Importance of Accounting & Financial Function in Decision Making

This document discusses the importance of accounting and financial function in decision making. It covers topics such as the preparation of financial statements, compliance with statutory requirements, performance analysis, and the duties and roles of the accounting and finance department. The document also includes a ratio analysis for SKANSKA PLC, a construction company based in the UK.

Financial
Decision
Making

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Importance of accounting & financial function:..........................................................................3
Duties and role of accounting and finance function:...................................................................5
TASK 2............................................................................................................................................7
Calculating ratios for SKANSKA PLC:......................................................................................7
Ratio analysis for SKANSKA PLC:............................................................................................7
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Finance is about managing financial information for company for its decision making.
Finance is necessary element for businesses as it helps for managing various department for
businesses. Finance is about arranging financial statements which includes cash flows, balance
sheet, income statement etc. (Keohane, 2018) These statements helps for knowing financial
position which helps for decision making. Managers using financial information for investment
decisions it helps for knowing which resource gives higher benefits for businesses. Financial
management is about planning, organising, managing, analysing, budgeting financial data for
businesses. Finance is about arranging funds for running business activities. The company which
is includes for this report is SKANSKA PLC. SKANSKA PLC is a Construction Company based
in UK. SKANSKA PLC started back in 1984. The company is planning to expand its operations
to other countries in Europe in the next ten (10) years. This report includes topics which are
importance for accounting & financial functions. Apart from this it includes topic ratio analysis
which helps for better performance which helps for higher profitability for businesses.
TASK 1
Importance of accounting & financial function:
Accounting includes recording, classifying and summarising all the financial transaction
related to the business which is then analysed by finance function of the company to make out
some meaningful information out of them that can be used by company to make informed
decisions. All these functions are performed by accounts and finance department in a company
which plays very important role in making decisions are aimed at taking company to the path of
growth and success.
Preparation of financial statements
Financial statements of a company includes three statements - Statement of Income,
Statement of Financial Position and Cash flow Statement (Shapiro and Hanouna, 2019). These
are inter-related and are required by company to perform informed decision-making. Accounts
and finance department of SKANSKA Plc play a very important role as this helps company
realise its true and fair financial performance and position. Financial statements of the company
are mentioned below:

 Income statement - It is also known as profit and loss account and use to determine
profitability of the company by taking into account all the expenses and revenues
pertaining to a defined accounting period. It is a period statement and end result is either
net profit or net loss in the reporting period. This net income is further bifurcated into
dividend paid out to company and retained earnings. Retained earnings in then
transferred to the shareholders' account in the Statement of Financial Position (King and
Kay, 2020).
 Statement of financial position - This is also known as Balance Sheet. It is a point
statement as it is used to determine financial standing of the company at a point of time
which is generally taken as the end of the reporting period used to ascertain profitability.
It has three main components - assets, liabilities and capital. Balance Sheet has to be
arrange as per formula under which total assets of the company must be equal in total to
shareholders' funds and liabilities put together or the total assets minus of liabilities must
be equal to shareholders' fund.
 Cash flow statement - This is the third financial statement which is concerned with
depicting the position of cash and cash equivalents for the company in the reported period
of time. It takes into account net reported income from income statement to adjust for
non-cash items in the reporting period. It is further divided into cash flow from operating
activities, cash flow from investing activities and cash flow from financing activities.
Final cash balance reported in the cash flow statements must be equal to cash balance
reported in the Statement of financial position.
Help in complying with statutory compliances
After preparing financial statements, these are to be compulsorily audited by independent
auditors and are to be filed with Company House (Yan, 2019). Other than filing financial reports
with Company House, accounts and finance department of the SKANSKA Plc also calculates
and pay various taxes applicable on the company such as corporate tax, VAT, etc. Audited
financial statements can also be used by company as a legal evidence and thus, accounts and
finance department of the company plays a very important role in the ensuring that business is
run in compliance with legal system of the land.

Helps in performance analysis
With the help of financial statements and their notes, accounts and finance department of
the company helps management in the evaluating the performance level of the business, to
further decide the course of action that company can take in order to achieve its targeted
objective. Further, it also forms the basis for various budget preparation (Flin and Martin, 2017).
Budgets are the anticipation of future on the basis of past performance and therefore, it can be
said that accounts and finance department of the company plays a very important role in
analysing the past performance to provide for the future anticipated trends and forecasts. This
will help SKANSKA Plc in arranging for its cash and other operations in such a way that its cash
heavy nature is not impacted by the inappropriate decision-making of the management.
Duties and role of accounting and finance function:
Accounts and finance play major role in every business which used to operated necessary
functions related to the money (Ahmed, Choudhury and Uddin, 2017). Company can
successfully survive when money is able to controlled in efficient manner and properly follow up
of all company's income and expenses. In the context of SKANSKA Plc, management of flow of
money can be effectively done by the finance and accounting principle and that also facilitates in
direct course of business. Following are the rules-
 Obeying the law- Accounting has some laws and rules that need to be maintained by all
organisation to keep the flow of all compliance and having better knowledge is very
important for the company. Its needs to ensure that every process that is prevailing in the
management should follow all laws and regulation. In the context of SKANSKA Plc, this
role of accounts and finance help in recording all important financial needs of the
organisation and helps in reducing unnecessary trouble in near future.
 Creating budgets and financial records- This is very important for the organisation to
record all necessary transactions to ensure the proper practices and that helps in
formulating the budgets for the company. Through that company able to anticipate the
revenue and expenses to make informed decision. In the context of SKANSKA Plc, this
role is useful in achieving the greater stability to the business and leads to success in the
organisation. As, this functions helps in recording of good financial record keeping to
analyse the and understand the future needs of the company (Brandimarte, 2017).

