Financial Decision Making: Importance of Accounting and Finance Function, Duties, and Ratio Analysis

This report discusses the importance of accounting and finance function, duties, and ratio analysis in financial decision making. It includes a case study of SKANSKA PLC's expansion plans and their financial performance analysis through ratios. The report covers topics such as profitability ratios, net profit margin, liquidity ratios, current ratio, and efficiency ratios.

Financial Decision Making

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1 ...........................................................................................................................................3
Description about importance of Accounting and finance function, duties along with their role.
......................................................................................................................................................3
TASK 2............................................................................................................................................7
Determination of ratios and interpretation on company's performance.......................................7
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................13

INTRODUCTION
Financial decision-making is based upon fiscal information available to evaluate business
performance through analysis of balance sheet, income, cash flow statement, etc. In this decision
revolves around two key indicators that are: how and when to borrow money along with this
also tell about the appropriate time of spending it. SKANSKA PLC is a construction company
based in United Kingdom, started back in 1984. Whereas, now entity is planning to expand its
business operations in other countries like Europe during next ten years. The following project
report will include importance of accounting & finance function, roles and duties with ratio
analysis.
TASK 1
Description about importance of Accounting and finance function, duties along with their
role.
Functions of accounting and finance department:
 Functions of accounting department: The key functions that accounts department need
to comply with for achieving enterprise goals are as follows:
1. To control business costs and revenue: Accounting department plays an important role
in tracking business spending in relation to income. Thus, accountant records all the
expenses of SKANSKA PLC accurately with proper formulation of charge sheet along
with their revenues (Jowel, 2021). Hence, according to this account's manager can ensure
organization's profitability.
2. Accounts receivable: Accountant properly keeps records of all receives and payments of
company to track timely payment of goods and services are made by their debtors or not.
Moreover, accountant also ensures about continually inflows of revenue into
SKANSKA's bank account.
3. Accounts payable: This function of accounting department pays attention towards the
companies bills and charges to ensure business credibility by timely paying money owed
from lenders or creditors. With proper record of payment book by accountant will lead
SKANSKA ltd to manage their funds effectively in respect to inflows of money.
4. Budgeting: Accountant's main function is to prepare companies budget by using
financial data from past as well as future anticipation for composing annual budget plan
accurately and effectively. Moreover, accounts manager drafts budgets for SKANSKA

PLC's each department individually along with of special projects if prevailing within
company.
5. Management of cash flows: Accounts department of company is responsible for
management of companies cash inflows and outflows along with this they make sure that
SKANSKA is not suffering from any financial crunches (Fordham and Hamilton, 2019).
Moreover, by preparing daily log accounts manager can ensure that company is having
sufficient cash to carry on its business operations.
 Functions of finance department: For ensuring financial stability of organization
finance manager performs many functions and some of them are mentioned below:1. Financial planning and analysis: Financing function goes beyond book keeping, hence
provide deep insight for taking decisions that will put impact on future. Therefore,
finance manager must be capable to analyse the risk and take necessary steps so that
threats can be overcome timely & ultimately will lead in SKANSKA ltd success.2. Tax compliances: As every organization is liable to pay tax and comply with all the
government laws, rules & regulations for this function finance department plays a crucial
role in determining tax liability accurately (Helmold and Samara, 2019). Therefore, to
ensure that SKANSKA has enforced with each monetary as well as local and national
laws finance manager makes report of financial working within organization.3. Capital restructuring: Finance manager plays an important role during doing capital
restructuring as their main function is to determine the appropriate and suitable capital
structure of company. Therefore, they arrange finance for entity after analysing working
capital need requirement and their risk taking capacity, so that SKANSKA PLC can
easily achieve its organizational objective with sound credibility.4. Capital budgeting: These forecasts returns on projected long term investments and
compares profitability of different investments with their cost, hence finance analyst
should be thoroughly familiar to all the financial techniques such as pay back, NPV, etc.
Therefore, finance department will ensure that current funds of SKANSKA is invested in
long term activities anticipates expected flow for future benefits dispersed over long
period.5. Acquisition of funds:This step comes after making finance forecasting and planning,
finance executive finds out various sources available in the market for acquiring funds to

