Financial Decision making

The report highlights the importance, functions and role of Accounting and Finance in Financial Decision making. It also includes the calculation of different financial ratios and their impact on the financial performance of SKANSKA PLC. The report analyzes the performance of SKANSKA PLC and suggests improvement actions.

Financial Decision making

TABLE OF CONTENT
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Significance, functions and role of Accounting..........................................................................3
Significance, functions and role of finance.................................................................................5
TASK 2............................................................................................................................................7
Calculating ratios of SP...............................................................................................................7
Analysing performance of SKANSKA PLC. along with its impact and improvement actions. 8
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Financial decision-making is the process of analysing the pros and cons of any decision
that involve use of money. It is important to make decisions about when, where and how a
company should acquire fund. The present report is based on SKANSKA PLC (SP) that is a
construction based company in UK. The report will highlight the various duties, roles, functions
and importance of Accounting and finance. Accounting supports the decision making as it
provides financial information to the company. Finance is an integral part of any company as it
helps in investment and deciding capital structure of any company. The report will also deal with
the calculation of different financial ratios and their impact on the financial performance of SP
from investors point of view
TASK 1
Significance, functions and role of Accounting
Accounting is the process of recording and measuring the financial transactions and
involve analysing and reporting these transactions to the users. The various accounting reports
generated by various departments of cost and management accounting are helpful in taking
decisions of the organization (Cockcroft and Russell, 2018).
Importance Keeping records of business transactions -Accounting involves maintenance of
systematic records of the transactions of the business that can help users to compare the
current financial position of SP to the past accounting transactions. It enables the users to
analyse the performance of the company for a fixed period of time. Helpful in decision-making- Accounting is important for management of the
organization which enables in planning and organizing the operations of SKANSKA

PLC. The decisions may vary in terms of pursuing geographical expansion to improving
the overall operational efficiency. Meeting various legal requirements- Tax authorities use the financial statements to
assess SP's revenue and net profit. The system of accounting is helpful in ensuring that
financial statements of the company are legal and reported accurately. Preparation of budgets- Budgets are essential to run the business successfully and the
information that is required for preparation of budgets is supplied by accounting. Helpful in filing financial statements- SP is required to file statement of profit and loss
and financial position to Registrar of companies and for direct and indirect tax filing
purposes.
Functions- Business revenues and costs- Just like managing personal finance, business accountants
keep record of expenses and payments of SP which is an important accounting and
finance function of accounting as it involves tracking business spending with respect to
income (Schoenmaker and Schramade, 2018). Collection from accounts receivable- Proper accounting ensures that revenue is
continuously flowing into the bank account by ensuring that SP receives all the due
payment. Payrolls- Accountants are in charge of managing the employee benefits. Accounting
helps to decide how employees are paid or compensated for the work that is based on
how wages affect SKANSKA PLC 's profits. Accounts payable- Accounting function help to set due dates for payments so that SP can
manage its own funds based on inflows of money. Accounts payable functions to pay
SP's bills. Financial reporting- The company prepares both quarterly and yearly reports for
shareholders showing the assets, profits and losses of SP. They also use fiscal reports to
understand financial resources of their firm.
Role of accounting- Save money- The basic role of accounting is to save money by spotting tax deductions,
detecting and preventing internal fraud, and avoiding costly reporting mistakes.

 Forecast future- Accounting analyse past data that makes SP to prepare for future with
accurate forecasting. Accounting helps to decide whether it is best to open a new line of
credit or to invest extra cash (Makarenko and Plastun, 2017). Increase profitability- Cost accounting analyses the costs to make a product or sell a
service and decide their profitability. To evaluate changing business strategies- Accounting provide answers to the “what if
scenarios” by interpreting the complex financial data.
 Provide Financial guidance- Accounting keeps track of cash flows against budgets and
offer suggestions based on SP's unique needs.
Significance, functions and role of finance
Finance is a term that involves activities associated with debt, credit, banking, money and
investments. It involves management of money that includes investing and saving, budgeting,
borrowing and lending etc. There are mainly 3 types of finance – public finance, corporate
finance and personal finance (Vogl, 2017).
Importance- Creation of profit – For business to keep running smoothly, the profit should be
increasing. This can be possible through proper management of initial capital investment
by keeping track on debt and equity of SP. Meeting operational expenses- Operational expenses of an organization is what makes it
keep going. Therefore, a proper financial plan provides a form of balance in managing
profits in relation to operational expenses that need to meet urgently (Bailey, 2017). Creation of asset- The finance sector allows SP to have best saving plan that is
independent on short term finance to meet this need. Investment in items like land, plant
and machinery boost the scale of production which can only be possible with adequate
financial management. Exploring new markets- Every company needs to expand and diversify its products and
services by exploring new markets. Therefore, without finance, the expansion and
diversification become quite difficult. Management of risks- Risk is a basic part of any business. It is a natural phenomenon to
have significant loss in the business. So, before that situation, financial management