 To analyse the financial performance- This function helps in analysing the
performance of the company through evaluating the past and learn from it and this refers
to the good accounting (Kudrna, 2016). In the context of SKANSKA plc, this helps in
assess the value of company and suggest the way to contribute the success of the
organisation. This enable to overall improvement in operational function and helps in
identify the areas of enhance the performance so as to achieve the desired objective and
goals.
Duties of accounting and finance functions are as follows-
 Developing business strategy- In the company, the goal is to make the maximum profit
and build the path for itself for longer period of time. In the organisation there is
importance of developing the strategy to make the functions more effective and make it
happen in right direction. In the context of SKANSKA Plc, the need of improving the
strategy is helps in achieving the good return to the company and also useful in reshaping
the fundamental of the management in proper way.
 Advising for project funding- In the company accounts and finance is very essential in
achieving the efficient project funding to the company to fulfil the essential requirement
to start new project, investing new asset and other major decision. In the context of the
SKANSKA Plc, the duties of accounting and finance department is to make the estimate
project funding to take right decision to achieving the goals and objective to maximise
the profit in order to enhance the productivity of the organisation.
 Control the cost- In the organisation the important thing is to control the cost as much as
possible to achieve the profit and so that company able to make effective growth in
longer period. In the selected organisation, this helps in cutting the cost through proper
analyses of reports, statement ans other transactions (Bari and et. al., 2019).
 Handling tax issues- Accounting and finance department usually deals in handling the
tax issues to ensure proper tax matters and leads to success of the company. In the
context of SKANSKA Plc, this functions helps inn maintaining the tax rate and its
application in the company and will lead to many other advantages as well in the
management.

TASK 2
Calculating ratios for SKANSKA PLC:
In context to SKANSKA PLC, mangers using ratio analysis for knowing activity for businesses.
Ratio Formula 2018 2019
Return on capital
employed
Operating profit/Total
assets-current*100
liabilities
750/3825*100=
19.60%
975/5850*100=
16.67%
Net profit margin Net profit/sales*100 600/4800*100= 12.5% 675/6000*100=
11.25%
Current ratio Current assets/current
liabilities
1515/645= 2.35 times 2070/2220= 0.93 times
Debtors collection
period
Receivables/sales*365 900/4800*365= 68
days
1200/6000*365= 73
days
Creditors payment
period
Payables/
purchase*365
570/2700*365= 77.05
days
2100/4800*365= 159
days
Ratio analysis for SKANSKA PLC:
Ratio analysis is about knowing financial position for businesses (Gibert and Conti,
2016). It is financial element which helps for knowing business liquidity, turnover, profitability
for businesses.
 Return on capital employed
Ratio 2018 2019
Return on capital Employed 19.60% 16.67%
It is about knowing company's return for its capital. It shows relation for earning &
capital. Higher the ratio means company earns higher for its capital. It helps businesses for
knowing how much returns company gets for investing its capital. In context to SKANSKA
PLC, it shows how much business earns for its capital. As per above data it shows returns on

capital employed for 2018 & 2019. for 2018 it shows company has 19.60% & 2019 company has
16.67%. it shows company gets higher returns for 2018. it should manage its resources, finance,
sales for managing profits which it reducing for 2019. Higher ratio showcase that business
organization use their capital in effective manner in order to generate profit by using business
resource. On the other side lower ratio of capital show that management department not able to
sufficiently use or apply their resource to generate revenue.
Value of ratio in future:
 It helps in financial planning for the business in a precise manner and leads to
development of a business in a short period of time.
 It helps in risk management analysis which is helpful in minimising risk associated
with a business.
 Ratio analysis helps a business to gain competitive advantage in near future in order
to lead other companies at the marketplace.
 Ratio analysis helps a business to gain sustainable growth at the marketplace.
 Net profit ratio
Ratio 2018 2019
Net Profit Ratio 12.50% 11.25%
Net profit ratio is about which shows how much profit company earns for its sales. It
shows relation for net profit & sales (Mansour, Cherif and Abdelfattah, 2019). The ideal ratio is
10%. in context to SKANSKA PLC, it shows data for 2018 & 2019. as per data it shows
company earns 12.5% for 2018 & 11.25% for 2019. it shows company has higher profits for
2018 which it reduces for 2019. it should manage its sales it should know how it uses its
resources for getting higher profits. To overcome this problem and increase percentage of net
margin ratio in 2019, management department use effective pricing strategy which attract
customer to take contract from this organisation.
Ways in which SKANSKA PLC can increase the value of its ratios:
 Company can hire professional financial management in order to gain an increase
in ratios.
 Company can increase its investment value in market to increase value of ratios