accomplish short and long term needs of SKANSKA Ltd (Dekkers and et.al, 2020).
Therefore, various sources in which finance manager may pay attention will be equity,
debt, banks, and other financial institutions, etc.
Roles and duties of accounting and finance department:
 Roles and duties of accounting department: There are many roles and duties which are
implemented by account's division so that their management team can take appropriate
decisions to achieve enterprise's goal.
1. Governing and maintaining day to day accounting function: The day to day role of
companies accountant department is implemented and overseen by the account's manager
in any organization (Aksoy and Hacioglu, 2021). Hence, daily business activities which
accountant overlook are payroll, accounts receivable & payable, intra-group accounting,
tax evaluation and payment, etc. Therefore, if these functions are duly accomplished than
it will lead to attain SKANSKA's goal efficaciously.
2. Preparing internal report: Cost accounting staff provide substantial value to
management team by totalling the gainfulness of various commodity, services, product
line, stores, customers and sales region, etc. In addition to this, for improving financial
result accountants also furnish different analysis methods to SKANSKA's management
for evaluating divergent aspects of business and taking action accordingly.
3. Supervising the financial activities of organization: Accounting department is
accountable for large number of regulatory functions within a business structure.
Therefore, accounts manager considers all back office activities like billings, budgeting,
doing journal entries, etc. Hence, if this important role of directing and monitoring is
performed well in the enterprise than it will be advantageous for SKANSKA to attain its
objectives easily.
4. Perform function of providing credit facility: This is the main duty which is performed
by accounting department because granting of credit to customers considered crucial as it
will maintain trust amongst the buyers through availing such facility (Oyewo, 2020).
Therefore, by this more customers will be attracted towards SKANSKA's products as
credit balance the need for more sales along with risk of creating more bad debts.
5. Helps business entity in carrying out managerial functions of accounting: Duty of
account manager in any organization is, to make available all necessary evaluated past

financial statements, budgeted report, etc. to the management team. Hence, SKANSKA
can easily accomplish its organizational objective by taking suitable financial decisions
regarding business entity through such analysis.6. Providing accounting information to interested parties: There are many parties who
are interested in gathering accounting information, apart from owner of business entity.
Therefore, the interested parties are bankers, other financial institution authority,
creditors, tax department officer, investors, etc (Barra, Savage and Im, 2020). Hence, the
duty of providing necessary accounting information to interested parties are performed by
accounting department so that they can make sound and practical judgment.
 Roles and duties of finance department: The activities expected from finance
department includes wide range, starting from book keeping and moves towards guiding
organizational management in making strategic decisions.
1. Analysing market trends for enterprise expansion: Finance department plays an
important role in taking expansion decision through doing corporate restructuring like
merger, acquisition, takeover, amalgamation, etc (Oyewo, 2020). Therefore, for this
finance department team do many market research about companies financial structure
they are planning to undertake, or thinking for expanding its reach in other country.
2. Maximizing wealth for companies shareholders: Every enterprise has predefined goals
and objectives therefore the most essential role finance manager plays is, to improve
wealth & maximize continuous pace of profits (Poon and et.al, 2020). Hence, they follow
mainly two ways for enhancing profits, and they are lowering cost of production or can
offer goods to SKANSKA's customers at lower price by superseding its competitors
strategy.
3. Decision relating to dividend pay out: One of the most essential financing decisions
that manager plays is related to companies dividend policy. Therefore, finance
department helps SKANSKA in identifying that what portion is to be kept as retained
earnings for future business growth & other part of fund to be distributed as dividend.
4. Performs the task regarding investment: Investing firms ideal funds in various projects
and securities that will generate high returns in respect to their risk, are to be achieved
and managed by finance department effectively & efficiently. Therefore, for this finance

