Financial Decision Making for SKANSKA PLC

This report evaluates the importance, functions, and duties of accounting and finance in financial decision making for SKANSKA PLC. It also analyzes the company's performance from an investor's perspective using financial ratios. The report highlights the decline in ROCE and net profit margin in 2019 and suggests ways to improve them.

Financial Decision Making

Table of Contents
INTRODUCTION- .........................................................................................................................3
Task 1..........................................................................................................................................3
Importance, functions and role of Accounting -.........................................................................3
Importance, functions and role of finance-.................................................................................5
Task 2 -........................................................................................................................................7
Company's performance from an investor's perspective- ..........................................................7
CONCLUSION-............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION-
Financial Decision making is the process of evaluating the pros and cons of a decision as
it is related to the use of money. It includes the choice between the equity or debt, investment
decisions and operating decisions of the company. The present report is based on SKANSKA
PLC (SP), a construction based company in UK. This report will critically evaluate the
importance, functions and duties of Accounting and finance. Accounting is the recording,
maintaining and reporting of the company's financial records and finance is the management of
money and investments. The report will also deal with the calculation of ratios and their impact
on the company's performance.
TASK 1
Executive summary- Financial decision-making involves the management of money in order to
maximize its profits. The report outlined will the importance, functions and role of accounting
and finance. Accounting helps to evaluate the financial performance and helps in effective
decision-making. The two types of accounting functions are management and historical
functions. Finance is also an essential part of any company as it involves various capital
budgeting decisions and involves financial planning.
Importance, functions and role of Accounting -
Accounting is a process of identifying and measuring financial activities and
communicating these to financial reports to the users and decision makers. The reports generated
by various departments of accounting such as the cost and management accounting are valuable
in taking informed decisions of the company (Melnyk and et.al, 2020).
Significance It helps in evaluating the performance of the company – Accounting helps to
understand what is going on in the company financially. It helps the SKANSKA PLC to
keep a track of expenses, gross margin, and also to compare the current data with the
previous accounting records and prepare the budgets appropriately (Campbell, 2017).
 It confirms the statutory compliance – The laws differ from state to state but appropriate
accounting systems and processes ensure statutory compliance of SP. The accounting
function ensures that liabilities like the sales tax, income tax, VAT etc. are properly
addressed.

 Helps in creating the budget – Budgets help to keep the operations of SKANSKA
PLC's operations profitable and they are based on historical financial data. Hence, the
financial data must be appropriate if they are supported by well-structured accounting
processes. Facilitates decision making for the management – Decisions such as geographical
expansion, increasing operational efficiency etc. can be taken using accounting
information. Helps in filing financial statements- Company is required to file financial statements
with Registrar of companies, accounts are required to be filed for direct and indirect tax
filing purposes. Communicates results – Accounting helps to communicate the results of the company to
various users such as the lenders, investors, creditors etc.
Functions -
There are 2 types of accounting functions -
Historical Functions –
 Recording all monetary transactions in journal.
 Classifying the records in various ledgers.
 Summarizing the records for hassle – free reviews. The balances of various accounts are
taken to trial balance and presented in a suitable form.
 Preparation of final accounts that is profit and loss statement and balance sheet to know
the financial position of SKANSKA PLC. Interpreting and communicating financial information to the users such as shareholders,
researchers, government, suppliers etc.
Managerial Functions-
 Planning, organising, directing and controlling financial policies of the company.
 Preparing budgets to obtain approximate value of future expenses.
 Controlling the cost of the company (Bailey, 2017).
 Identifying and analysing the errors and mistakes in the earlier records to make accurate
reports.
Role of accounting-

