Financial Decision Making

This report discusses the importance of finance and accounting departments in business and their roles, duties, and functions. It focuses on financial decision making and analysis, including the evaluation of financial statements and the calculation of ratios. The case study of SKANSA Plc, a UK-based construction company, is used to illustrate these concepts.

Financial Decision Making

EXECUTIVE SUMMARY
This report summarizes that financial planning is a essential component for every
business as it enables organization to evaluate and analyse its financial position. Finance related
information plays a crucial role in identifying performance of business and its future
proficiencies. Effective financial analysis by proper understanding of financial statements and
appropriate linkage of identified information with business performance permits competence in
financial decision making process, it further enhances management efficiency of business.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Definition and importance of finance and accounting department in business along with there
roles, duties and functions:..........................................................................................................1
TASK 2............................................................................................................................................6
Calculation of ratios with the use of financial statement for the purpose of analysing financial
statement and commenting on it with perspective of investor:....................................................6
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Finance refers to the process of managing money in business. It includes borrowing of
money, investing, saving, borrowing as well as accounting. Accounting indicates a systematic
procedure of identifying, recording, summarizing and communicating financial transactions of
company (Bartel, 2018). This technique helps firm in tracking its income, expenditures,
investments, working capital etc. which ensures effective management of funds in business and
contributes in its smooth functioning. This report is based on financial and accounting
interpretation of SKANSA Plc. It is a UK based company and deals in construction and
development sector. This report consists description of functions, roles and duties of accounting
and finance along with its importance in organization. Further, financial statements of firm is
evaluated by calculating and interpreting ratios with the motive of analysing performance of
business.
TASK 1
Overview of organization: SKANSA Plc is a construction company and was founded in 1984.
it is headquartered in UK and is planning strategically for expanding its operations in counties of
Europe.
Definition and importance of finance and accounting department in business along with there
roles, duties and functions:
Finance department is an organizational part that focuses on managing funds of business
and plans their expenditure or investment (Blue, 2020). On the contrary, focus of Accounting
department is on recording and interpreting various financial transactions in business.
Roles of finance department: Following are the roles of department of finance in an
organization:
 Investment function: Financial department of firm analyses profitability and suitability
of various projects by calculating net present values, future value, internal rate of return
etc. Financial decision makers are capable of evaluating risk factor associated with
investments and its expected yield. Hence, in depth analysis of projects enable SKANSA
Plc to deter threats of loss and provides overview of suitable investment options so that
organization can invest in appropriate alternative and earn high profitability (de Freitas
and et.al., 2020). It provides opportunity to firm for adequate use of its capital and
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implement a strong capital budgeting function for future growth and expansion plan of
SKANSA Plc.
 Financing function: Analysing and comparing financial statement by finance
department of SKANSA Plc to evaluate its financial performance over the period and
avoid unnecessary expenditures and improvising profitability. It is a role of department of
finance in an organization to ensure adequate implementation of accounting principles
and proper design of financial processes (Falloon, 2020).
 Dividend function: Manager of finance is responsible of implementing effective
dividend policy in an organization for the purpose of maximizing shareholder value
which further leads to improvisation in market value of business. Other dividend related
roles of SKANSA Plc's finance department are distributing profits adequately among
shareholders, having stable earning options so that the risk associated with equity share
owners reduce, balancing of dividend per share to maintain expectations of company as
well as share holders and ensuring that dividend announcement positively affect stock
market reputation of company.
 Working capital function: Maintenance of working capital in business is essential for
fluent functioning of business operations. Working capital management plays a crucial
role in maintenance of adequate fund in business, so that SKANSA Plc can manage its
day to day operations and run business smoothly.
Importance of role of finance department:
 It plays a vital role in meeting operational expenses of business, such as, interest
payments, purchase of raw materials etc. by effectively managing working capital
requirements.
 Analyses of financial reports assess business in evaluating its profit or loss during period
which enables SKANSA in interpreting its performance and hence provides a financial
picture to management.
 Finance department also ensures availability of business finance through various sources
and maintenance of retained earnings as an appealing source of investment capital
(Hrnjic, Reeb and Yeung, 2019).
