This report evaluates the financial performance of Skanska PLC and the relevance of expanding its business unit. It covers the importance, roles, functions, and duties of financial management, and analyzes the organization's performance using ratio analysis techniques.
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FINANCIAL EVALUATION OF SKANSKA PLC
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Table of Contents INTRODUCTION...........................................................................................................................3 Task 1...............................................................................................................................................3 Importance, roles, functions and duties of financial management...............................................3 Task 2...............................................................................................................................................7 Performance of organsiation........................................................................................................7 CONCLUSION..............................................................................................................................10 References......................................................................................................................................11
INTRODUCTION Financial management is a practice involve managing the financial resources associated with the business entity. This report is based on the case study of Skansa Plc in context to its management of finance related practice. The organisation is based in United Kingdom which initiated its business operations in the year 1984. The organisation is further planning to expand its operations in other business locations as well such as Europe within the time spam of 10 financial years. The aim of the project is to evaluate the financial performance of the business unit and on the basis of that to understand the relevance of expansion of business unit. Henceforth, report will give emphasis over the importance of accounting and finance functions in the organisation. Duties and roles of financial management will also understand in this project,. Furthermore, the performance of the Skansa Plc would be analysed with the use of ratio analysis technique. Task 1 Importance, roles, functions and duties of financial management Financial management is about to manbage the fuinancial situation of the business enterprises. Financial planning: This practice is important as it allow the Skansa Plc to manage the financial position of the business entity. The significance of this technique adopted by the organisation is such that managing financial resources is very important in respect to the business venture. The limitation of thefinancialresourcealso motivatethebusinessventuretoincorporatethefinancial management like practices adopted by the organisation (Cui, Jo and Na, 2018). Financial planning involve allocation of funds and proper use of the financial resources adopted by the business unit. This is an obvious fact that the Skansa Plcis a growing firm that require the business unit to make a strong use of the financial resources available with the organisation. Financial planning is about to coordinate the best use of the financial resources available with the organisation. Proper use and allocation of funds The aim of the financial management practice at the Skansa Plcis to properly use the financial resources. Based on the different requirements related to the business venture this is about to allocate funds in against to follow the business practices. The aim of the financial
management practice is to ensure the best use of resources and financial feasibility available with the organisation (Drempetic, Klein and Zwergel, 2020). Allocation of funds involve on the basis of the specific need of each functional activity associated with Skansa Plcit involves segregation of funds over different operations. This also support the overall objectives of organisation to mitigate the business objectives. Taking sound financial decisions Financial management further comprises with taking up the financial decisions. This involve taking up the sound financial decisions. The role of the financial management practice is also to make strong decisions that can ensure the mitigation of the financial objectives in the best way possible. The resources available with the Skansa Plcare limited which require the management and expert to take on the sound decision-making when it comes to utilising the financial resources at the work place (Rondinelli, 2017). Taking up sound decision would include assessing the financial need of each individual functional activity and on the basis of the need identified this involves making strong decisions. Allocation related decisions are involved in this practice. The aim of the management is to make the optimum use of the financial resources that further support the business unit to mitigate the business objectives in the best way possible. Acquisition of funds Financial duty wisely involve acquisition of funds related aspect. This involve identifying the sources to collect financial resources associated with the organisation. Identification of sources of funds is equally essential for the business venture as financial resources are required for delivering every single functional activity. Acquiring fund is very important as it further support the business unit to process further the financial resources in regular business functions. Funds acquisition is very important part of the business practices adopted by the venture. Every single functional direction associated with the organisation seek finance and funds to meet up various functional responsibilities of the company (Milliman and Clair, 2017). The overall financial resources available in the respective market are limited in number that allow the Skansa Plcto effectively allocate all its resources in all different business operations entertain by the organisation. Also acquisition of funds are very powerful function that needed to operate by business venture in an y given situation. IT is important to assess the cost of acquiring the finances in the market. When it comes to evaluating about the funding options available cost of