 Project Planning – Companies plan effective strategies using the data supplied by
accountants. They can decide how to function, where, when and how much to invest so
that the returns are good and shareholders are satisfied too. Public accountability – Based on financial information of the firms, public stakeholders
consider making investments in the company. So, the company must not indulge in
unethical practices and the accounts should be reflecting true and fair view of the affairs
of the company. If public has invested their money, then the company is held accountable
to them. Cash flow management and reporting- The role of accounting is to manage all cash
flows, showing a clear picture of how much cash is in hand, which help in taking crucial
and prioritize crucial financial decisions of SKANSKA PLC. Forming statistical reports – Accounting role is to prepare the statistical reports for
monitoring of tax policies and coordinating different reports of the company.
 Preparing Budgets – Annual and monthly budgets are based on the accounting
information of SP. Accounts of current and previous year or one or more years are
compared and budgets are made.
Importance, functions and role of finance-
Finance is a term that is related to management and study of money and investments. It
deals with how the company can acquire money that is capital of the company. Finance includes
allocation of asset and management of monetary resources (Beck and Levine, 2018).
Significance- Making profit for the company- “Company needs money to make money”. Finance is
needed for increasing the revenue of SKANSKA PLC to ensure that it is running
efficiently and successfully (Akan and Tevfik, 2020). Exploring new Markets – Every company wants to expand in terms of diversification,
exploring new products and markets. Therefore, without effective structure of finance,
diversification and exploring new places, markets and products may be quite difficult. Making more assets for the company- Company's long term goal is to improve its
production by acquiring more and more assets for the company. So, the company's
finance department help the company in having viable savings plan apart from short term

finances to meet the objectives. Viable saving plan can be to invest in bonds, stocks,
Pension fund, etc. which increases the financial assets of the company. Helping in managing operational expenses – Operational costs include cost of raw
material, remuneration to employees, interest, inventory etc. and meeting these expenses
is necessary for the SKANSKA PLC to keep going. Good financial management will
make certain that there is stability in the management of profits so that the operational
expenses are met. Managing the unavoidable risk – Some risks of SKASKA PLC cannot be totally
avoided. Therefore, they need to be managed properly. Having financial management
skills is beneficial in developing plans before time.
Functions- Setting financial goals and strategies – By using finance, the SKANSKA PLC can
define financial goals to understand what success is according to the company. Financial
plans state whether the company is approaching the profitability or after consistent efforts
the company remains stagnant. For eg. SKANSKA has properly managed its finance by
analsying the profits of 2018 and 2019. The profits of 2019 has increased by £75 which
indicates that financial performance of the company has improved. Setting Budgets and forecasting – Budgeting is a popular financial planning tool that
develops from forecasting. SKANSKA PLC find that creating and following a budget is
useful in keeping track on financial activities. Forecasting includes making predictions in
calculating what the future financials of the company may look like. It determines what
the sales volume, capital expenses may arise (Definition of Finance Functions, 2021).
This type of information make the investors and stakeholders know about the profitability
of the company. Managing Payables and Receivables – Finance is needed to manage the trade
receivables and payables of SKANSKA PLC. The creditors, vendors and the employees
expect quick payments. Therefore, the right amount of liquidity is needed to keep the
operations run smoothly. Provides accurate reporting – If SKANSKA PLC receive outside financing, then there
will be standard external reporting requirements. These reports focus on how the
shareholders and lenders relates to the company. Reports are needed by these

shareholders to determine the right time to purchase and sell. Therefore, the process
totally relies on accurate data for making such decisions.
Role of finance- Bookkeeping – It involves day to day recording, analysis and interpretation of a
company's financial transactions (Stancea, 2017). Analyse market trends – Financial management analyse the various market trends to find
opportunities for diversification or expansion. Maximising the wealth – Company's shareholders are the assets of the company as they
have invested in SKANSKA PLC. Their return should be maximised and this is one of
the most important role of finance. To handle financial negotiations - It is the role of finance to handle the financial
negotiations with banks and other financial institutions. Managing the taxes – Running a company involves payment of taxes. Therefore, finance
is necessary to handle tax issues of (SP) (Reid and Myddelton, 2020). Financial Planning – Finance plays a role in formation of budgets which are useful for
future planning of funds. For instance, The profit and loss account of SP depicted that the
company has decided to retain profits instead of distributing dividend in 2019. Therefore,
various dividend and investment decisions are made on the basis of financial statements. Managing flow of cash – Finance is needed for managing cash in and out of the
company (Lassala, Apetrei and Sapena, 2017). Managing company's investments - Role of finance is to manage company's assets.
Proper flow of finance is essential for making investment in SP. Expansion and Diversification - In diversifying and expanding the product and market,
finance plays a very important role. Growth and Development – Finance is required for innovation of the products including
launch of new products and services. This can ultimately lead to growth and
development. Risk management -Risks can be identified and managed through adequate finance. Risks
include external changes of the economy, currency fluctuations and recession. Their
impact can be managed through finance.
Conclusion-

