Financial Decision Making for SKANSKA Plc

This report discusses the importance of accounting and finance functions for SKANSKA Plc, along with its duties and roles. It also explains the calculation of ratios and the causes of changes in them. The report highlights the significance of maintaining proper accounting records and financial statements for assessing business performance, maintaining statutory compliance, planning and controlling, and communicating financial information. It also emphasizes the importance of financial interpretation, budgeting and forecasting, and managing investments and assets. The report concludes with suggestions for improving the return on capital employed and net profit margin ratios.

Financial Decision Making

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Explaining importance of accounting and finance function along with its duties and roles.......3
TASK 2............................................................................................................................................7
Calculating ratios and explaining causes of changes in them.....................................................7
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Accounting can be referred to as a procedure of recording, analysing and interpreting the
business transactions in systematic manner which helps company to make proper decisions.
Financial statements aids in evaluating the business performance and position and how it is
utilized in taking major planning and controlling decisions. The present case scenario is based on
SKANSKA Plc which is a construction company based in UK and established in 1984. It plans
to expand its operations to other countries as well, especially in Europe.
The report will highlight the importance of accounting and finance functions to the
organization along with its duties and roles they play in it. The report will further outline the
interpretation of various ratios and how they help company in decision-making process. It will
also showcase how ratios are used and analysed by investors willing to invest their funds in
organization.
TASK 1
Explaining importance of accounting and finance function along with its duties and roles
Importance of Accounting & Finance function: Assessing business performance: SKANSKA Plc can evaluate its business performance
by maintaining its final accounts (income statements). It helps in recording all the
expenses and incomes of company and calculating net profit/loss for a particular year
(Loughran and McDonald, 2016). It helps in determining primary and secondary sources
of income and all operating and non-operating expenditure. Maintaining statutory compliance: Company cannot operate in a market without
following proper accounting practices. There are various laws and legislations for
different nations that company needs to follow. SKANSKA Plc accounting function
ensures that liabilities like tax calculation, pension funds, etc. are properly recorded and
accounted as per the laws of country. Helps in planning and controlling: Accounting records maintained by company aids in
planning and controlling business activities (Smith, 2015). Construction company can
plan its future activities with help of budgets and projections based on accounting data to

operate profitably. It helps in finding any deviations from budgets and taking necessary
actions to reach the budgeted figures. Assessing business position: Keeping a close check on how well a business is doing
helps company in lot of ways (Gippel, Smith and Zhu, 2015). Balance sheet provides
complete detail about the financial health or position of SKANSKA Plc by having a look
at its assets and liabilities. It can identify how much it is dependent on external funds and
owner's funds to execute its business activities. Communication of financial information: Accounting function has to interpret this
information to external and internal parties. Internal parties of SKANSKA Plc like
employees, top-management staff, owners, etc. and external parties like creditors,
debtors, investors, competitors, government, etc. want to know relevant information
about company which is provided to them by accounting records and statements. Establishing Strategies: A good strategy is developed when accounting data is properly
recorded and maintained (Mitchell and Lusardi, 2015). SKANSKA Plc developing a
certain strategy of procuring raw materials and other resources at cheaper rates from
suppliers will require them to look at inventory records. Such accounting records
facilitate the strategy-making profitable for firm. Simplifying Decision-making process: Management team requires accounting and
financial records to make informed and profitable decisions. Major decisions like make
or buy a product, diversification decision or any operational decision of SKANSKA Plc
requires maintenance of financial records which eases the process (Importance of
Accounting in Business, 2018). Managing cash flows: Complete record of accounting transactions help in tracking cash
inflows and outflows. It also helps in determining the working capital requirements of the
company. SKANSKA Plc can easily manage their cash flows by preparing Cash Flow
Statement which helps in controlling the usage of funds. Keeps business organized: This is important because it helps in keeping complicated
accounting records and data in a systematic and organized manner which is easily
understandable by internal or external users. This also helps in having transparency in
financial records of company.

