Financial Decision Making: Importance, Roles, and Ratios of Skansa Plc

This document discusses the importance, duties, and roles of the accounting and finance functions in financial decision-making. It also includes a ratio analysis of Skansa Plc, highlighting its performance and providing recommendations for potential investors.

FINANCIAL DECISION
MAKING

EXECUTIVE SUMMARY
Financial decision-making implies the decisions related to the optimum utilization of the
financial resources of the company. The project shows the various accounting and the finance
functions that are undertaken by the organization. It shall also ensure that operational efficiency
and the achievement of the organizational objectives. The ratio analysis of the Skansa Plc shows
that the company is on the downward graph.

TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK-1............................................................................................................................................1
Importance, duties and roles of the accounting and finance functions........................................1
TASK- 2...........................................................................................................................................4
(a) Calculations of ratios of Skansa Plc.......................................................................................4
(b) Interpretation of the ratios of Skansa Plc...............................................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Financial decision making is focused with the management of the finances in a company
from the acquisition, sources, utilization, managing the costs and budgeting in the company.
These decisions are taken by the accounting and finance department of the company. This report
shall be highlighting the various functions that are played by the accounting and finance
department of the organization, and they shall assist in the proper decision-making in the
business. Apart from that the report shall be reflecting the ratio analysis of Skansa Plc and the
comparison in the performance that is generated in two years. Further it shall also recommend
upon whether an investor must invest in the company or not.
TASK-1
Importance, duties and roles of the accounting and finance functions
1. Accounting Department:-
 Financial accounting- This is one of the significant functions of accounting department
under which the transactions of the business are recorded, summarized and then
presented in the financial statements of the company. The financial statements of the
company include the primary books of accounts, profit and loss account, balance sheet,
cash flow statement and the statement representing the changes in the position of the
equity shareholders of the company. These financial statements are then analysed and
interpreted by the internal and the external users of the company and assess the financial
and the liquidity position of the company (Cockcroft and Russell, 2018). They can also
be used to facilitate comparison internally to find out the inefficient departments and
externally with the competitors that are there in the industry. The financial accounting is
further capable of meeting the various other functions of the business as on the basis of
these statements the planning and decisions shall be taken by the company.
 Management accounting- This is another major function that is performed by the
accounting department of the organization which is concerned with facilitating the
decision-making process in respect of the future operations of the company. Post the
financial accounting is undertaken the financial information pertaining to the statements
shall be communicated to the management of the company who shall use this data to
formulate the strategic decisions for the company which can enhance the performance
and lead to the achievement of the organizational objectives of the company. The
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budgeting shall be done for the coming period using the past data that is provided to the
company. Based on this budget the optimum allocation of the resources will be made
such that the costs are minimized and the targets are fulfilled (Spanicciati, 2019). They
shall also perform the control duties by rectifying the deviations that have occurred in the
budgeted performance of the company.
 Tax functions- Apart from all the other roles and responsibilities that are undertaken by
the accounting department it also plays an important role in the tax management of the
company. This involves tracking the tax liabilities, advance tax, outstanding tax and the
various tax filing documents of the company. They determine the taxable income of the
company and by complying with all the prescribed rules of the Income tax act they shall
file the returns. Also, the knowledgeable tax accountants plan the revenues in the manner
that the deductions or the exemptions can be availed by the company and ultimately the
tax liability of the company can be reduced. In the financial decisions of the company the
debt financing is preferred over equity this is because interest is a tax-deductible
expenses and it allows financial leverage to the company. So it can be evaluated that the
assessment of tax is an important duty of the accounting department. Auditing function- Internal auditing is another role that is fulfilled by the accounting
department of Skansa Plc which to control and govern the internal operations and present
a true and fair view through the financial statements of the company. It de-motivates the
internal frauds, material misstatements, errors, compliance issues etc. that can be there in
the accounting of the company's transactions (Suprapto, 2019). The auditing ensures the
transparency, corporate governance and ethical code of conduct in the internal affairs of
the business. This function shall be facilitating proper control of the operations and shall
contribute in enhancing the efficiency and reducing the fraudulent practices that take
place in the organization. Apart from that it shall also maintain the integrity and
confidentiality of the company's data. The audited financial statements shall also increase
the confidence of the users of financial statements in the business and motivate the
investors to invest their amount in the business. The accuracy and fairness of the data
shall be positively publicizing the company.
2. Finance Department:-
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 Investment function- This function of the finance department is focusing upon the first
and the foremost segment which is the acquisition of the finances from the different
money market and capital market instruments. It ascertains the finance is arranged by
minimizing the cost of acquisition and risk of its repayment. Under the money market
instruments there can be certificate of deposits, bill discounting and treasury bills.
Whereas the capital market instruments for a longer period than one year and it includes
the various debt and equity sources of financing. Apart from that the investment function
also include the decision regrading the capital structure of the company which needs to be
balanced in a way that the fixed obligations and the dilution of the capital both are
balanced and optimized (Melnychenko, 2017). It can be done in accordance with the
investment plan which shall show the returns post covering the costs of its acquisition.
