Financial Decision Making

This document discusses the importance of accounting and finance function, duties and role within Skanska plc. It also includes the calculation and analysis of financial ratios for the company.

FINANCIAL DECISION
MAKING
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................4
TASK 1............................................................................................................................................4
Importance of accounting and finance function, duties and role within Skanska plc.................4
TASK 2............................................................................................................................................8
A) Calculation of five ration for two years..................................................................................8
B) Overall performance of Skanska Plc as per results from two years and their respective
cause, reason and effects for change in ratio.............................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13
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INTRODUCTION
Financial decision manager is responsible for taking all decision related to liabilities and
stockholder equity of company. Capital budgeting, capital structuring, dividend decision and
working capital management are four areas in which financial decision are taken for achievement
of end objectives. There are several internal factors that affect financial decision making such as
size of business, cost and risk involved and nature of business. This report is about Skanska Plc
that is Construction Company in United Kingdom that has started its operation in 1984.
Furthermore the company is planning to expand its business operation in other European
countries in order to earn higher profit margin. It has covered detailed related to importance of
accounting and finance function, its duties and roles with Skanska plc. Moreover, has interpret
financial ratio in terms of its causes, reason and effects for the changes in ratio between the two
years that is 2019 and 2018.
TASK 1
Importance of accounting and finance function, duties and role within Skanska plc
Accounting can be defined as the art of recording, classifying and summarising the
transactional, event related to money in well organised manner so that they can be easily
interpreted in financial terms. It plays an crucial role in running the business as it track overall
income, expenditure and ensure all statutory regulation are followed. Thus, it provide necessary
information about the company to its management, investors, government, senior executive and
many other stakeholder that are interested in growth and operation of business (Meriam, Achsani
and Novianti , 2017). Accounting and financial help in generating three financial statements
which can be stated as follows:
1. Income statement that provide crucial detailed pertaining to overall profit and loss that
company have generated during the year.
2. Balance sheet is another financial and accounting record that provides clear information
related to financial position of company on specific data as well as time.
3. Cash flow statement is the third record that is manage by account and finance that
provide necessary information pertaining to actual cash in and out flow from business
during particular year (Schotten and Morais, 2019).
There are various reasons which illustrate the importance of accounting and finance in the
company such as:
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1) Ensure statutory compliance: It can be stated that the proper maintenance of accounting
and finance is necessary because it helps in ensuring that all legal regulation, laws are
implemented as well as abided by the company. The law vary from state to state and
country to country but systematic accounting process and system contribute in complying
to all legal laws and effective operation of business (Fischer-Pauzenberger and
Schwaiger, 2018). Therefore, the accounting and financial function of Skanska plc to
ensure that all liabilities such as VAT, pension fund, income tax and sales tax are
appropriately addressed.
2) Helps in creating budget and future projection: The another importance of
maintaining accounting and financial for Skanska plc is that it contribute in creating
effective budget as well as future projection. Likewise the manager of company generally
takes decision related to future strategies on the basis of historical financial data and
information for effective operation of business in external environment (Wilkerson and
Bassani, 2020). Well structured accounting and financial process and system maintained
by Skanska plc manager has helped it in making the appropriate budget of the company
and planning future project. So that it can easily grow and succeed in future
circumstances for longer time frame.
3) Help in filling the financial statement: This is also one of the importance of accounting
and finance of Skanska plc as business required to fill their financial statement with
registrar of companies. Moreover, it need to list entities in order to file with stock
exchange, direct and indirect tax filling purposes. Therefore it can be interpreted that
accounting and financial management play an important role in filling financial statement
for smooth operation of business in external environment or construction industry of
United Kingdom.
4) Facilitate decision making: It is also analysed that accounting and finance facilitate
effective decision making as manager of Skanska plc by knowing the financial
information is able to take right decision at right time. For example: the management of
company can make use of financial information to take decision related to geographical
expansion of business or improving its efficiency for better results.