manager's duty is, to understand and compute the risk involved in various investment
avenues.
5. Aid to manage working capital of company: Finance department is responsible for
managing business entities cash inflows and outflows to ensure that sufficient funds are
available with SKANSKA for meeting their day to day business operations (Hunjra and
et.al, 2020). Hence, for this finance manager plays a decisive role in forecasting regular
needs, so that cash crunches does not hinder the flow of carrying out business activity.
6. Administering and coordinating performance through budget report: Another major
roles and duties executed by finance department is performance evaluation, and through
preparation of budget report it can be identified effortlessly. All-though, from budgeting
the deviation occurred will be easily determined and through that finance manager can
detect, because of which department such difference between actual and estimated output
incurred. Hence, by this role the action of employees during working get enhanced &
controlled.
TASK 2
Determination of ratios and interpretation on company's performance.
Ratio is a financial tool which helps the company to analyse various aspects of financial
statements of business that includes profitability, liquidity, efficiency and solvency of
enterprises. Therefore, for this analyst depends upon current and past financial report for
obtaining information and using that to evaluate companies performance (Naibaho, 2020).
Further, they use data to determine and draw comparison with other competing firms to know
what is the companies financial health.
Particulars Formula
For the year
ended 31
December 2018
For the year
ended 31
December 2019
Profitability ratio:
Return on capital
employed:
EBIT / Capital
employed

Earning before interest
and tax 750 975
Total assets 4470 8070
Current liabilities 645 2220
Capital employed (Total
assets – current liabilities) 3825 5850
ROCE in % 19.61% 16.67%
Net profit margin: Net profit / Net sales
Net profit 600 675
Net sales 4800 6000
Net profit margin in % 12.50% 11.25%
Liquidity ratio:
Current ratio:
Current asset / Current
liabilities
Current asset 1515 2070
Current liabilities 645 2220
Current ratio in times 2.35 0.93
Efficiency ratio:
Debtors collection
period:
Trade receivable /
Revenue from
operations * 365

Trade receivables 900 1200
Revenue from operations 4800 6000
Debtors collection
period in days 68.44 73
Creditors collection
period:
Trade payables /
purchases * 365
Trade payables 570 2100
Purchases 2700 4800
Creditors collection
period in days 77.06 159.69
Interpretation:
 Return on capital employed: ROCE is a financial ratio that is used in evaluating
companies profitability and its capital efficiency. Hence, in other terms this ratio aid to
understand that how well firm is generating profits by using its capital invested. From the
above computation it's clear that ROCE is depicting a deteriorating impact with change of
2.94% from year 2018 to 2019, i.e., from 19.61 percent it is dropping to 16.67 %.
Therefore, main reason behind such changes are that SKANSKA's operating expenses
has increased during current period which is showing impact on firms earnings before
interest and tax with less rise. In addition to this their capital employed are also showing
positive trend but, then also its overall percentage has gone down, it's just because of a
closing inventory (Maheshwari, Maheshwari, and Maheshwari, 2021). Hence, due to this
firm has not able to generate sufficient money and is remained invested in business in
form of current assets & impacted with overall change in its total assets. Along with short
term assets, companies current liabilities i.e., short term debt obligation has also putted
major effect with high rise, on money that is invested in enterprise. Further, after
analysing it, accountant can conclude that business is not optimally utilizing its capital
that are debt and equity, as they are increasing their debt portion and with this its finance

cost has also boosting up. Therefore, if company need to improve its profitability ratio,
they need to work on their cost reduction & start paying its current debts on time.
 Net profit margin: This ratio is also termed as profit margin which is used to calculate
percentage of net income produced by a company from its total revenue. Hence, net profit
is equal to profit margin divided by total revenue. In period 2019, companies net profit
margin has showed negative trend i.e., from 12.50% it has moved towards 11.25%,
showing a change of 1.25 percent (Net Profit Margin: Definition and How to Calculate,
2021). Whereas, SKANSKA is facing such major downturn because of many causes, and
they are, increase of current assets with rise in its closing inventories. Hence, besides this,
such change of rise is also depicted in the companies finance cost, due to deployment of
more funds in debt structure along with its operating expenses. Moreover, due to this
drastic changes it has impacted company very badly as they are not in a position of
producing enough profits from its sales and overhead cost composition. Therefore, for
this enterprise can increase their overall sales through selling goods and services at high
prices, or can reduce operating cost by acquiring raw materials at cheaper rate. Along
with decrease in overhead they can also bring down their closing inventory through using
market tactics like increase the price of commodities in respect to their competitors, etc.
Further, if company also reduces the consumption of utilities like power, water, gas, etc.
they can improve and control the expenses of business, along with this by reducing
labour cost, will also lead firm to decrease business expenses & improve its net profit
margin ratio.
 Current ratio: These are also known as working capital ratio which measures the
capability of firm to meet its short term current obligation with its current assets within a
year. After computing the following trend from given information, it has become cleared
that SKANSKA's liquidity position is showing adverse effect from period 2018, as the
ratio fallen down to 0.93 during its current year (Keshavarz-Ghorabaee, and et.al, 2018).
Moreover, such drastic changes are recorded in the books which occurred due to the
increase in its current liabilities, as company has not made their credit payment on time.
Hence, major portion of short term debts consist of trade payables which impacting
enterprises financial position unfavourably. These changes reflecting that firm is not
having sufficient current assets with them for repaying its short term debt obligation, as