 Auditing can be avoided: If proper accounting practices and methods laid down by
governing bodies are followed without any mistakes, then there is no need to audit the
financial books of accounts by any external audit department. Deals with taxes: Business operating at a large scale have complex taxation management
which is sorted and calculated by accounting and finance function. Tax calculation is
very difficult and sometimes complicated, if not done by professionals (Cockcroft and
Russell, 2018). Therefore, accounting is important to determine accurate taxation amount
after proper deductions. Saves time: If financial data and accounts are not arranged and organized well enough, it
will be very difficult & complex to understand such data. Accounting functions solves
this problem by presenting data in a systematic order which saves time and energy and
manages company's finance. Serves as an evidence in court: If company enters the court of law for any arguments
against them, then all accounting data and records serves as an evidence or proof in front
of law. Hence, it is beneficial for SKANSKA Plc to maintain accounts clearly which can
be very helpful in the future.
 Clarity & Transparency: Financial records are clear and transparent enough to provide
useful information to shareholders' and investors so that they can easily invest their
excess funds in company and earn a good return over it (Wisdom and Oyebisi, 2017).
Information such as earnings before interest and tax, depreciation amount, etc. should be
accurate and free from any mistakes so that they can be analysed and interpreted by
investors.
Duties and Roles:
Any organization without accounting and finance function cannot operate efficiently and
effectively. Accounting aids in recording all incomes and expenses to determine profitability of
company. There are various duties and responsibilities of accounting function which are as
follows: Financial Accounting: All the business transactions are recorded in books of accounts by
following accounting practices (Melé, Rosanas and Fontrodona, 2017). The person

performing this duty is known as financial accountant who is required to comply with all
regulatory frameworks and taxation authorities. Determining income and expenses: The vital function of accounting is to uncover
expenditure incurred in order to earn that revenue. It helps SKANSKA Plc to maintain a
record of funds of company and to see whether expenses incurred are generating profits
or not and how much fund is allocated to each activity (What is the Role of the
Accounting and Finance Department, 2021). Employee Income: Another function of accounting is to maintain enough funds so that
wages and salaries can easily be credited to employee accounts. This function help in
determining the salary and other employee benefits according to their work and
company's profitability index. Company makes payroll tables and gives salaries and
wages. Report making: Preparing report on quarterly and yearly basis to provide all important
information to shareholders' about profits, returns etc. (Izzalqurny, Subroto and Ghofar,
2019) is also a function of accounting. SKANSKA Plc prepares such reports to have a
clear understanding about the financial matters of firm. Financial Interpretation: Organization can perform regular analysis and interpretation
about financial performance. It can be done either by external agency or internal team to
determine what all functions can be improved in efficiency and provides suggestions for
improvement. SKANSKA Plc can analyse its financial data and accounts to assess
performance in order to increase profits and reduce costs and wastes. Budgeting and Forecasting: Accounting function also prepares budget which help in
forecasting future and decision-making. Past financial data is processed to project future
outcomes by means of budgeting techniques (Maeenuddina and et.al., 2020.).
Construction company can make budgets and allocate resources to different departments
according to their requirements. Identifying sources of finance: It also identifies various sources of finance and selects
the best from different alternatives. Selection of finance mix is crucial because the whole
company's performance is dependent upon the correct usage of allocated funds. Finance
function also has to look at cost of funds before selecting and has to make a balance
between external loans and owner's funds.