Role of Accounts department: Major roles of accounts department in business along
with its critical evaluation are discussed below:
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 Financial accounting: This role of accounting department indicates recording of
transactions related to finance and its reporting through financial statements. Transactions
are recorded in journals, ledger and trial balance of business while it is further reported
and summarized in financial statements, such as, cash flow statement, income statement
and balance sheet of company. Hence, accounting department of SKANSA Plc enables it
to keep track of financial transactions with the use of specific guidelines.
 Management accounting: it indicates preparation of reports about operations of business
that helps firm in long term as well as short term decision making process. Here, financial
information is provided to managers to SKANSA Plc that helps them in improvising
operation efficiency of business (Karmakar, Dutta and Biswas, 2018). This role is not
focused on external, rather, it focuses on improving internal decision making of company
by providing useful financial information with the motive of enhancing productivity and
strategic formulation of firm.
 Tax function: This department contains specially trained team of accountants that
calculates taxable income of company. This ensures periodic estimation of tax payments
with systematic tax fillings in SKANSA Plc. It is a role of this department is to
investigate implications of taxes on financial plans and enhance proper planning of
budgets. Overall, it deals with tax affairs of business.
 Auditing function: Accounting department plays another crucial role of conducting
internal audits in compliance with tax regulations. In relevance to SKANSA Plc., it
evaluates accounting systems of firm and analyse units of tax control for reducing taxes.
Proper training is provided to team members in accordance to audit regulations as well as
procedures.
Importance of roles of Accounting department:
 This department is responsible for adequate recording of transactions related to funds.
 It provides effective financial information to business managers which can be further
utilised for strengthens strategic and financial planning of business (Kumar, Jindal and
Velaga, 2018).
Duties of finance and accounting department: While considering duties of accounting
and finance departments in an organization, following factors can be analysed:
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 Development of financial plan: It is a duty of this department of SKANSA Plc. to
forecast financial planning and prepare effective budgeting so that revenues and
expenditures of business can be tracked and effective strategy can be formulated for
managing funds of company in a proper manner ( Modestino, Sederberg and Tuller,
2019).
 Activities of business development: As per assessment of financial conditions of
business, finance managers of SKANSA Plc. Is responsible for preparing development
activities as per the company's objective of expanding business in European countries.
Hence, department of accounting and finance is obliged to prepare a proper plan of
capital requirements and other expenses along with effective assessment of revenue
expected to earn. This assess business in analysing risk factor involved in expansion
strategy.
 Reconciling financial transactions: It is a duty of finance department to reconcile
yearly, monthly as well as daily transactions related to finance to track performance of
firm. It indicates comparing set of two accounts for eliminating errors and increasing
accuracy. It also helps firm in identifying any fraud or discrepancies.
 Advising on matter of project funding: Project funding indicates sum allotted in
projects. As in case of SKANSA Plc, firm is plan to invest in expansion projects hence, it
is a duty ODF finance and accounting department to evaluate risk associated with such
projects by identify initial investment required and its future returns (Niu, and et.al.,
2020).
Importance of duties related to finance and accounting department:
 These departments have vital duty of interpreting financial information and avoiding any
errors or hindrances which improves effectiveness of business.
 Further, its essential suggestions of finance related decisions and problems, secures
business from entering into non-profitable projects and directs focus of SKANSA Plc.
towards essential and profitable investment alternatives.
Function of Finance and account: While focusing on functions of these departments
some major points can be interpreted which are described below:
 Cost Control – This function of finance and account department plays important for
every company to check the cost management in every department of organisation to
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minimise the cost and ensure maximum utilisation of resources. SKANSA is
multinational construction company who focuses on activities of cost control department
and try to minimise the expenses of company through proper coordination and planning.
 Investment appraisal – Finance and Account Department monitor the different
techniques involve in this like Capital Budgeting, investment appraisal techniques that
ensure all the project that comes in hand of company is profitable. SKANSA is
construction company which handles multiple projects from all over world. So, this is
essence of company to carefully examine this function to sustain in the market (Paley,
Tully and Sharma, 2019).