It is concluded that accounting and finance function is helpful in decision-making of SP. The
various accounting role identified above are preparation of budgets, risk management,
management of cash flows etc. to improve the overall operations of SP.
TASK 2
Company's performance from an investor's perspective-
Financial performance examines the company at a specific point of time. Financial
statements used in evaluating the company overall performance include balance sheet, profit and
loss statement and cash flow statement (Cruciani, 2017). The financial performance can be
analysed through various financial performance indicators. They are-
RATIOS PARTICULARS 2018 2019
Return on capital
employed EBIT/CAPITAL EMPLOYED*100 15.69 11.54
Capital employed = Total assets –
current liabilities
Total assets 4470 8070
Current liabilities 645 2220
Net Profit Margin Net profit /sales*100 12.5 11.25
Net profit 600 675
sales 4800 6000
Current Ratio Current assets / current liabilities 2.35 0.93
Current assets 1515 2070
Current liabilities 645 2220
Average collection days
365/ Average receivable turnover
ratio 68.48 73
Average receivable turnover ratio =
net sales*365/Average trade
receivables
Average Payment days 365/ Average payable turnover ratio 87.19 168.83

Average payment period = net
purchases*365/Average trade
payables
Analysis- Return on capital employed – It is a financial ratio that can be used to assess SKANSKA
PLC' s profitability and efficiency. It is the amount of profit that the company is making
per £1 of capital employed. Capital employed is the quantum of capital that is used for
acquisition of profits by company. In 2018, ROCE is 15.69% and it decreases to 11.54%
in 2019 which shows company's profitability per £1 has declined. Investors use ROCE to
get a normal view of their future returns. Since return on capital employed has reduced, it
shows that the company is not utilising its assets efficiently for generation of profits. It is
important to investors to determine the feasibility of investment. Companies should try to
achieve increasing ROCE year by year since this shows that the company is stable is a
pleasant investment option for the investors. Overall, this ratio highlights the profitability,
and future aspects of the company. This can be used for making comparisons between
different firms to determine the venture which has high possible returns. As ROCE is
declining the investor should not invest in the company. ROCE can be improved by
reducing costs or increasing its sales, checking the areas that is incurring excess or
inefficient costs. Payment off debts by reducing the liabilities can also increase return on
capital employed (Tissen and Sneidere, 2019). Net Profit Margin – It is the ratio of net profits to sales for a firm. It shows how much
amount of profit is generated per £1 of sales after including all company's expenses
involved in generating those revenues. A higher net profit ratio means that the company
is more efficient in converting sales into profits. The net profit ratio is declined from
12.5% in 2018 to 11.25% in 2019. If an investor is interested in the company, they will
decide whether they are making good investment or not. As net profit will not take into
account specific issues like cost of goods sold is too high etc., therefore, it will give the
investors more accurate view of SKANSKA's overall performance. Overall the company
should not invest as the net profit ratio is declining. Improving this ratio through
increasing sales is the best option. This can be done by raising the price of its products or
selling more quantity. But demand is also to be considered while raising prices. Another