 Managing Investments and Assets: It is also responsibility of accounting function to
analyse, select and manage new and existing assets. The cost of acquiring assets,
maintenance cost, depreciation cost, etc. needs to be considered by finance and
accounting department. Along with fixed assets, current assets also needs to be managed
which further helps in maintaining working capital requirements. Responsible for making strategic decisions: Another role is to provide deeper insights
when strategic decisions are taken and implemented. Decisions like make or buy a
product, dividend policy, acquiring capital assets, etc. are made by finance department
which helps SKANSKA Plc to conduct its operations effectively. Implementing control: It is responsibility of accounting and finance to maintain proper
control over all business activities in order to save important resources. Through budgets,
controlling measures are applied so that any deviations can be handled with care.
SKANSKA Plc can maintain control over production levels to check quantity and quality
of products. Cordial relations with suppliers: It is duty of finance to have a healthy relation with
vendors and suppliers by settling their dues on time. Accounting department should try to
save money by taking discounts for early payments asking for cheaper rates for buying
bulk quantities.
 Determines the price of business: When company wishes to sale its business, it has to
determine selling price which is done by finance function. Calculation of sale price can
be easily done by company if it has maintained all the financial records without any
mishap.
TASK 2
Calculating ratios and explaining causes of changes in them
RATIO CALCULATION 2018 2019
Amt. in £ Amt. in £
1. Return on capital employed
EBIT / capital employed
Earnings before interest and tax 450 375

Capital employed 3825 5850
ROCE 0.1176470588 0.0641025641
2. NET PROFIT MARGIN
NP / NET SALES * 100
NP 600 675
Net sales 4800 6000
NPR 12.5 11.25
3. CURRENT RATIO
CA / CL
Current assets 1515 2070
Current liabilities 645 2220
CURRENT RATIO 2.3488372093 0.9324324324
4. DEBTORS COLLECTION PERIOD
(Accounts receivable balance / total net sales) * 365
Accounts receivable balance 900 1200
Net sales 4800 6000
Average receivables days 68.4375 73
5. CREDITORS PAYABLE PERIOD
Average accounts payable / (credit purchase / 365)
Average account payable 570 2100
Net credit purchase 2700 4800
Average payable days 77.0555555556 159.69
Identifying possible causes of change in ratios and providing suggestions:
With help of above calculations, the performance and position of SKANSKA Plc can be
evaluated. Return on capital employed ratio is a good measure to judge performance of
organization. It calculates company's efficiency, that is, how much income is generated or earned

from capital employed. Along with company, it is also very beneficial for the prospective
investors, shareholders', etc. because they are the ones who will invest in business and want to
know how much return they can expect from money invested by them. Here, SKANSKA Plc
earns a return of 0.06 in 2019 and 0.11 in 2018. There is a downward shift in the ratio which
means that in 2019, company has a return of 0.06, that is, every pound invested in capital,
SKANSKA Plc has earned £0.06 which is very less.
There can be many reasons for low ROCE such as construction company does not have
any benchmarks set or using its capital assets in unproductive manners (Amanda, 2019).
Company must maintain this rate at least double the rate of interest. If enterprise wants funds
from investors, then it has to increase its profits and make productive use of assets from the
capital employed. Organization can enhance this ratio by clearing its debt which will reduce its
liability. It can also go for restructure of existing loans or refinancing at lower rate of interest
with better repayment options.
In respect of Net Profit Margin, company is showing declining profits, that is, net profit
has not increased according to the increase in net sales. It is reported at 12.5% in 2018 and
11.25% in 2019. Reasons for the downfall can be that company is not making extra efforts to
increase sales. It is dependent on traditional marketing practices only and not yet adopted online
marketing tools. Another reason can be SKANSKA Plc is incurring huge operating and finance
expenses to earn profit. In industry, company wants increasing net profit ratio as it indicates what
income is made by company by making its total sales.
Organisation can either increase its prices to have more profits in pockets, however, it
should be increased to a certain extent only because customers may not be willing to purchase at
increased prices. It can also focus on cost reduction techniques of production by purchasing raw
materials at cheaper rates in bulk quantities and using the latest techniques and machinery for
production process. Business entity can also focus on reducing utility expenses like curbing
consumption levels of power, water and gas. Another option to improve ratio can be finding and
acquiring new customers or tapping newer markets to increase net sales. SKANSKA plc can also
resort to social media marketing and advertising practices for promoting their business.
Another ratio, that is, Current ratio that determines ability of company to settle their
short term payments and obligations within a time frame. Ratio of company accounts for 2.34 in
2018 and 0.93 in 2019, that is also declining which shows inability of company to settle its dues.