5) Helps in effective communication with stakeholders: The accounting and financial
records are best way to communicate crucial information of company to all interested
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stakeholders of the company. Likewise the creditors, investors and lenders are external
user of accounting information as investors are key individuals that have invested their
capital in company. So through financial information they are able to know whether they
would able to get maximums return on their capital invested or not thereby take right
decision to buy shares of company (de Lima, da Cruz and Martinez, 2020). Thereby it is
the main role of accounting and finance to represent accurate and true fact related to
company so that users or interest parties can easily rely on it.
6) Systematic record of financial information: another importance of accounting and
financial function is that it contributes company such as Skanska plc in maintaining
systematic record of financial information of firm. Thus it contributes in recording
updated records so that interest stakeholders or users can easily compare the financial
performance of company to its historical data. Thereby the finance and account helps in
providing necessary information to several users of Skanska plc in well organised and
systematic manner (Ugoani, 2020). So that they need not have to face any challenge
while understanding and interpreting financial performance and position of company in
construction sector.
There are various functions, roles and duties that have to be performed by accounting and
finance of Skanska plc that are explained as follows:
1) Analysing the financial performance: The first and foremost function of the accounting
and finance is to analysis the overall financial performance and positioning of the
company. The financial record helps in understanding actual asset and liabilities of firm
or actual cash inflow and out flow during particular year. The Skanska plc manager can
easily access the financial position of company by looking into financial statement
thereby make correct decision for growth and development of company. Moreover, this
financial and account records provide insight to manager about the past mistakes thereby
more informed decision can be taken for bright future ahead.
2) Keeping or maintaining financial records: Another functions or duty of the Skanska
plc accounting and finance is to maintain proper records of company actual income and
expenses or its current positioning in market. In addition to this accounting is essential
record of company financial activities that help manager of company to take decision
related to future strategies for sustainability of enterprise (Ugoani, 2020). So, the role or
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function of financial accounting is to maintained records of financial information such as
balance sheet, income statement and cash flow during the year.
3) Avoiding legal problem: It is another accounting and financial function of Skanska plc
in which it make sure that company does not incur into any type of legal problem or
issues. Company by maintaining correct and accurate financial record is able to protect
itself from various legal laws and regulation. Likewise it is the role of financial manager
of Skanska plc to have knowledge pertaining to what expense need to be deducted, what
and how much tax need to be paid etc.
4) Making a Budget: The accounting and financial manager of Skanska plc make use of
financial records, understand the actual cash flow in order to create appropriate budget
for the company. In order to create a accurate budget for future expense, manager must
have information pertaining to net income, expenses as well as anticipated unexpected
adjustment (Spanicciati, 2019). Thus, it is role of manager to represent actual financial
information of company and continuously track change in order to adjust budget of the
company for its effective operation.
5) Preparation of financial statement: The Skanska plc accounting and financial manager
is responsible for preparation of effective financial statement of company such as balance
sheet, income statement and cash flow statement. So that accounting and finance prepare
several financial statement that helps investors, senior executive of company to know
exact position of company. Thereby, they are able to plan effective strategies that could
be used for growth and development of firm.
6) Inventory management and control: The accounting and finance function is also to
manage and control the inventory of company so that no additional expenses need to be
incurred by company on acquiring and retaining inventory. Likewise the manager of
accounting and finance maintained records of actual asset present and need to be required
in order to achieve the end objectives of organisation (Coulon, 2020).
7) Developing business strategy: It can be stated that accounting and finance of Skanska
plc also play crucial role in developing effective business strategy that can lead in growth
and expansion of business. Such as the main motivate of running an enterprise is to earn
higher profit margin so through analysis and interpreting the financial information.
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Manager of company is able to plan appropriate strategies that could be used by firm to
enhance its market share and profit margin to maximum extend.
TASK 2
Financial ration of the company can be defined as relative magnitude of two selected
numerical values that are taken from organisation financial statement. In another words, it can be
stated that financial ratio are created by making use of numerical value that are extracted from
financial statement of company in order to gathered meaningful information. The Skanska plc is
planning to expanding its business operation in various other European countries with an
motivate to earn higher profit margin (Han-Hsing and Li, 2020). Therefore on the basis of
financial statement of company several ratios have been calculated and interpreted such as return
on capital employed, net profit margin, average receivable days, average payable days and
current ratio. The ration helped in taking better decision regarding whether the company needs to
expand its business operation into other European countries or not.