techniques help to make a contingency plan that prepare SP to manage the unavoidable
risks (The Role of Finance in Achieving Sustainability 2020).
Functions- Investment decision – It is one of the most important finance functions that appropriately
allocate capital to long term assets of the business. This process is called capital
budgeting. Since the future is not certain, therefore, calculation of expected return is
difficult. While considering investment proposal it is must to take into account both the
expected return and risks. Investment decision not only involve allocation of capital but
also involves the decisions of using funds that are acquired by disposing the assets which
becomes obsolete, unproductive and unprofitable. Financial decisions- It is important to make suitable decision about how, where and
when SP should acquire funds. Funds can be acquired through different means and
channels. The debt equity ratio is to be correctly maintained which is known as a firm's
capital structure. Debt affects the risks and returns of the shareholder. A sound financial
structure aims at maximizing the return of shareholders and minimizing the risks (Ekpo,
Etukafia and Udofot, 2017). Dividend decisions- The key finance function is to decide whether to distribute all the
profits to the shareholders or retain them or distribute part of the profits to shareholders
and retain some part in the business. Optimum dividend policy is to be decided which
maximizes SP's market value. It is a practice to pay dividends regularly if there are
profits. Liquidity Decisions- It is very important to maintain liquidity position of a firm in order
to overcome and avoid insolvency. In order to maintain proper linkage between
profitability and liquidity, sufficient funds need to be invested in current assets. Current
assets should properly be disposed and valued from time to time if they become less
profitable.
Role of finance- Follow rules and management of taxes- Maintaining proper books and accounts are
important for all the functions of management. Finance plays an effective role in reducing
handling various tax issues.

 Financial planning- Every business need money to run business. Therefore, they must
look into various sources of raising finance. Finance plays a vital role in formation of
budgets that is useful in financial planning. Management of flow of cash- Finance controls the cash in and cash out of SKANSKA
PLC. Measurement of success- Money is the bench mark for any company's success. Financial
management is needed to improve earnings. Companies need finance professionals to
know how much profit is made, compare them with previous years and measure its
growth (Bose Dong and Simpson, 2019). Predicting risks and avoiding them- Role of finance includes forecasting future events
which helps to know about various risks that might occur in the upcoming period.
Comparing actual results with forecasted figures help to assess the areas of improvement. To handle financial negotiations- It is the role of finance to handle the financial
negotiations with banks and other financial institutions. Development- Finance is required for innovation of products and services which can
automatically lead to growth and development of SKANSKA PLC.
 Understand market trends- Financial management analyse various market trends to
know about the opportunities for expansion or diversification.
TASK 2
Calculating ratios of SP
a. Return on capital employed
Particulars Formula 2018 2019
Operating profit 750 975
Capital employed Total assets – current
liabilities
4470-645
=3825
8070-2,220
= 5850
Return on capital
employed
Operating
profit/Capital
employed*100
19 16.66
b. Net profit margin

Particulars Formula 2018 2019
Net profit 600 675
Sales revenue 4800 6000
Net profit margin Net profit/Sales
revenue*100
12.5 11
c. Current ratio
Particulars Formula 2018 2019
Current assets 1515 2070
Current liabilities 645 2220
Current ratio Current assets/Current
liabilities
2.34 0.93
d. Debtors collection period
Particulars Formula 2018 2019
Trade receivables 900 1200
Sales revenue 4800 6000
Debtors collection
period
Trade
receivables/Sales*365
68.43 73
e. Creditors payment period
Particulars Formula 2018 2019
Trade payable 570 2100
COGS 3450 4350
Creditors payment Trade 60 176