It means for every £1 liability, company can pay only £0.93, rest of it has to be financed.
Company's net current liability has increased drastically from previous year without
much increase in current assets. The major causes of low current ratio can be SKANSKA Plc
does not have sufficient liquid money to pay its liabilities on time or it is operating beyond its
normal capacity. Another reason can be the resources of business are not utilized in optimum
ways. In addition to this, business is not collecting their dues from debtors on time which is
further increasing their working capital requirements.
Improvements can be done in many ways to enhance ratio such as purchase of fixed
assets can be delayed if it requires involvement of cash payments, decreasing personal drawings
from business or selling off unproductive assets which are old and obsolete and just increasing
assets. Ratio improvement can also be done by reducing dependence on short term loan and
switching to long term debt. It reduces burden to pay principal amount along with interest in
short time.
SKANSKA Plc's performance can also be evaluated on basis of its collection and payable
period. The debtors collection period has increased from previous year, that is, from around 68
days in 2018 to 73 days in 2019. The impetus behind increased collection period may
management's inefficient credit policy in order to enhance sales. Organisation is having liberal
credit policy and offering long credit period to its debtors. Company department is not paying
attention on collection of dues which results in increased outstanding amount. SKANSKA Plc
must reduce its collection period by offering cash discounts and other discounts for early
payments.
Lower collection period can also be achieved by accepting payments in easier ways either
through paper checks that can be discounted with banks or through online payments like
debit/credit card, paypal, etc., (Haralayya, 2021). It can also create A/R report to record payment
status of debtors which can be reviewed on a regular basis and any problem arising can be sorted
out. Construction company can also expand their customer base by offering their products and
services to large clients who will be able to pay within 30-40 days time frame. Furthermore,
business can perform credit evaluation, that is, checking credit worthiness of new customers
before granting credit to them and making agreements. Organization can also chase external
credit control agency to give good results in shorter time.

On the other hand, creditors payable period which shows the average no. of days
company takes to make payments to their creditors and suppliers. If business wants to increase
cash flow then it can pay its bills in longer days possible. However, settling dues after a long
time period may increase the risk on company's side because it may affect their credit worthiness
(What are Financial ratios, 2021). The payable period of SKANSKA Plc has increased
drastically from 77 days in 2018 to 159 days in 2019. The main cause for increased period can be
huge credit purchase of raw materials and other resources and not able to convert it into cash
sales within due time. When SKANSKA Plc is purchasing cheap raw materials from foreign
countries, it can face the problem of foreign exchange loss. Account payables will increase when
foreign rate moves against favour showing loss in accounts.
It can be improved by purchasing only that much stock levels which can be sold by
company and realize cash within a time period (Hasanaj and Kuqi, 2019). Enterprise can also
make payments early to get discounts given by suppliers. Company can also make paperless
transactions by directly transferring amount to suppliers bank accounts. It can also make a list of
vendors according to the dates on which they become due. This will help enterprise to prioritize
suppliers who are top on list to clear their payment on due date.
CONCLUSION
The above report concluded the fact that accounting and finance function is vital for any
business to carry on with its business operations smoothly. It is clear from report that accounting
function helps in assessing financial performance and position of SKANSKA Plc. It also helps in
decision-making process and communicating important information to its final users. Report has
depicted that there are various roles and responsibilities of accounting such as complying with
government laws, preparing reports and budgets, analysing and interpreting financial data.
Further, the report has examined different ratios which proves to be helpful in monitoring
the final results. The report also identified various reasons and causes for changes in ratios
between two years and provided suggestions which can be implemented for improvements like
making extra efforts to increase sales, earning sufficient profits to provide good return to
investors, making fast payments to creditors and collections from debtors, maintaining sufficient
current assets to meet financial obligations, etc.

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