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adopting each individual funds will also be understood. This would provide a clear overview about the way funds should be managed. Along with managing the funds it further contain a great opportunity to channelise the financial resources in the best way possible. Skansa Plc also analysis the repayment term related to acquisition of each financial resource. This make the practices more effective for the business venture to effectively analysis of the funding choices available with the company. Financial control Financialcontrol is also among the cor duty associated with the management of finances at the organisation. Controlling financial resources involve taking an eye over consumption of the funds and different financial choices associated with respective target market. Financial control would further be included as ensuring the financial feasibility regarding each individual financial resource avail;able with the Skansa Plc . The overall spectrum of financial control involve identifying the funding requirements and based on the factors identified this is about to make the most suitable use of the finances (Li and et.al.,2018). This is essential and important part of the financial management to control the overall resources are available with the company so that best level of allocation of funds can be done. This would further make the overall financial stability more feasible in nature. Financial control supported the Skansa Plcto maximise the profitability opportunity to the business venture. This further allow the business entity to improve liquidity situation at the business operations. Controlling would further include the use of funds in all different business operations adopted by the company. Profit making is amopng the core objective associated with the business operations deliver by the company. This aspect of the financial management support the business unit to achieve its one of the core business objective. Financial controlling favour the company to make the best use of the financial resources associated with the company. Increase wealth of firm Wealthmanagement is also one of the key feature related to the financial management practices adopted by the company. Wealth is the overall value of the business including all its assets, business value and such like elements. Wealth management is itself is a core term that favour or support the business entity to ensure the fulfilment of all business objectives. The basic role of the financial management is about to incorporate the business tactics in such manner that overall wealth of the Skansa Plc can be increased. This is an important direction that adopted by
the professionals at the business unit to maximise the overall wealth of the business unit (Weybrecht,2017).Thedutyoftheprofessionalswhenitcomestoentertainfinancial management is not only to incorporate the best use of the financial resources along with this the role is also to improve the overall funds availability. This is a basic responsibility of the financial professional is to ensure that managing wealth is very significant in respect to the financial professional at the work place. The availability of the financial resources are limited and in such a situation this is about to manage the overall financial requirement in such manner that wealth of the firm could be improved. Improve liquidity Financial management also play role in improving liquidity situation of the business unit. Liquidity involve managing the finances of the organisation in such manner that short term obligations can meet easily. Boosting up liquidity is required in context to the business unit as it favour the Skansa Plc to ensure mitigation of short term obligations of the business unit such as payment to creditor and other short term expenses(Amel-Zadeh and Serafeim, 2018).Improving the liquidity situation is essential in respect to the business entity channelise its business operations. This is also a duty of the financial expert to support the liquidity requirements of the venture. The above stated points demonstrate about all the cpre role, responsibilities, importance and other such aspect associated with the financial management practice adopted by the company. The main aim of the financial management practices adopted by the business venture is to ensure the best suitable financial stability at the organisation. This is required for the organisation to avail its resources in such manner that company get to deliver its overall business objectives in the best way possible. Task 2 Performance of organsiation Return on capital employed(ROCE) RatiosFormula20182019 Return on capital employedEBIT / Capital employed0.200.17 Earning before interest and tax750975 Capital employedTotal assets – current liabilities38255850