measure to improve ratio is to reduce the cost of production. This can be done by finding
the cheaper sources of raw materials. For some businesses, the best way to reduce cost
without sacrificing with the quality is expansion. Current Ratio – It is a liquidity ratio that evaluates a company's capacity to pay short
term obligations that is due within one year. It tells the investors how company can
maximize current assets to pay its current debt and other payables. An ideal current ratio
is 2:1. If a company has a current ratio less than 1, indicates that it does not have capital
on hand to pay off short term liabilities and a current ratio greater than 1 indicates that the
company is having enough capital to remain solvent for short term. Current ratio has also
declined from 2018 to 2019. In 2018, it is ideal but in 2019 it has reduced to 0.93. A
company must have more assets than liabilities to be solvent. While making investment
in SKANSKA PLC, the investor will evaluate the current ratio so that the short term
solvency of the company can be predicted. Hence, investor should not invest in the
company as the ratio has declined. This ratio can be improved by submitting the invoices
as quickly as possible and by shifting from short term debt to long term debt which
lowers the rate of interest. Another possible way to increase liquidity is to sell the useless
assets and controlling the short term expenses such as rent, marketing and other
professional fees. Average collection Days (ACD) – It is the amount of time taken by the company to
receive payments which are owed by the debtors in terms of trade receivables. It shows
the effectiveness of company's trade receivable management practices. Lower average
collection days indicates that a company is taking less time to recover amount from its
debtors which indicates sound financial position of the company. Quicker collection of
trade receivables is good as it ensures proper liquidity at any point of time. An investor
always prefers to invest in a company which has lower collection period. In 2018 the
average collection days are 68.48 days whereas in 2019 it has increased to 73 days. This
might happen due to looser credit policy. Lower collection period means more liquidity
and therefore leads to more solvency of the company. Therefore, investor will not invest
in the company average collection days has increased. The average collection days can be
decreased by offering different incentive schemes to those who pay early, charging
penalties for late payment which can be a motivator for payment on time. ACD can be

reduced by effective communication with the customers and staying up to date about
customer information (Rashid, 2018)
 Average payment days (APD) – It is a solvency ratio that measures the average number
of days that a company takes to pay its creditors. Higher average payment period
indicates that the company takes more time to pay off the liabilities which shows that the
company has excess cash in hand for short term investment. On the other hand, if it is too
much high then also it has an adverse effect on the investors as it shows that the company
is facing difficulties to find the cash to pay off the creditors. It provides an insight into the
company's cash flow and creditworthiness. An investor would like to invest in a company
having higher average payment days as they are more liquid as compared to the investors
having lower average payment days but too high APD is also adverse as it affects the
credit worthiness of the company. In 2018, the average payment days are 87.19 whereas
in 2019 it has increased to 168.83. This shows that the company is not having enough
revenue to pay off the short term liabilities. Therefore, the investor should assess each of
the situation. If the average payment period is upto 90 days, then he can invest in the
company. Therefore, he should not invest in SKANSKA as APD exceeds 90 days. APP
can be improved by protecting the working capital staying good with the creditors.
Working capital can have improved by increasing the liquidity of the company. In order
to increase it, SKANSKA can reduce the overhead expenses, by selling the unproductive
assets, taking proper steps for recovering the amount from debtors. Refinancing can also
be considered if necessary. Liquidity can be increased by earning interest on any excess
cash balance and checking the profitability to assess where prices can be raised and costs
can be reduced.
Overall, the performance of the company gives a general view about the wellbeing of the
firm (Markonah, Salim and Franciska, 2020). The stakeholders of the company are creditors,
investors, employees, management etc. Each group has its own interest in understanding the
financial performance of the company. The financial performance states how well SKANSKA
PLC is managing its assets, liabilities, incomes, expenses and financial interest of its
shareholders. The various ratios are analysed and it is observed that the company's performance
is declining when it is compared to performance of 2018. To increase the overall performance,

proper inventory management can be an effective way. Proper monitoring, organising and
coordinating inventory can improve the cash flow and working capital of the company. This
makes SKANSKA PLC to invest more capital back in the company which enables the growth
and expand its market base.
CONCLUSION-
The above report concluded the importance, functions, roles and duties of accounting and
finance in SKANSKA PLC. Accounting helps in evaluating the performance of the company,
helps in taking management decisions, helping to communicate the financial results to investors,
government and other shareholders. There are 2 types of management functions- historical
functions and management functions. Finance also plays a very important role in financial
decision making and maximising wealth of shareholders. It helps in managing the operating
expenses. Finance can lead to expansion and diversification of the company. Moreover, the
report dealt with analysing the performance of the company. Financial performance of the
company is very important from investor's point of view. The various financial ratios are
calculated and on the basis of results, interpretation is developed.

REFERENCES
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Online
Definition of Finance Functions. 2021. [Online]. Available through: <
https://www.managementstudyhq.com/financial-function-types-importance-objectives.html>