 Financing function- The investment function that shall be undertaken by the finance
department of Skansa Plc is concerned about the allocation of the financial resources of
the company for the capital expenditures of the business (Finance Functions, 2021).
These capital expenditures are conducted in order process the growth, expansions and up-
gradations in the business which involves huge amounts, long term, irreversible decision
and the risky ventures. These decisions are to be taken by the management post the
analysis of the cash flows that shall be generated, growth in the returns, availability of the
resources and its feasibility for the business. These decisions are taken for the major
objectives of the business which are to maximize the profitability and the shareholder's
wealth for the business. The various investment opportunities are analysed to find out the
best out of them which is selected based on the different techniques of investment
appraisal like the net present value, internal rate of return, payback period etc. These are
then applied in the business to enhance the returns that are generated.
 Dividend function- This function in the company is associated with the decision related
to the payment of dividend to the shareholders of the company. From the amount of profit
that is left with the company they have to ascertain that what amount is to be retained in
the company for the future investments and what proportion of these earnings are to be
extended to the shareholders of the company as returns on the capital contribution that
they have done in the business (Popoola, 2018). The declaration of dividend has to be
done viably by the management because this shall decide the future prosperity of the
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business and also the objective of wealth maximization of the shareholders. The
dividends must also be as per the needs and expectations of the shareholders of the
company. Their level of satisfaction shall further attract new investors for the company
and increase the value of the same.
 Working capital function- The working capital functions shall be measuring the amount
of working capital that needs to be maintained by the business so that the operations can
be conducted smoothly and efficiently. Working capital is the difference between the
current assets and current liabilities of the company. The working capital must at-least be
sufficient to meet the short term obligations that are due on the company and also is
sufficient to run the operating cycle of the business. Excess amount is also good for the
company as idle cash shall not give any benefits to the company but pose the cost of
acquisition. So the accurate amount of the working capital is to be accessed by the
management that is to be maintained in the company.
TASK- 2
(a) Calculations of ratios of Skansa Plc.
S.NO RATIOS FORMULA CALCULATIONS
2018 2019
1
Return on Capital
Employed
Earnings before interest and tax/
Capital employed (total assets –
current liabilities)*100 19.60% 16.70%
Earnings before interest and
tax 750 975
Total assets 4470 8070
Current Liabilities 645 2220
2 Net Profit Margin
Net profit/ Revenue from
operations*100 12.50% 11.25%
Net Profit 600 675
Revenue from operations 4800 6000
3 Current Ratio Current assets/ Current liabilities 2.348 0.932
Current assets 1515 2070
Current Liabilities 645 2220
4
Average Receivable Days/
Debtors Collection Period
Accounts Receivable/ Revenue from
operations*365 68.4375 73
Accounts Receivable 900 1200
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Revenue from operations 4800 6000
5
Average Payable Days/
Creditors Collection
Period Accounts payable/ Purchases*365 77.055 159.6875
Accounts Payable 570 2100
Purchases 2700 4800
(b) Interpretation of the ratios of Skansa Plc.
1. Return on capital employed- The return on capital employed is the ratio that shall measure the
profitability that is ascertainable to the capital of the company. It shows the efficiency with
which the capital of the company is used to derive profits for the company. The table above
shows that Skansa is earning 19.6% profits on the capital that is employed in the business
operations whereas it can be observed that in the year 2019 this ratio has fallen down to 16.70%.
The efficiency with which the capital of the company is used has decreased in the subsequent
year indicating that the operational efficiency has declined impacting the overall performance of
the business (Zolfani, Yazdani and Zavadskas, 2018).
2. Net profit margin- The net profit margin is the profitability ratio of the company which shows
the amount of profit that is earned by the company on the sales made during the year by the
company. It shows the returns that are generated per dollar of sale that is made by the company.
As per the financial data of the Skansa Plc it can be inferred that in the year 2018 the company is
earning a net profit of 12.5% but on the contrary in the year 2019 the company has earned
11.25%. Despite the fact that in the year 2019 the sales have increased for the company yet its
profitability have reduced significantly (Zavadskas and et.al., 2018). This can be due to the
increased expenses and costs of the company. This shows lack of the operational efficiency in
the employees of the company due to which economies of scale is not attained in the company.
3. Current ratio- The current ratio of the company shows the availability of the current assets to
meet the short term obligations and the liabilities of the company (Zolfani and Chatterjee, 2019).
These are the assets that can be converted to cash within a period of 1 year and so they shall be
used in meeting the short term liabilities that are to be arisen within the period of 1 year. The
financial statements of the Skansa shows that its current ratio in the year 2018 is 2.34 whereas in
the year 2019 is just 0.9. This shows that in 2018 the availability was even more than double the
liabilities that are to be met within the financial year. But this has significantly got affected in the
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year 2019 where the current assets is even less than the current liabilities that are to be met in the
period. This shows high level of inefficiency that is pertaining in the company (Liang, Zhao and
Hong, 2019). The management of the company has to take actions to improve the liquidity of the
company so that financially the company can prosper and the operations of the business can be
smoothly undertaken.
