Financial Decision Making: Importance of Accounting and Finance Functions in SKANSKA Plc

This report discusses the importance of accounting and finance functions in SKANSKA Plc and evaluates their duties and roles. It also covers the calculation of financial ratios and analyzes the performance of the company.

FINANCIAL DECISION
MAKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Implication of management accounting techniques within SKANSKA Plc for decision making
.....................................................................................................................................................3
Critical evaluation of significance of Accounting and finance function.....................................4
Significance of accounting and finance functions......................................................................4
Duties of accounting & finance within SKANSKA PLC...........................................................6
Roles of Accounting & finance within SKANSKA PLC...........................................................6
TASK 2............................................................................................................................................7
Calculation of financial ratios.....................................................................................................7
Comment on the performance of SKANSKA Plc mentioning possible causes, reasons and
effects for change........................................................................................................................8
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
The financial decision-making is one of the crucial decisions made by the finance
manager of the company. The decision is about the financing mix of the organization. This report
is basically based on the SKANSKA Plc which contain two tasks. In the first task, the report will
discuss the importance of accounting and finance function. Further, the report will also critically
evaluate the importance of accounting and finance duties and roles in SKANSKA Plc using the
appropriate examples. In addition, the second task of the report will cover the calculation of
financial ratios of SKANSKA Plc using the financial statement of the company. In the
continuous, the report will interpretate and analyse the performance of the company on the basis
of the ratio results (Agbo and Nwankwo, 2018). Lastly, the report will state whether the investors
need to invest £1 million in the SKANSKA company or not.
TASK 1
Implication of management accounting techniques within SKANSKA Plc for decision making
The various management accounting techniques that is available to the company with the
help of which they can plan, control and make decision regarding business operations and
finance are as follows:
 Variance analysis: This is a technique which state the difference or gap between the
actual and standard income and expenses. With the implication of this technique the
management of the SKANSKA Plc improve their budgets estimations for upcoming year.
For example, the company able to identify and manage the key areas which leads to more
gap (Akhtaruzzaman, Berg and Hajzler, 2017).
 Break-even analysis: The break-even analysis of the products helps the company in
identifying the sales point whether they will neither earn profit nor they will incur any
loss. For example, with the implication of this technique, SKANSKA company able to
identify each product margin of safety and on this basis make decision regarding
continuation or dropping of that product line. This helps the company in maintaining its
profitability.
 Investment appraisal technique: This is also known as capital budgeting technique
which helps the company in identifying the best and profitable projects out of the

alternative projects. For example, if the SKANSKA Plc wants to invest its fund in the
projects than they can use Net Present Value method of appraisal to select one out of
many. The impact of which the company can achieve its higher returns objectives from
such investment appraisal (Anjum, 2021).
Critical evaluation of significance of Accounting and finance function
Both finance & accounting are of great importance while managing the any concern in order to
achieve financial goals and objectives of the business. In order to handle money with care, these
functions are necessary to be performed. It aids in effective management of business income and
expenses, assessing and controlling flow money, accordingly, directing business operations to
move towards the achievement of desired objectives (Kokina and Blanchette, 2019). The
accountant and financial manager or director are those who by performing these functions able to
frame financial strategy for the business, so that end goals and objectives can be met in the
desired manner and at the right time.
Accounting function is concerned with keeping accurate record of all the financial
transaction that took place during the course of a business and accordingly create journal, ledger
and trial balance, on the basis of which financial statements are prepared at the end of the period
which is required by the law and various internal and external parties to the business. In other
words, accounting function aims to communicate great sort of financial information to the
stakeholders, owners, managers and investors at large of the business which in turn helps these
parties of the business in making decision for the future related to their association with the
business (Brooks and Oikonomou, 2018). For instance, stakeholders utilises financial
information to assess the financial standing of the business to decide upon whether to continue
their association with the business or not. Investors specially needed such financial information
before making any new or additional investment in SKANSKA plc. to evaluate its financial
performance. It is the duty of the accounting or financial manager to ensure that whatever
information has been communicated is being understood by the concerned party in a required
manner. Therefore, accounting and financial information must be presented in a manner that
experts could get benefited out of it.
Significance of accounting and finance functions
Helps in the evaluation of business performance: The records generated by accounting function
reflects the outcome of business operations with the help of which financial position of the