they are not having strict policies regarding allowing goods sold on credit. Hence, due to
these, companies debtors has captured a large space in companies balance sheet which
has reduced the inflows of money within organization. Besides this, major part of fund is
also blocked in the inventory as, company is unable to sold off their whole stocks and
convert them into cash. Subsequently, due to this reason firm is facing liquidity crunches
& seeing a fall in its current financial position by not meeting a requirement with its ideal
ratio i.e., 2:1. Therefore, for improving the current ratio company need to sell off non
utilized assets and enhance profitability by rising commodities price.
 Average receivable days: Debtors collection period helps company to know that how
much time it is taking for clearing its accounts receivable i.e., it tells that for how many
days invoice remains outstanding in business before it is actually collected. Therefore,
from the above computed table it has analysed that firms debtor collection period has also
showed a negative trend as average receivable days has raised to 73 days during current
year from 68.44 days. Reasons behind such alterations are clearly noticeable as debtors
recorded in the SKANSKA's Ltd balance sheet is more. Along with this after analysing
ratio trend of debtors collection period it has depicted that company is facing trouble in
receiving due money from their customers which indicates that trade debtors are
problematic. Consequently, creating hindrance between maintaining liquidity position as
the money is tied up in customers credit which is indicating poor business entity's
performance. Hence, to overcome this problem enterprise can give their debtors an early
payment discounts so that by this strategy they will start paying company with a great
speed. Along with this, firm need to begin reminding their buyers about late payment
from the first day, although, business entity besides this can also prepare debtors aging
report through which they can easily identify the upcoming receiving date from their
customers.
 Creditors collection period: This depicts that how much average time does company be
taking to settle its short term obligation with their trade distributors. Thus, from this chart
it reflects repaying habit of enterprise and how much business entity is taking benefit of
trade payables available. Following, computed table of ratio trend indicates positive
impact on companies average payable days as the creditor's collection period has raised
from 77.06 to 159.69 days during current year. This is considered to be a good sign for

company as they are getting more time in repaying its debt which reflects that
SKANSKA is having great credibility status (Average payment period, 2021). Hence, due
to this company is getting benefit of maintaining good amount of cash balance, &
utilizing it by investing them in profitable investment ventures so that to earn high rate of
returns. Subsequently, with increased trade creditors and purchases enterprises
performance seems to be best in comparison with its average payable days.
CONCLUSION
From the following project report it has been articulated that functions of accounting and
financing department will help SKANSKA PLC to control their cost and aid in improving
revenue through preparing budgets for the following departments. Along with this the function
will also help organization at a time of doing capital restructuring & acquiring funds. Whereas,
for this they perform many roles and duties like governing day to day business accounting
functions, recruiting workforce to fill up the vacant position, maximizing shareholder's wealth,
etc. Hence, in addition to this they also throw a light on companies performance by ratio analysis
tool.

REFERENCES
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Online
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<https://www.myaccountingcourse.com/financial-ratios/average-payment-period>
Net Profit Margin: Definition and How to Calculate. 2021 [Online]. Available through
<https://www.fool.com/investing/how-to-invest/stocks/net-margin/>