A) Calculation of five ration for two years
1) Return on capital employed: It is profitability ratio of company that is used to measure how
effectively the enterprise have make use of its capital in order to generate maximum profit or
return. This ratio is mainly used by the investors of company to know whether they are able to
earn maximum return by investing their capital in the organisation or not. Moreover, the ratio
makes use of two important calculation such as capital employed and operating profit. EBIT that
is earning before interest and tax is known as operating profit which is generally represented in
the income statement of the company (Ginesti, Caldarelli and Zampella, 2018). While capital
employed is total asset of company is subtracted from current liabilities or stockholder equity
less long term liabilities. Therefore, return on capital is calculated as:
Return on capital employed = OPERATING PROFIT/ CAPITAL EMPLOYED*100
2019
1650 / 5850 (8070 – 2220) * 100
= 28.21%
2018
1350 / 3830 (4470 – 645) * 100
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= 35.25%
2) Net profit margin: It is financial ratio that is mainly used to calculate percentage of profit
that company generated during the year from its total revenue. So it is the net percentage of
revenue that company earns after deducting the overall expenses of company from sales volume.
This ratio is mainly intended to calculated because it helps in measuring overall success of
business such as high net profit margin clearly specify that company have accurately set its price
of products and services (Spanicciati, 2019). At the same time have effective control over the
price of products so that maximum value can be delivered to customers in minimum time frame.
Therefore in order to calculate net profit is divided by the total revenue of the company such as:
NET PROFIT MARGIN RATION = NET PROFIT/ REVENUE
2019
675 / 6000 * 100
= 11.25%
2018
600 / 4800 * 100
= 12.5%
3) Current ratio: It is the ratio that describe about the current assets and liabilities of the
enterprise that helps in understanding the way company is able to pay its short term liabilities.
Thus this is ratio that tells investors about the way company can effectively maximise its current
assets in order to satisfy all its debt and payable. Therefore in order to calculate current ratio of
Skanska Plc following formulae is used:
CURRENT RATIO = CURRENT ASSET/ CURRENT LIABILITIES
2019
2070 / 2220
= .932
2018
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1515 / 645
= 2.35
4) Average receivable days: It is another ratio that provide necessary information pertaining to
the way company is able to collect its debt from numerous debtors in specific time frame. The
less the time enterprise take in order to gathered debt from debtors it is easily grow and expand
its business operation (Liu, 2020). So it helps in understanding the way organisation such as
Skanska Plc are able to manage its credit that are extend to customers or collect its short term
debt for having sufficient cash to operate business. In order to calculate the Average receivable
days following formula is applied as follows:
ACCOUNT RECEIVABLE DAYS = DAYS IN PERIOD * AVERAGE ACCOUNT
RECEIVABLE / SALES ON CREDIT
2019
1200 / 6000 * 365
= 73 Days
2018
900 / 4800 * 365
= 68.44 Days
5) Average payable days: This is last ratio that has been calculated for Skanska Plc that helps in
understanding that average number of days it takes organisation to make payment to all its
suppliers. The company that is able to make payment of creditors in limited time frame is able to
retain its brand image and reputation in minds of customers (Ajanaku, E. A. and Ekundayo, O.
A., 2020). Therefore to calculate the average payable days for Skanska Plc following formulae
has been applied as:
AVERAGE PAYABLE DAYS = DAYS IN PERIOD * AVERAGE ACCOUNT PAYABLE/
PURCHASE OF CREDIT
2019
2100 / 4350 * 365
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= 176.21 Days
2018
570 / 3450 * 365
= 60.304 Days
B) Overall performance of Skanska Plc as per results from two years and their respective
cause, reason and effects for change in ratio
Return on capital employed:
From the above analysis it can be interpreted that in 2019 the Skanska Plc have return on
capital employed ratio as 28.21% but in 2018, it was 35.25%. So it can be interpreted and
analysed that investors of company are not able to generate high return on capital employed by
the investors. Since in 2018 they were getting more return as compared to 2019 thus it can be
clearly stated that there is an ineffective operation of business in external environment. The
reason for decrease in capital employed ratio is that company may not able to effectively utilise
its resources and delivered services to customers.