period payable/COGS*365
Analysing performance of SKANSKA PLC. along with its impact and improvement actions.
Return on capital employed is concerned with measuring how efficient a company is
utilizing its funds so that appropriate amount of profits can be generated. It is one of the essential
ratio that is usually assessed by analyst, investors, competitors, etc. from the above illustrated
table it can be articulated in the year 2018 and 2019 derived outcome is 19 & 16.66%
respectively. On the basis of this, it can be interpreted that organization efficiency of generating
profit to provide return on employed capital has declined as compared to earlier year. It can be
analysed that firm's efficiency has declined which is due to various reasons and that are need to
be specified by the firm in turn improvement action can be taken. This can negatively affect the
business processing as investors will highly get affected. Investors can get dissatisfied from the
prevailing level of performance which need to be improved in order to have sustainability (Joo,
2021). This can result in declined capital and affect daily processing and credibility of specified
organization. In order to make improvement organization required to implement the actions like
reducing the cost and increasing sales. There is higher need to decline cost of goods sold so that
objective of increased profitability can be done. In addition to this, operational efficiency, paying
off debts, proper inventory management, keeping lower interest rates, etc. these actions can be
executed by firm to eliminate negative impact.
Net profit margin is concerned with evaluating efficiency of firm to generating profits
from the revenue generated. In addition to this, this is one of the significant ratio which play
crucial role in analysing organizational growth in terms of creating profits. In the year 2018 and
2019 generated amount of net profit ratio is 12.5 &11.25 respectively. On the basis of obtained
results it can be stated that capacity of generating profits from making sales has reduced. It can
adversely influence liquidity position of company and result in unstable organization. In the
current era, there are higher competitions and investors, suppliers, creditors, lenders, banking
institutions highly look for those organizations which are capable of providing larger return.
The current situations & efficiency of generating profits of SKANSKA PLC. It can be analysed
that investors can take unfavourable decision for specified organization. They may withdraw
their invested capital which can highly impact reputation and credibility of firm. Lack of

operational efficiency, low working capital, inability to pay debts, etc. can influence firm in
adverse pattern (Kliestik and et.al., 2020). SKANSKA PLC can execute few course of action in
order to make modifications for having positive influence of company. It comprises reducing
cost, fixing appropriate price, higher gain margin, increasing sales & market share, eliminating
factors not contributing to success, having appropriate inventory level, etc. These specified
course of action can be taken into consideration for improving organizational performance.
These actions can be accounting and finance conclusion highly useful for SKANSKA PLC for
making improvements in turn leading position in industry can be derived (Sustainability
Accounting and reporting in the industry 4.0. 2021).
Current ratio is associated with assessing capacity of organization in terms of paying
short term debts with help of assets. This helps in determining organizational capacity of
overcoming short term liabilities which gives insights about firm credibility in industry. From the
evaluation it can be articulated that for the specified period of time current ratio of SKANSKA
PLC derived is 2.34 and 0.93 times respectively. Standard bench marking set for the current ratio
lies between 1.2-1.5 times. By making comparing of current year performance with previous it
can be identified that it’s in downward sloping condition. Ideal ratio is higher as compared to
present year outcome which is indicating that entity need to make changes (Alarussi, 2021). The
obtained result can negatively affect functioning of firm as investors, suppliers, etc. stakeholder
can found firm not trustworthiness and lower fund-raising capacity. It can spoil relationship
with suppliers, lenders, etc. that can affect present processing of firm. There are various actions
which can be implemented by enterprise to develop to make appropriate approach for having
alteration to uplift organization (Naimi and Whitcomb, 2020.). This includes cutting overhead
expenses, paying off liabilities, having proper demand forecasting, etc. so that proper level of
cash & equivalents assets can be obtained to decrease liabilities, getting rid of useless assets,
etc. can contribute in having better current ratio which can incline efficiency of paying short term
liabilities. These actions will be useful for the firm to improve prevailing circumstances to get
higher sustainability in industry.
Debtors collection period or Average Collection Days (ACD) refers to the duration
Bailey, S. J., 2017. within which firm is obtaining collecting payments for conducting