Interpretation ROCE is the financial ratio that can be used to access a company's capital efficiency and profitability. With the helps of ROCE, it can be analysed how well a company is earning profit on its capital that has been invested (Chopra, Bansal and Wadhwa, 2020). Capital employed of the company is calculated by subtracting total assets to current liability. ROCE is decreased from the year 2018 to 2019 by 0.20 to 0.17. The main reason behind this is that Skanska Plc has kept more retain earning as compare to previous year. Moreover, respective stakeholders use this ratio to analyse the performance of the company by evaluating all the area of the investment. Likewise, company has various financial assets to create its wealth which include non-current assets and current assets. Therefore,Skanska Plcchoose to deploy their fund in such a way that can increase its performance. In addition to this, it is computed with the helps of earning before interest and tax over capital employed (Gulo, 2021). Net profit margin RatiosFormula20182019 Net profit marginNet income * 100 / revenue12.50%11.25% Net income600675 revenue48006000 Interpretation Net profit margin shows how much company is generating profit from itsoperation and weather operating and overhead cost are being included. A higher net profit ratio indicate that company is efficient at converting their sales into income. The main aim of theSkanska Plcis not only maximization of sales but also generate more and more actual profit. Moreover, it is the most important indicator of company's financial health. Net profit margin is decreased from year 2018 to 2019 by 12.50% to 11.25%. The reason behind this is thatSkanska Plcis unable to convert its revenue into profit (Musallam, 2018). Likewise, it includes business activity like total revenue, COGS, all the out going cash flow, debt payment, interest payment etc. Moreover, increase in revenue does not mean high in profit because it can be followed with higher expenses. On the other side decrease in revenue does not mean less profit because it can be
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followed with effective cost management. This ratio is calculated in percentage by dividing net income to net sales. Current Ratio RatiosFormula20182019 Current ratioCurrent assets / Current liabilities2.350.93 Current assets15152070 Current liabilities6452220 Interpretation Current ratio show the liquidity position that means how well company is able to meet its short term requirements. Respective stakeholdersfeel secure if company has higher current assets as compare to current liabilities. The standard current ratios is more than one which describe that company has enough current assets to meet short term liability. From the above analysis, it has studied that company's current ratio is decreasing from the year 2018 to 2019 by 2.35 to 0.93. The decreasing in this ratio is not good for the company's liquidity and solvency. The reason behind this is thatSkanska Plchas increased their current liabilities as compare to previous year (Robison, 2021). Moreover, this yearSkanska Plchas increased its current assets but not as same or higher percentage as current liabilities are increased which means it has high obligation and less return sources. It is required to take action to rectify this ratio. This ratio is computed with the helps of current assets over current liabilities. Debtors collection period/Average Receivable days RatiosFormula20182019 Debtors collection periodAverage debtors * 365 / Net sales6873 Average debtors9001200 Net sales48006000 Interpretation The average collection period is the time duration in whichSkanska Plcreceives its payment in the respect of credit sales. Moreover, it represents the number of days between the
date when company has made credit sales and the day as payment is collected. Higher collection period showSkanska Plctakes long period to recover its payment. On the other side, shorter period representSkanska Plctakes short duration to recover its amount. Further, this ratio is calculatedonthebasisofhowmuchcompanyhasmadecreditsales.Fromtheabove computation, it has represented that debtors collection period is increasing from the year 2018 to 2019 by 68 to 73 days. Likewise,Skanska Plcneed to manage their collection period to ensure that has an enough cash in hand to meet financial obligation (Sochima and Iyafekhe, 2018). Company prefer short period for collecting its payment because it gives chance to explore or invest in different opportunity which are present in the market. Further, this ratio is computed by dividing average debtors to net sales and then multiply with the quotient that is no. of days. Average Payable days/ Creditors collection period RatiosFormula20182019 Creditor collection periodAverage creditor * 365/ COGS60176 Average creditor5702100 Cost of goods sold (COGS)34504350 Interpretation Average payable days is the financial ratio which indicate the average time duration that aSkanska Plcto pay its invoice and bills. This ratio is depended on the net credit purchases. This ratio is calculated on annual or quarterly basis which represent how wellSkanska Plcis managing its cash outflow. Moreover, it is computed with the help of cost of goods sold which means opening inventory plus purchases and minus closing inventory. The higher creditor collection period shows company takes longer period to pay its obligations like invoices and bills. On the other side, shorter payables days indicate that company takes short duration for making payment to its creditors. From the above analysis, it has been interpreted that average collection period is increased from the year 2018 to 2019 by 60 to 176 days.Skanska Plcchoose long period for making its payment because it helps to manage working capital requirements and free cash flow (Yusof And et.al., 2021). Moreover, this ratio is evaluated by dividing average creditors to COGS and then multiply with number of days.
