial performance, this means
that as financial statements are being prepared in the performance of accounting functions, so
through these statement company can make self-evaluation of its financial position. This will
also be beneficial for the other stakeholder including the shareholders, owners, investors,
customers and various other for determining the financial position and situation of the company
(Popescu, 2020).
In the same manner by performing the finance function along with its various associated
functions and decision in the form of investment, financing and dividend, companies including
SKANSKA PLC can determine and ensure the adequate availability of finance in the company.
Through the performance of this function SKANSKA can easily carry out its business operation.
it would not be wrong to said that performance of finance and accounting function including the
management accounting the company can take adequate decision and make future plan and
strategies.
This report will discuss about the concept of management accounting and its various
techniques including budgeting, costing, standard costing and various other. Management
accounting is also an important element of accounting that plays a major role in controlling and

decision making. This accounting is solely concerned with the managers and used for the internal
purpose. On the basis of this accounting the plans and policies are being determined. At last a
critical evaluation of the concept of management accounting is being included along with the
context of SKANSKA PLC.
MAIN BODY
Management accounting technique
Management accounting:
It is that part or branch of accounting that link the management with the accounting. This
means the accounting that is concerned with the use of management and for the internal use
would be counted as management accounting (Abdusalomova, 2019). It would also be right to
said that the information that is used for decision making is all related with the management
accounting. It is only be used for the internal purpose by the management of the company. in
simple words the management accounting means the presentation of accounting information in
such a manner that is being used by the managers in taking decisions and framing policies and
strategies.
Techniques:
Financial planning:
As the main objective of every business organization is to maximize its profit share. As,
management accounting help in financial planning, so by making the plan regarding the future
the company including the SKANSKA PLC can be directed towards the direction of its goal
accomplishment in the form of raising of profit.
Cost accounting:
This is also an important element and technique associated with the management
accounting. As under this accounting the cost that is being associated with the product, process,
department and various other are being determined that may act as a guide to the company in
order to determine the cost or the operation cost.
Cash flow analysis:
It is also an important technique associated with the management accounting. As per this
the movement of cash along with the period is being determined and analysed (Pradhan, Swain

and Dash, 2018). This statement and technique shows the inward and outward flow with respect
to the SKANSKA PLC.
Standard costing:
This is also a technique of management accounting. As per this, the standard cost is being
determined (Ameen, Ahmed and Abd Hafez, 2018). This determination of the cost may be
related to any process or the department. This is useful in terms of analysation and evaluation
between the actual cost and the standard one.
Budgetary control:
As per this technique the budgets regarding the future need are being prepared in
advance. Budget refer to a statement that provide the information regarding the estimated
revenue and the expenditure. This is an important technique because through this the SKANSKA
PLC can evaluate and analyse the actual expenses with the budgeted.
Decision making:
This is one of the important and critical technique that is being associated with the
management accounting. As decision regarding choosing of alternative is one of the important
task and any wrong decision may bring an adverse effect towards the company (Argenti, 2018).
However, evaluating the best alternative and selecting the most suitable for SKANSKA PLC is
being done through decision making accounting of management accounting. Under that the cost
is being evaluated.
Marginal costing:
This is also an important technique related with the management accounting. Under this the
selling price is being determined by keeping adequate margin for the company. here selecting the
best sales mix, best use of resources, determination of buying decision all being taken under the
SKANSKA PLC.
Evaluation
From the above technique it can be evaluated that management accounting plays an
important role in terms of planning, controlling, and decision making in the company including
the SKANSKA PLC. As under management accounting the various techniques including the
financial planning, standard costing, cash flow and various other are being included which
directly contribute their role in terms of planning and controlling. This can be understood as if

the standard cost is being set and determined with reference to any activity and the process and
then the actual performance and the associated cost is being compared then it will directly lead to
controlling and determination of fluctuation. Likewise, making of financial planning also enable
the company including the SKANSKA PLC to make the plan regarding the future.
In the same manner, decision making accounting also enable the company including the
SKANSKA PLC to determine the best alternative so that the most appropriate decision would be
taken. It is also to be noted that the company by adopting and using the management accounting
technique can have a better analysis and control over their daily operation and business operation
because under this accounting a direct check over the operation is being established.
Through the adoption and execution of this accounting practice by the SKANSKA PLC, it
can better operate its business operation along with keeping a good controlling. This means as
through this technique it will perform various technique and thereby as a result of those it can
better perform its business and move in the direction of the accomplishment of its objectives.
Likewise, an association of cost and the budgetary technique also guide the company regarding
the estimation of the required cost or the estimated budgets regarding the future. This means that
through management accounting the SKANKA PLC can determine the cost element of the
process along with determination of the estimated future expenses and the revenue. this will not
only assist it to have an adequate controlling but it will also act as a guide to carry out its
business operating activities.
However, on a critical note it is to be noted that the installation cost of the management
accounting technique is usually high that the normal and the small business can’t afford it. Thus,
determination of its usage and advantages and the cost associated is to be considered before
implementing this accounting. Likewise, in the same manner the approximation percentage
associated with the management accounting is also high (Shil, Hoque and Akter, 2019). This
means the data that is being derived and forecasted is based on approximation and not 100%
accurate. Thus, before adopting and implementing this management accounting into practice by
the SKANSKA PLC this point is also needed to be considered that the forecasted budgets and
the costing is just approximate and not 100% accurate.