business can be determined easily, so that understanding can be developed about what is going
on in the business in financial terms. Also, with the data available of various financial years can
be used for establishing comparison between current data & previous data in order to budget
future perspectives of the business appropriately along with determining the performance trends
of the business (Bebbington and Unerman, 2018). This accordingly helps in determining whether
the financial circumstances of the business has improved or worsened in comparison to previous
years.
Statutory compliance can be ensured: When appropriate processes and systems of accounting
are present, it is helpful in complying with the statutory requirements, so that various issues and
problems that could arise due to non – compliance can be avoided to a large extent. Also,
meeting liabilities of both short term and long term can be facilitated through maintaining
appropriate record of each accounts associated with SKANSKA plc. For example, if the
creditor’s payment is outstanding on particular day can be easily determined through creditor’s
ledger.
Preparation of budget and making future projections: Forecasting and budgeting both are
known as either maker or destroyer of the business and to accomplish these tasks of forecasting
and budgeting successfully, financial records play a vital role (Kornberger, Pflueger and
Mouritsen, 2017). Business trends can be identified through historical data and on the basis of
which various future projections are made by financial manager or director with the aims of
keeping up the business profitable. The utility and value of financial data gets enhanced when it
has been generated through an appropriate accounting processes.
Helps in making investment decisions: With the help of finance function, where to make
investment can be determined as this function provide useful insights of which investment will
generate how much liquidity or return and for how much time. Accordingly, allocation of capital
can be done towards long term assets in the most profitable manner.
Helps in making financing decisions: Such decisions are meant for identify the sources from
which funds needed business operations can be acquired. It also determines the time when the
funds will be needed along with the amount of funds required. How much proportion of debt and
equity should be included in the overall capital is the concern of this function as it affects the
firm’s value and shareholder’s wealth. Therefore, maximisation of shareholder’s wealth and
minimisation of business’s risks can be ensured through finance function. For example, whether

to use more of equity or debt in the capital structure and how much the proportion of both these
components would cost to the business & and affects its value is being decided through
performing finance function.
Helps in making decisions related to distribution of profits: Dividend decision taken by the
financial manager is concerned about how much of the earnings of the SKANSKA plc. should be
distributed among shareholders and how much should be retained with the company can be
decided through finance function only. For example, dividend pay - out ratio can be determined
by finance manager by understanding the stability of SKANSKA plc. in generating revenues and
profits and liquidity position of the company, so that future course of action of the company
could not get hampered.
Duties of accounting & finance within SKANSKA PLC.
The finance & accounting department of SKANSKA plc. has the following duties to perform:
 It is the duty of the financial accountant of SKANSKA plc. to record all the financial
transaction associated with the company on a regular basis (Scase and Goffee, 2017).
 Financial accountant has the duty to prepare income & expenditure reports on a monthly
basis and provides the same to the financial manager of SKANSKA plc. to carry out their
duty of making decisions and preparing budgets accordingly.
 Financial accountant has the duty of collecting as much data as possible, so that future
estimations can be in an effective manner. Similarly, financial manager is responsible for
advising on how much funding will be needed for the particular project on the basis of
their own estimations.
 At last, Key Performance Indicators of the business must be created by financial manager
and analysed from time to time to ensure that the business is moving in the desired
direction.
For example, financial manager of SKANSKA is responsible for conducting internal audit on a
monthly basis to identify any discrepancies in the company’s financial results as against its
financial goals.
Roles of Accounting & finance within SKANSKA PLC.
The role played by accounting and finance department of SKANSKA plc. Is very noticeable
where it facilitates the following:

 Recording of company's income and expenses to arrive at the year end financial
performance of the company (Mai and et.al., 2019).
 System accountant facilitates analysis of financial information needs of the company by
undertaking review of the existing accounting system.
 Monthly processing of payroll is what the task of financial accountant.
 Financial manager undertake to prepare budgets for every upcoming period and
accordingly identify variances occuring between planned and actual performance to avoid
any discrepancies in overall performance by taking corrective measures immediately or at
the right time. In this way, they ensures that the SKANSKA plc. is moving on the right
track.
TASK 2
Calculation of financial ratios
Ratio Calculation
Ratios Formula 2018 2019
Finance cost 150 300
Total Assets 4470 8070
Current Liabilities 645 2220
Net Profit 600 675
Net Sales 4800 6000
Current Assets 1515 2070
Opening debtors 0 900
Closing debtors 900 1200
Net credit sales 4800 6000
Opening creditor 0 570
Closing creditor 570 2100
Net credit purchase 2700 4800

Earning before
interest and tax
(EBIT)
Net Profit + Finance cost 750 975
Capital employed Total Assets – Current Liabilities 3825 5850
Average receivable Opening debtor + closing debtor/ 2 450 1500
Average payable Opening creditor + closing creditor/ 2 285 1620
Return on capital
employed
EBIT/ capital employed* 100 20.00% 17.00%
Net Profit margin Net profit/ net sales* 100 12.50% 11.25%
Current ratio Current assets/ current liabilities 2.3 0.93
Average
receivable days
Average receivable/ Net credit sales*
365 days
34 days 91 days
Average payable
days
Average payable/ Net credit purchase*
365 days
39 days 123 days
Comment on the performance of SKANSKA Plc mentioning possible causes, reasons and effects
for change.
On the basis of above calculations of financial ratio, the performance of the company are
as follows:
Profitability Ratio:
The profitability ratio is a financial metrics which indicate the ability of the company to
generate revenue or profit from its products sale, utilization of capital and total equity. As per the
above information it is identified that the net profit margin of the SKANSKA is 12.50% in the
year 2018 while in the year 2019 the ratio is 11.25%. Along with that, the return on capital
employed in the year 2018 and 2019 is 20% and 17%. This means that the profitability position
of the company in the current year is poor as compared to previous year because negative change
in the ratios. The possible causes and reasons for this change is high cost even if the sales are
high. The high cost of sales is result into the low profitability of the business. Beside this, the