transactions on credit. It is essential for firm to have proper period of collecting funds from
customers so that appropriate level of liquidity can be maintained. The derived outcome for the
specified ratio is 68.43 and 73 days respectively for the period 2018 & 2019. It is presenting
upward movement of days of collecting payments from the clients. It is better to have less debtor
collection days as it indicates that the organization is collecting payment faster. ACD of 2019
increases with respect to 2018 which will have an adverse impact on the investors. This ratio
needs to be improved by taking various actions to avoid consequences of less liquidity, lower
profitability, etc. These all can be neglected by offering discounts to customers, encouraging
instant payments, etc. so that proper processing can be obtained in order to derive competitive
advantages. Debtors collection period can be improved by effective communication with the
clients and keeping up to date about the customer information.
Creditors payment period or Average payment days (APD) refers to the average time
taken by the company to pay the amount due to creditors. It is better to have less average
payment period as it indicates that a company is taking less time to pay off its creditors. Higher
pence’s by disposing the obsolete or unprofitable assets, improving stock control, refinancing
etc. APD indicates adverse position of the company and will have negative impact on the
investor. This shows that company is facing problem in timely payment to creditors. On the other
hand, a high APD also shows that there is more cash in hand for short term investments. It is to
be ensured that a company must not take too much time to pay off its liabilities. In 2018, APD of
SKANSKA PLC is 60 days which has increased to 176 days in 2019. This depicts that SP is
taking more time in paying off the short term obligations. Therefore, an investor should not
invest in the company. The ideal APD is 90 days for an investor to decide whether to invest in
the organization or not. As APD of SKANSKA PLC exceeded 90 days, the investor should not
invest in the company. APD can be improved by keeping a track on the cash flows of the
company. Cash flow position of SP can be improved by increasing the liquidity of the company.
To increase the liquidity, the company needs to reduce the expenses by disposing the obsolete or
unprofitable assets, improving stock control, refinancing etc.
Overall, the SP's performance gives a general view about the profitability of the
company. The various stakeholders of the company such as investors, management, employees
etc. have their own interest of understanding of financial statements. The financial performance

states how well the company is managing its operations. After calculating the ratios, it is
observed that the company's performance is not good as compared to 2018. The various steps to
improve the overall performance include proper monitoring and controlling of inventory. The
company should improve the cash flows of the company.
CONCLUSION
The above report highlighted the importance, functions and role of accounting and
finance in SKANSKA PLC. Accounting not only help in conducting the day to day activities of
SP but also helps in future growth. Accounting is helpful in taking important financial decisions
of SKANSKA PLC. The different functions of accounting and finance includes management of
cash flows, investment decisions etc. Finance also plays a vital role in maximizing the wealth of
shareholder of SP. Finance is needed to meet various operational expenses and for expansion and
diversification. At last the report dealt with evaluating the financial performance of the company
by calculating ratios and comparing them. Ratio analysis is very crucial for the investor who
want to make investment in SKANSKA PLC.

REFERENCES
Books and Journals
Alarussi, A. S. A., 2021. Financial ratios and efficiency in Malaysian listed companies. Asian
Journal of Economics and Banking.
Bailey, S. J., 2017. Strategic public finance. Macmillan International Higher Education.
Bebbington, J., Russell, S. and Thomson, I., 2017. Accounting and sustainable development:
Reflections and propositions. Critical Perspectives on Accounting.48. pp.21-34.
Bose, S., Dong, G. and Simpson, A., 2019. The role of finance in achieving sustainability. In The
Financial Ecosystem.(pp. 1-18). Palgrave Macmillan, Cham.
Cockcroft, S. and Russell, M., 2018. Big data opportunities for accounting and finance practice
and research.Australian Accounting Review.28(3). pp.323-333.
Ekpo, N. B., Etukafia, N. and Udofot, P.O., 2017. Finance manager and the finance function in
business sustainability. International Journal of Business, Marketing and
Management.2(1), pp.31-38.
Joo, J., 2021. Statistical Analysis of Extreme Values of Financial Ratios. Knowledge
Management Research. 22(2). pp.247-268.
Kliestik, T. and et.al.,2020. Remaining financially healthy and competitive: The role of financial
predictors. Journal of Competitiveness. 12(1). pp.74.
Makarenko, I. and Plastun, A., 2017. The role of accounting in sustainable
development.Accounting and Financial Control.1(2). pp.4-12.
Naimi, A. I. and Whitcomb, B.W., 2020. Estimating risk ratios and risk differences using
regression. American journal of epidemiology.
Schoenmaker, D. and Schramade, W., 2018. Principles of sustainable finance. Oxford University
Press.
Vogl, J., 2017. The ascendancy of finance. John Wiley & Sons.
Online
Sustainability Accounting and reporting in the industry 4.0. 2021 [Online]. Available Through:
<https://www.sciencedirect.com/science/article/abs/pii/S0959652620308301>
The Role of Finance in Achieving Sustainability 2020 [Online]. Available
Through:<https://link.springer.com/chapter/10.1007/978-3-030-05624-7_1>