 Handling Taxes issues – The core function of finance and account department is to
examine and control tax payment by company as this will indirectly effect the function
of company. SKANSA company is dealing in industry where they have to monitor their
tax payment regularly and ensure that tax payment is as per the guidelines and policies
because excess of tax payment will impact negatively and decrease in payment can put
them in danger.
 Maintaining Financial statement – It is mandatory function to maintain and
preparation of financial statement of finance and accounts department. This shows how
company is performing and its final position and after this only further strategies were
formulated. SKANSA Plc company is also prepare and manage their financial statement
and on that basis they plan some strategies and tactics for future events.
Importance of function of accounts and finance function:
 Cost control function is important to maintain a certain level of cost operation and if it
goes above that level than it will increase expense and effect the profitability of company.
For big company like SKANSA it is necessary to maintain their cost level at minimum
level and try to optimise at maximum level to maintain their profitability status (Roberts,
Armijo and Katada, 2018).
 SKANSA is big construction company that deal with many suppliers and clients all over
the world and has to identify which project is beneficial for them in long term and short
term and accept these deals on the basis of capital budgeting techniques. In that
techniques various methods are there which used to calculate profitability of different
projects and investment appraisal.
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 Laws and regulation are different and vary accordingly on their application and they
ensure the smooth functioning of business as it consist regulation of VAT, Sales tax,
Income Tax and funds which need to considered. SKANSA is large multinational
company in UK and it function and operate in different countries and has to follow rules
and regulation to addresses no causalities in terms of any situation.
 Preparation and maintaining the financial statement is mandatory for company to check
their financial condition and SKANSA is maintaining proper financial statement and on
that basis they formulate their further operational strategies and balance income and
expense and try to find out the way to increase their profit margin.
TASK 2
Calculation of ratios with the use of financial statement for the purpose of analysing financial
statement and commenting on it with perspective of investor:
Financial analysis refers to assessment of finance related transactions for evaluating
performance of an organization on the basis of financial information. It permits firm to
identifying its strengths and weaknesses in relevance to financial data. Utilization of financial
analysis in SKANSA Plc. Authorizes firm in assessing managerial effectiveness as well as
operational efficiency. It also enables firm in determining its creditworthiness and current
position in terms of cash or financial position. It also serves as a measurement criteria for
stakeholder to evaluate reliability of company (Trinh and et.al., 2020). Financial ratio is an
effective tool for analysis of financial information. It serves as a relative magnitude among two
numerical values in financial statement. SKANSA Plc. Uses this technique to identify its
competencies in terms of finance. Company evaluates major five ratios that represents position
of entire business. These ratios are further interpreted below:
 Return on Capital Employed: It is a baseline that gauges performance of company.
This ratio analysis profit that is generated from capital employed in business. Hence, it is
a indicator of efficiency of SKANSA Plc, or in other words, it evaluates profit generating
capacity of firm. It provides opportunity to management of enterprise in evaluating
productivity of business. It enables business in interpreting long term profitability of
business.
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Formula:
Return on Capital Employed = Operating Profit / (Total Assets – Current Liability)*100
Particulars 2019 2018
Net profit 675 600
Capital employed 5850 3825
Result 11.54 15.69
Working note: Calculation of Capital Employed:
Particulars 2019 2018
Total assets 8070 4470
Less: Current liabilities 2220 645
Capital employed 5850 3825
From the above ratio it can be interpreted that return on capital employed of SKANSA
Plc. has decreased over a period of time. As it was 15.69 in 2018 but it reduced to 11.54 in 2019
which states that profit generating capacity of firms capital employed has decreased. Reason for
this can be employment of unnecessary equipments in business which are more probe to
increasing cost rather than providing profit (Vrbka and Rowland, 2019).
 Net profit margin: This ratio shows percentage of profit generated from revenue of
business. That is, it represents amount of profit that company earned on the basis of
revenue generated by enterprise. Net profit indicates actual profit earned by company
after deduction of all expenses, such as, selling and distribution expenses, tax
expenditures, manufacturing expenses etc., from sales revenue. It is the most vital
indicator of financial health of SKANSA Plc. It enables organization to compare its
profitability over a period of time and instigate required improvements in case firm is
facing losses with the motive of enhancing its proficiency. It monitors management of
company in assessing profit from sales of business or it can be said that efficiency of
management in sales achieved into net income of an organization.