Net profit margin: The above ratio clearly represent that the net profit that company have earn
in 2019 was around 11.25% while the profit in 2018 was around 12.5% Thus it can be stated that
the net profit earned by organisation has decreased to 1% which resulted in loss in value and
market share of firm. The main cause for decrease in overall profit margin ratio of Skanska Plc
is that it had made more expenditure on various function which result in decrease in overall
profit of company.
Current ratio: The above ration represent that total current assets and liabilities that company
have in particular year. Likewise the ratio represent that in 2018 the current ratio of Skanska Plc
was around 2.35 whereas it has been decreased to .932 in 2019. Thus, it clearly show that
company is unable to manage its current asset and liabilities that have impacted on smooth
operation of business. In 2018 the current ratio is matching with current ratio that is 2:1 which
show that Skanska Plc is able to maintained twice assets as compared to liabilities but in 2019 it
has not match the same. So the issue is due to ineffective management of current assets or
working capital of organisation.
Average receivable days: From the above ration calculated related to Average receivable days
it can be interested that in 2019 Skanska Plc manager requires only 73 days to collect receivable
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from the debtors. On the contrary note, it can be illustrated that in 2018, there were only 68.44
days that have been required by the company to collect receivable form several debtors of the
organisation. So the positive sign is when firm is able to collect receivable in limited time frame
but the time of collection has been increased in 2019 which is not a good sign for the
organisation.
Average payable days: It can be stated that Skanska Plc in 2018 has around 60.304 days
payable while in 2019 the company payable required around 176.21 days to make payment to its
creditors. Therefore delay in payment of credit amount lead in decreasing overall brand image of
company in construction industry. In addition to this investors are less interested to provide
capital or credit because of delay in payment. So, Skanska Plc manager need to focus on
improving its Average payable days ration for better outcome of organisation.
CONCLUSION
From the above report it can be concluded that there are various function, duties that are
to be performed by accounting and finance of Skanska Plc for smooth operation of business in
external environment. Moreover, accounting and finance is important for company as it helps in
maintaining record of financial statement, helps management in better decision making for
benefits of company. At last it can be summarised from above analysis that Skanska Plc overall
performance has been decreased from 2018 to 2019 which emphasis the manager need to take
serious steps to enhance performance of business. Therefore, it needs to plan better strategies that
could be used to improve current ratio, net profit margin and capital employed ratio of the
company in construction industry.
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REFERENCES
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Coulon, Y., 2020. Efficiency Ratios. In Rational Investing with Ratios (pp. 31-45). Palgrave
Pivot, Cham.
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Finance.
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finance model: hedge portfolio representation of derivatives. In IFIP Working
Conference on The Practice of Enterprise Modeling (pp. 372-382). Springer, Cham.
Ginesti, G., Caldarelli, A. and Zampella, A., 2018. Exploring the impact of intellectual capital on
company reputation and performance. Journal of Intellectual Capital.
Han-Hsing, Y. and Li, F., 2020. CW Company Accounts Receivable Management Status Quo
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Liu, J., 2020. The relationship between accounts receivable management and corporations'
financial performance (Doctoral dissertation).
Liu, S. and He, S., 2019, January. Application of block chaining technology in finance and
accounting field. In 2019 International Conference on Intelligent Transportation, Big
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Measurement Tool and Factors Affecting Account Receivable
Performance. International Journal of Science and Research (IJSR), 6(10). pp.1169-
1177.
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financial market. Financial Innovation, 5(1). pp.1-19.
Spanicciati, M., 2019. BUILDING TRUST IN MANAGEMENT ACCOUNTING. Strategic
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Ugoani, J., 2020. Accounting Function as Management Performance Tool in
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Wilkerson, J. M. and Bassani, A. D., 2020. A Functional Elaboration Theory Perspective on
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