poor management of the company is also one of the reasons behind the poor profitability
(Battiston and et.al., 2021). The effect of such change over the investors is that they unable to get
high returns and on the company is that they unable to keep their investors happy and satisfied.
Liquidity Ratio:
The liquidity ratio is also one of the significant part of the financial ratio which state the
ability of the company to pay of its current liabilities. The payment must be done with the use of
amount generated from current assets. This ratio includes current ratio (CR). The CR of
SKANSKA Plc in the year 2018 is 2.3 while in the year 2019 it has reduced to 0.93. This is a
negative change in the ratio which indicate that company are unable to manage its current assets
and liabilities. The reason and causes behind this might be that the company are holding outdated
inventories within the warehouse which further increases their holding cost. Further, the reason
of such change is also because of the late payment receivables from trade debtors. This change
majorly affects the performance of the SKASKA Plc because they are unable to maintain a
relation with its customer as well as its creditors (Bradbury and Scott, 2021). However, investors
of the company do not use the liquidity ratio for their decision-making thus it does not affect
them. In order to improve this, it is advisable to the company that they have to switch from the
short-term debt to the long-term debt.
Efficiency Ratio:
The efficiency ratio of the company basically states its ability to use and manage the
current and fixed assets of the company. This includes the average receivable days which state
the ability of the company to receive the payment from its debtors and customers. The average
receivable days also known as debtors’ collection period of the SKANSKA Plc in the year 2018
is 34 days while in the year 2019 91 days. This indicates that previously company receives its
debtors’ dues in 34 days but now they require 91 days to get its payment from the trade
receivables. The reason behind such change is that the company is poor credit policy
management of the business. The decrease in the cash sales and increase in the credit sales of the
products are also one of the causes behind the high collection days. This change has affected
only on the debtors and company but it does not put the effect on the investors. The poor and low
collection period badly affects the operating cycle of the business and the impact of which whole

cash management get dissolved (Brooks and Oikonomou, 2018). Thus, it is advisable to the
company that they have to improve the same for which they need to provide the discounts to its
debtors on its early payment. Further, the credit policy is only allowable to the loyal customers of
the company only.
Short-term Solvency Ratio:
The short-term solvency ratio of the company indicates that the ability of the company to
meet its short-term obligation such as business loan, creditors etc. This ratio involves the average
payment ratio and this ratio of SKANSKA Plc in the year 2018 is 39 days while in the year 2019
is 123 days. This means that now the company is paying its creditors late which indicate poor
credibility and solvency of the business. The possible causes of such negative change of ratio is
that the company are unable to receive its payment from customer on time thus they also unable
to pay the payment to its creditors on time. The effect of this over the company is that their credit
worthiness is highly affected and further the creditors will never allow to supply the raw material
to company at credit terms (Bui, 2021). That's why it is advisable to the company that they have
to improve its creditors payment period. For this, they can acquire long-term loan to pay its
creditors on time if the liability gets increases.
Recommendation to Investors of SKANSKA Plc.
On the basis of above calculation and interpretation of financial ratios of SKANSKA Plc,
it is identified that the overall performance of the company in the year 2019 is poorer than the
performance of the company in the year 2018. On this basis, it can be clearly identified and state
that investment of the £1 million in the SKANSKA company is not profitable for the investors at
all. It is because the profit and earnings of the company as comparison or percentage of its sales
are decreasing even though the sales of the company are increasing. The investors of the
company basically analyse the risk attached with the business before making the decision
regarding the investment. It is because any wrong decision may lead to heavy loss to the
company which may also be financial. Further, it is also advisable to the company that such
negative change and poor performance is because of the Covid-19 and lock-down (Cockcroft and
Russell, 2018). After this situation, it might be possible that the company will definitely recover

its position and earn high profit. So, investors can invest part of the amount of £1 million in the
company.
CONCLUSION
The report has concluded the function, duty and roles of the accounting and finance team
within the SKANSKA Plc. The report has also concluded the importance of accounting and
finance within the company and how they help the company in achieving their goals and
objectives. Further, this report has also calculated the five ratios such as return on capital
employed, net profit margin, current ratio, average receivable days and average payable days.
The report has also commented on the performance of SKANSKA using the result of the
financial ratio. The comment also includes the reason, causes and effect of negative as well as
positive change in the ratio. This report has also concluded that the performance of the company
in the current year is poor as compared to the previous year which might be because of the
Covid-19 situation and lock-down. The report has also concluded the management accounting
techniques which help the company in their decision-making process along with the planning
and controlling. Lastly, the report has stated that investment of £1 million is profitable for the
investors of the company or not.

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