Formula:
Net Profit Margin = Net profit / Sales * 100
Particulars 2019 2018
Net profit 675 600
Sales 6000 4800
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Result 11.25 12.5
Interpretation of net profit ratio of SKANSA Plc. states that its percentage of profit from
revenue generated has reduced over time. While it was 12.5% in 2018 it came down to 11.25%
in 2019. As it can be analysed from income statement of company that its sales revenue has
increased in a year from 4800 to 6000 hence, it clearly indicates reason of declining profit is
increasing cost. Hence, firm should focus on reducing its expenditures for improvising
profitability.
 Current Ratio: Firm's ability and efficiency to pay short term debts or obligations is
evaluated with the utilization of this liquidity ratio. It compares current assets with
current liabilities of firm. Current assets refers to assets of business that can be converted
into cash within a year. While, current liabilities specifies that obligations which are to be
paid within a year. Application of this technique in SKANSA Plc., provides
understanding of working capital efficiency of entity and idea of operating cycle of firm.
Further it showcase potential of business to its stakeholders.
Formula:
Current Ratio = Current Assets / Current Liabilities
Particulars 2019 2018
Current assets 2070 1515
Current liabilities 2220 645
Result 0.93 2.35
Current ratio of SKANSA Plc. has declined from 2.35 in 2018 to 0.93 in 2019. Ideal ratio
that firm should maintain is 2:1. this states that ability of business in paying obligations of short
duration was good in 2018 but it reduced over a year. Hence, management should focus on
maintaining cash flow within organization.
 Debtors Collection Period: It is also termed as Average Collection Period. It indicates
time period that business takes to collect payments from its debtors (Wen and Yang,
2019). It is formulated by division of amount receivable with net credit sales of company.
The reason for calculating this ratio is that, if company will not keep track record of its
receivable amounts than it will not be able to remind debtors to pay for the same. It will
increase risk of bad debts and even arise problem of cash flow in business as money will
be blocked and firm may face difficulty in managing business affairs. This ratio
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constitutes ability of SKANSA Plc. in managing its operations smoothly by measuring
time taken by company in receiving amount from debtors. The lower average collection
ratio is, the higher is proficiency of company in managing its operations, and vice versa.
Formula:
Debtors Collection Period = Receivables / Sales * 365
Particulars 2019 2018
Account receivables 1200 900
Annual total sale 6000 4800
Result 73 68.44
Debtors collection period of organization has increased over time which is a negative
indicator. Because it represents that debtors of SKANSA Plc. are taking longer duration of time
in paying debts which hinders cash flow of business.
 Creditors Payment Period: Creditors payment period, also known as Average Payment
Period is ratio that evaluates average time taken by business in paying amount to its
creditors. If this ratio is higher than it is a negative indicator, as it states that company is
not accountable enough to pay credits on time. On the contrary, if this ratio is low it
states that ability of company to pay creditor's amount is good which further indicates to
stakeholders that company is accountable. Hence, it increases value of company which
enhances facilitates ease to firm in future borrowing. So it can be stated that it is an
financial indicators of proficiency of SKANSA Plc.
Formula:
Creditor's Payment Period = Payables / Purchases * 365
Particulars 2019 2018
Account payables 2100 570
Cost of goods sales 5250 3900
Result 146 53.35
Improvement in payment period from 53.35 to 146 days is not a good indicator as it
showcase that SKANSA Plc is taking more time as compared to previous year making payments
to creditors. Firm should focus on proper financial planning to eliminate this hindrance in
efficiency of business (Zachariadis, Hileman and Scott, 2019).
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CONCLUSION
Financial decision making is a systematic procedure of evaluating financial information
of making strategical decision for enhancement of productivity and profitability of business. It
also influences decision of shareholder's equity and borrowing capacity of business. Financial
and accounting department has various roles, duties and functions in organization to
management flow of fund. Further, financial ratios are the tool for financial analysis of business.
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REFERENCES
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