CONCLUSION
From the above report it is concluded that management accounting plays an important role
in terms of financial decision making along with controlling. This means that through the
concept of management accounting the company can make the financial planning along with
controlling its expenditure through the use of standard costing and other technique. This report
also summarizes that SKANKA PLC by having an implementation of the management
accounting can make and operate their business activities with better controlling. Management
accounting also enable the company to take the most appropriate decision by having an
evaluation of various available alternatives. Through this report an understanding about the
various techniques of management accounting is also being understood that how they play an
important role in terms of decision making, controlling and planning regarding the future.

REFERENCES
Books and journals
Abdusalomova, N., 2019. PROBLEMS OF MANAGEMENT ACCOUNTING AND WAYS TO
SOLVE THEM. International Finance and Accounting. 2019(3). p.2.
Ameen, A.M., Ahmed, M.F. and Abd Hafez, M.A., 2018. The Impact of Management
Accounting and How It Can Be Implemented into the Organizational Culture. Dutch
Journal of Finance and Management. 2(1). p.02.
Argenti, J., 2018. Management techniques: a practical guide. Routledge.
Popescu, A.M., 2020. The Importance of Accounting Information for Stakeholders. Ovidius
University Annals, Economic Sciences Series. 20(2). pp.1117-1121.
Pradhan, D., Swain, P.K. and Dash, M., 2018. Effect of management accounting techniques on
supply chain and firm performance: An empirical study. International Journal of
Mechanical Engineering and Technology. 9(5). pp.1049-1057.
Pretorius, P., 2020, July. Finance function as a business system. In INCOSE International
Symposium (Vol. 30, No. 1, pp. 1606-1620).
Shil, N.C., Hoque, M. and Akter, M., 2019. Revisiting Management Accounting Practice Gap: A
Proposed PERAPPGAP Model. Journal of Accounting and Finance. 19(1). pp.135-155.
Online references
Skanska UK in brief., 2021. [Online]. Available through < https://www.skanska.co.uk/about-
skanska/skanska-in-the-uk/skanska-uk-in-brief/ >
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TASK-2 RATIO ANALYSIS
Calculation of ratios
Ratios Formula 31-Dec-2018 31-Dec-2019
Return On Capital
Employed (ROCE)
Operating
profit/Capital
employed*100
=750/3825*100
=19.61%
=975/5850*100
=16.67%
Net profit margin Net profit/Sales
revenue *100
=600/4800*100
=12.5%
=675/6000*100
=11.25%
Current ratio Current assets/Current
liabilities
=1515/645
=2.35
=2070/2220
=0.93
Debtor collection
period
Trade
receivable/Credit
Sales*365
=900/4800*365
=68.44 days
=1200/6000*365
=73 days
Creditor collection
period
Trade payable/Credit
purchase*365
=570/2700*365
=77 days
=2100/4800*365
=160 days
Operating profit:
=Gross profit-operating expenses
For 2018:
=1350-600
=£750
For 2019:
=1650-675
=£975
Capital employed:
=Total assets- current liabilities
For 2018:
=4470-645
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=3825
For 2019:
=8070-2220
= 5850
Performance of SKANSKA PLC
Accounting ratio and their importance:
Accounting ratio:
It refers to the comparison of two or more financial data of the company and drawing
interferences and on the basis of analysation of the financial statement. In simple words, these
ratios are used to be calculated with the reference of financial statement of the company (Wild,
2019). It is counted as an important tool for the stakeholders of the company in terms of
measuring the profitability and financial performance of the company.
Importance:
It is important for the calculation of accounting ratio because through their calculation the
company including SKANSKA PLC can determine its efficiency along with its financial
performance. These ratio act as a base that help the company to make self-evaluation and
analysation of its performance. It is also important in determining the relation between the
variables of accounting with one another.
Return on capital employed (ROCE):
It is an important financial ratio that measure the amount of return that is being earned
over the capital employed. This means that through this ratio the profitability and efficiency of
the company can be analysed (Hague, 2018). In simple words this ratio helps to determine the
what the company is being generating from the capital being employed and used.
Importance:
This ratio is highly important for the SKANSKA PLC because through this ratio it can
determine the actual profit that is being earned by the company from the capital employed or the
capital operation. This means that through the calculation of this ratio the company can
determine its efficiency of business operation and the capital that is being used and implemented
into the company (Andjelic and Vesic, 2017).
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Comparison:
While comparing the ROCE of 2018 and 2019 of SKANSKA PLC it can be analysed that
the ratio decreases from 19.61 to 16.67%. a decline in the ratio is an indication of the poor
efficiency of the company with regard to the business operation. as the ratio is declining which
can also mean that the company is not efficiently utilising its capital
Cause:
The main cause behind such declining ratio may include improper planning of the
SKANSKA PLC with regard to the use of the capital. As the ratio usually decline because of the
raising capital employed which means that either the capital is more than required or there is
shortage which is ultimately declining the ratio.
Improvement:
The SKANSKA PLC can improve this ratio if it will focus over the proper utilisation of
the capital. It can also be raised if the company will focus on reducing the cost and raising the
percentage of sales (SUGARA, 2017). Likewise, disposal of un-useful assets may also improve
the ratio.
Net profit margin:
This ratio is concerned with the generation and the measurement of the net profit and the
margin that is being earned by the company over its revenue. this means that through this ratio
the company can determine the net profit that is being earned by it over its revenue (Soboleva
and et.al., 2018).
Importance:
This is an important ratio because through its calculation SKANSKA PLC can determine
that whether it is performing or operating its business towards the direction of its objective or
not. As the main aim of every company is to earn profit so this ratio would help the company to
have an analysis that whether they have achieved their objective or not.
Comparison:
While comparing the net profit ratio of SKANSKA PLC it is being analysed that the ratio
was 12.5% in 2018 which decline to 11.25% in 2019. This means that the company’s capacity of
earning profit decline from the previous year. In simple words the company’s ability to earn
profit is decline.
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Cause:
The main cause of declining ratio with the SKANSKA PLC may include poor cost
structure or the inadequate pricing policy of the company. This means that an incurring high cost
of operation and low selling price may lead to decline in the net profit margin for the company.
Improvement:
However, it can be improved if the company will focus over reducing the cost of
operation along with raising the sales of its project. This means that if the company will improve
the sale and minimise the operating profit then its share or percentage of profit margin will
automatically raise.
Current ratio:
It is the ratio of current asset to current liability. This ratio is also known as liquidity
ratio. This ratio indicates that how easily the company can meet its short term obligation and pay
its short term debts (Sengupta, 2020). This ratio tells the investors that how the company can
maximise its assets in order to satisfy its debts and liabilities.
Importance:
This is most important ratio for the investor to analyse and know that whether the
company is efficient in order to cover and meet its short terms debts and liabilities (Rashid,
2018). This is also an important ratio for SKANSKA PLC too because through this ratio it can
also make self-evaluation about its liquidity position.
Comparison:
With regard to current ratio of SKANSKA PLC of 2018 and 2019, it is being seen that
the ratio is declining from 2.35 to 0.93. this shows that the ability of the company with regard to
meeting the short terms obligations are also declining and reducing. This reducing percentage
also shows that company’s current liabilities are also raising with respect to time.
Cause:
The main cause for such declining ratio could be the non-availability of sufficient funds
for the payment of liabilities. It may also be due to improper use of business resources with
respect to payment of debts. Likewise, as it is seen that current liabilities are increased so it may
also be counted as a major cause.
Improvement:
5