The overall performance of the organisation is not feasible enough to invest in the business. Return on capital employed of the company has gone slow in the year with the rate of 19% in comparison to the year 2018 where the ratio was 20%. In the recent financial year the performance of the venture has gone down that create a negative environment to invest in the business practices of the venture. This make it significant for the organisation to incorporate the business practice in such a way that positive level of return can be incorporated. Net profit margin has also went down in respect to theSkansa Plc. Net profit margin is a true indicator in regard to the overall performance of the business venture entertain by the organization. This is a positive indicator that demonstrate the fact that the profitability of the business venture has gone down.Currentratioclearlydemonstratethattheliquiditysituationofthebusinesshas challenged. The recent ratio is .93 which is not even close the idle current ratio. This is important for the organization to have a suitable liquidity positive by considering the current asset double the number in comparison with the current liability of the organization. Role of current ratio is very significant for the business unit as it clearly favor the venture to ensure the best suitable level of current position of the organization. The liquidity situation of the company has also challenged due to the increased period of collection against debtor of the business unit. This is identified the fact that the liquidity situation of the business unit has been went down due to the increased collection time. Today the Skansa Plc take more time to collect the due of the debtor in comparison to the earlier financial tear. So as the business unit is taking more time to repay its current obligation. This is further not a positive situation in context to the business unit as this allows the organization to support the current position of the organization. Overall this can be stated the fact that it is not feasible enough to invest in business operations entertained by the organization. Investor can look for other option available in the market which can provide a better return against the investment made. CONCLUSION Investment decision-making is about to analysis whether the identified investment option is feasible enough or not. This is important fact that the overall performance of the company could go down which further affected over the investment choices. In every aspect company could perform less effectively when it comes to profitability, liquidity and all other aspects. This is important for the business unit to understand its requirement and to make the most important
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decisions. The leadership at the Skabnsa Plc require to evaluate its situation and based on that it is important to make strong decisions. References Books and journals Amel-Zadeh, A. and Serafeim, G., 2018. Why and how investors use ESG information: Evidence from a global survey.Financial Analysts Journal,74(3).pp.87-103. Chopra, A., Bansal, A. and Wadhwa, A., 2020. Evidence of Predicting Early Signs of Corporate BankruptcyUsingFinancialRatiosintheIndianLandscape.arXivpreprint arXiv:2008.04782. Cui, J., Jo, H. and Na, H., 2018. Does corporate social responsibility affect information asymmetry?.Journal of Business Ethics,148(3). pp.549-572. Drempetic, S., Klein, C. and Zwergel, B., 2020. The influence of firm size on the ESG score: Corporatesustainabilityratingsunderreview.JournalofBusinessEthics,167(2). pp.333-360. Gulo, K., 2021. The effect of financial ratios on income growth in agricultural companies registered in Indonesia/stock Market.JURNAL GLOBAL MANAJEMEN.10(1). pp.76- 89. Li, Y. and et.al.,2018. The impact of environmental, social, and governance disclosure on firm value: The role of CEO power.The British Accounting Review,50(1). pp.60-75. Milliman, J. and Clair, J., 2017. Best environmental HRM practices in the US. InGreening People(pp. 49-73). Routledge. Musallam, S.R., 2018. Exploring the relationship between financial ratios and market stock returns.Eurasian Journal of Business and Economics.11(21). pp.101-116. Robison, L., 2021. Financial Ratios.Financial Management for Small Businesses, 2nd OER Edition. Rondinelli,D.A.,2017.Decentralizationanddevelopment.InInternationaldevelopment governance(pp. 391-404). Routledge. Sochima, A.H. and Iyafekhe, C., 2018. Financial ratios and bank efficiency in Nigeria: a non- parametric analysis.Zeszyty Naukowe. Organizacja i Zarządzanie/Politechnika Śląska. Weybrecht, G., 2017. From challenge to opportunity–Management education's crucial role in sustainabilityandtheSustainableDevelopmentGoals–Anoverviewand framework.The International Journal of Management Education,15(2).pp.84-92. Yusof, N.M. And et.al., 2021. Determining the Credit Score and Credit Rating of Firms using the Combination of KMV-Merton Model and Financial Ratios.Science and Technology Indonesia.6(3). pp.105-112.