4. Average receivable days/ Debtors collection period- The debtors collection period shows the
number of days that are allowed as the credit period to the debtors of the company. This period
must be in sync with the creditors period so that the operating cycle of the company can
smoothly and efficiently perform the operations of the business. The ratio analysis shows that the
company is collecting its debt within a period of 68 days in 2018 whereas this period has
increased in the year 2019 where the number of days taken by the creditors to pay off the debts is
approximately 73 days. It can be seen that averagely the period of collection for the company is
remaining same and it enhance the business of the company (Liu and et.al., 2020).
5. Average payable days/ Creditors collection period- The creditors collection period shows the
amount of days that are taken by the company to pay off the debts to its suppliers from whom
they have purchased the goods and services. In the year 2018 this period was about 77 days but
unexpectedly it has rose to about 160 days. This shows high level of liquidity crisis in the
company where it is not able to meet the short term liabilities of the company (Mostafa,
Montemagno and Qureshi, 2018). This also affects the credibility of the company and overall
distorts the brand image of Skansa. This shall also affect the supply chain of the company where
suppliers shall be doubting the liquidity position of the company. In this case the company
should borrow amount and meet its liabilities on time.
From the above interpretation of the various ratios that are calculated for Skansa Plc it
can be evaluated that the company's performance in terms of operational efficiency, management
of the assets, third party relationships and the competitive advantage in the market is
deteriorating as compared to the previous year. It can be assessed that the company is having a
downward graph and investment in the company shall be a risky affair. The investors must do
proper research about whether the company has any future growth prospects in the business,
expansion plans, reviving strategies or the change in the current business model of the company.
If any of such actions are to be undertaken then only the company can plan to execute
investments in the company to determine future returns.
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CONCLUSION
It can be summarized from the above project that the accounting and finance department
of the company has various functions to play and are has crucial role in the financial decision-
making process of the company. These departments assess the cost budgeting and the optimum
utilization of the financial resources which help the company deriving the operational efficiency
and attain the organizational objectives of the business. The ratio analysis of the company shows
that the performance of the company has downgraded in the subsequent year and this is the
reason that the investors are suggested upon checking out the changes or the future growth
prospects before investing in the company.
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REFERENCES
Books and Journals
Cockcroft, S. and Russell, M., 2018. Big data opportunities for accounting and finance practice
and research. Australian Accounting Review. 28(3). pp.323-333.
Liang, W., Zhao, G. and Hong, C., 2019. Selecting the optimal mining method with extended
multi-objective optimization by ratio analysis plus the full multiplicative form
(MULTIMOORA) approach. Neural Computing and Applications. 31(10). pp.5871-
5886.
Liu, H. and et.al., 2020. CNHO and mineral element stable isotope ratio analysis for
authentication in tea. Journal of Food Composition and Analysis. 91. p.103513.
Melnychenko, I., 2017. Functions, Methods and Principles of Accounting in Improving an
Enterprise's Economic Security. Accounting and Finance. (2). pp.50-56.
Mostafa, K. G., Montemagno, C. and Qureshi, A. J., 2018. Strength to cost ratio analysis of
FDM Nylon 12 3D Printed Parts. Procedia Manufacturing. 26. pp.753-762.
Popoola, O. M. J., 2018. Preface to the Volume 2 Issue 2 of Indian Pacific Journal of Accounting
and Finance. Indian-Pacific Journal of Accounting and Finance. 2(2). pp.1-3.
Spanicciati, M., 2019. BUILDING TRUST IN MANAGEMENT ACCOUNTING. Strategic
Finance. 100(12). pp.62-67.
Suprapto, S., 2019. Study of Accounting and Finance Activity: Growing Demand for Models of
Accounting for Intangible Assets. RELIGACION. REVISTA DE CIENCIAS SOCIALES
Y HUMANIDADES. 4(19). pp.455-461.
Zavadskas, E. K. and et.al., 2018. A novel multicriteria approach–rough step-wise weight
assessment ratio analysis method (R-SWARA) and its application in logistics. Studies in
Informatics and Control. 27(1). pp.97-106.
Zolfani, S. H. and Chatterjee, P., 2019. Comparative evaluation of sustainable design based on
Step-Wise Weight Assessment Ratio Analysis (SWARA) and Best Worst Method
(BWM) methods: a perspective on household furnishing materials. Symmetry. 11(1).
p.74.
Zolfani, S. H., Yazdani, M. and Zavadskas, E. K., 2018. An extended stepwise weight
assessment ratio analysis (SWARA) method for improving criteria prioritization
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Finance Functions. 2021. [Online] Available through:
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