It can be improved with an adoption of the practice of timely payment of current
liabilities. Adoption of the policy of faster conversation period of debtors may also be an
important way of improving the ratio. Selling of un-useful and non-productive assets, raising
current assets and similar techniques can also be adopted by SKANSKA PLC in order to raise
this ratio.
Debtors collection period:
It refers to the ratio that shows the average time taken by the company in order to collect
debts from the market. This ratio shows that how much time and efficient the company is in
order to collect the debt from the market (Mithare, 2020). Through this ratio the company can
enable and compare the actual time that is being required in the collection of debt with the
allotted time.
Importance:
This is an important ratio because through this ratio the company’s promptness and
efficiency is being analysed that how the company and its operation with regard to debt
collection are efficient. This ratio is also important for the SKANSKA PLC because as it operate
construction project so through this ratio it can easily capture and perform its debt collection.
Comparison:
While comparing the ratio of 2018 and 2019 of SKANSKA PLC it is analysed that the
days was raised from 68 to 73. This means that the company’s moves and efforts with regard to
debt collection are not efficient and effective.
Cause:
Low concentration towards the collection of debts, poor collection policy and strategies,
low focus towards the debtors, carelessness towards the timely debt collection are some of the
reason associated with the rising debtor collection period of SKANSKA PLC.
Improvement:
This can be reduced by adopting the practice of offering discounts and other benefits to
debtors on making timely payment. Automate and timely collection policy, flexible payment
methods and instalment system may also enable the SKANSKA PLC to reduce the period.
Creditors collection period:
6

It refers to a ratio that shows and depicts the number of days that is being required by the
company in making payment of the credit payment that is being due to it (Killingsworth and
Mehany, 2018). More shorter the period would be the more efficient performance of the
company would be.
Importance:
This is an important ratio because through this ratio the SKANSKA PLC can raise the
brand image in the market along with building trust among the investors and the creditors. This
means that if the period would be low then the company can easily avail the credit at good rate
(Vidgen, Shaw and Grant, 2017).
Comparison:
By having a comparison of the ratio of 2018 and 2019 of SKANSKA PLC it is being
analysed that the number of days are being raised from 77 to 160 days. This clearly shows that
the company is not efficient and performing well with regard to making payment to its creditors.
Cause:
The main cause of the raising period includes poor performance of the company with
respect to earning income. It can also be caused due to non-availability of sufficient funds with
the company that it can pay off its creditors.
Improvement:
This can be improved by having a negotiation with the creditors with reference to
payment. Likewise, enabling the credit at affordable price would also encourage the company to
make the payment on time. Focus on raising the efficiency of the business with respect to raising
revenue may also solve the problem.
CONCLUSION
From the above ratio analysis of the SKANSKA PLC it can be concluded that the
performance of the company with respect to 2018 is not good. As the various important ratio
including the profitability, ROCE, and various other are declining which clearly shows that the
performance and the efficiency of the company is being declining while having a comparison
between the 2018 and 2019. It is also understood from the report that as the debtor collection and
7

creditor collection period is also raising which again indicate the poor performance of the
company.
Hence it would also be recommended that making an investment in the SKANSKA PLC
by having an analysation of the financial performance of ratio, it would be not a wise decision.
This means the decision regarding making of investment in the company is not correct by the
investors because the performance of the company is declined from 2018 to 2019.
8

REFERENCES
Andjelic, S. and Vesic, T., 2017. The importance of financial analysis for business decision
making. In Book of proceedings from Sixth International Scientific Conference
Employment, Education and Entrepreneurship (pp. 9-25).
Hague, D., 2018. Pricing in business (Vol. 23). Routledge.
Killingsworth, J. and Mehany, M.H., 2018. Implications of collection period variance in the
construction industry. Journal of Financial Management of Property and Construction.
Mithare, Y., 2020. Ratio Analysis.
Rashid, C.A., 2018. Efficiency of financial ratios analysis for evaluating companies’
liquidity. International Journal of Social Sciences & Educational Studies. 4(4). p.110.
Sengupta, A.K., 2020. THE CONCEPT OF LIQUIDITY AND THE DEPENDENCY
RATIO. INDIAN JOURNAL OF ACCOUNTING, p.23.
Soboleva, and et.al., 2018. Monitoring of businesses operations with cash flow
analysis. International Journal of Civil Engineering and Technology. 9(11). p.2034.
SUGARA, R., 2017. PENGARUH RETURN ON CAPITAL EMPLOYED (ROCE), CAPITAL
ADEQUACY RATIO (CAR), NON PERFORMING FINANCING (NPF) DAN
FINANCING TO DEPOSIT RATIO (FDR) TERHADAP PEMBIAYAAN MURABAHAH
PADA PT. BANK SYARIAH MANDIRI DI INDONESIA PERIODE 2007-2015 (Doctoral
dissertation, Universitas Islam Negeri Sultan Syarif Kasim Riau).
Vidgen, R., Shaw, S. and Grant, D.B., 2017. Management challenges in creating value from
business analytics. European Journal of Operational Research. 261(2). pp.626-639.
Wild, J., 2019. Financial Accounting: Information for Decisions, 9e.
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