 It can hire skilled and trained accounting staff as well as workers in order to
majorly lead various operations.
 Current ratio:
Ratio 2018 2019
Current Ratio 2.35 times 0.93 times
Current ratio is about which company using for knowing for how much cash it has for
paying its debts (Thach, Kreinovich and Trung, 2020). It shows relation for current liabilities &
current assets. It is known as working capital ratio. In context to SKANSKA PLC, it shows how
much ability businesses has for paying its debts. As per data it shows current ratio for 2018 &
2019. it shows business has 2.35 & 0.93 for its business performance. It shows company has
manages its performance for 2018 for better manner which it reduces for 2019 it should manage
its sales.
 Debtor's Collection Period
Ratio 2018 2019
Debtor's Collection Period 68 days 73 days
Debtors' collection period is that average period of time which a company takes to
receive the money due to the trade debtors. It is the average period of time in relation to the total
number of days in the reporting period. It is a part of the cash conversion cycle and represents
cash inflow in the cycle (Nekrasova, Karnaukhova and Sviridov, 2018). Therefore, the lesser it
is, better it is considered for it would mean that company would be able to receive money in a
shorter period of time. Debtors' collection period for SKANSKA Plc in the year 2018 was 68
days while it rose to 73 days in the year 2019. It is negative shift for the company and is capable
of having adverse impact on its cash conversion cycle which is not a positive sign for the
potential investor, who is seeking to invest in the company. However, it can be seen that there is
a good rise in the trade receivables of the company and that this increase could be a result of
changes in company's policy by relaxing the debtor's payment period for a bit to attract more

customers. But then, company should watch out that this does not lay much of an adverse impact
over its working capital management and cash management.
 Creditors' Payment Period
Ratio 2018 2019
Creditor's Payment Period 77 days 159 days
Creditors' payment period is that average period of time which a company takes to pay
the money back due to its trade creditors. It is the average period of time in relation to the total
number of days in the reporting period (Cottam, 2019). It is a part of the cash conversion cycle
and represents cash outflow in the cycle. Therefore, the higher it is, better it is considered for it
would mean that company would be able to retain money in the business for a longer period of
time. Creditors' payment period for SKANSKA Plc in the year 2018 was 77 days while it rose to
159 days in the year 2019. It is a positive shift for the company and is a positive sign for the
potential investor, who is seeking to invest in the company. This can also be due to either
changes in company polices or the company has not paid back its creditors due. Latter can
change the prospects of popularity of company in the market. However, likely reason should be
former as there is huge rise in the value of trade creditors in 2019 but it is able to create liquidity
issues for the company as and when the payment will become due.
CONCLUSION
From the above report it has been concluded that financial management is about
planning, organising, managing, analysing, budgeting financial resources for businesses.
Managers using financial statements for managing its financial data which includes cash flow
statement, balance sheet, income statement which helps for better performance which helps for
higher profitability for businesses. Managers using ratio analysis for knowing business liquidity,
turnover, profitability for businesses. In order to gain competitive advantage at the marketplace it
is essential for a company to hire professional management to handle finance related operations.
It is essential in the era of stiff competition to gain edge over different competitors by maintain
professional finance related standards in the business.

REFERENCES
Books & journals:
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financial markets. In 2017 IEEE/ACM International Conference on Advances in Social
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Bari, A. and et. al., 2019, March. Predicting financial markets using the wisdom of crowds.
In 2019 IEEE 4th International Conference on Big Data Analytics (ICBDA) (pp. 334-
340). IEEE.
Brandimarte, P., 2017. An Introduction to Financial Markets: A Quantitative Approach. John
Wiley & Sons.
Cottam, M., 2019. Foreign policy decision making: The influence of cognition. Routledge.
Flin, R. and Martin, L., 2017. Decision-making under stress: Emerging themes and applications.
Routledge.
Gibert, K. and Conti, D., 2016. On the understanding of profiles by means of post-processing
techniques: an application to financial assets. International Journal of Computer
Mathematics, 93(5), pp.807-820.
Keohane, R. O., 2018. The New European community: decisionmaking and institutional change.
Routledge.
King, M. and Kay, J., 2020. Radical uncertainty: Decision-making for an unknowable future.
Hachette UK.
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Shapiro, A. C. and Hanouna, P., 2019. Multinational financial management. John Wiley & Sons.
Thach, N. N., Kreinovich, V. and Trung, N. D., 2020. Data Science for Financial Econometrics.
Springer International Publishing AG.
Yan, T. A. N., 2019. FINANCIAL CAPABILITY, FINANCIAL DECISION AND
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