Importance of Accounting and Finance Function in an Organization

This report evaluates the importance of accounting and finance function within an organization and provides an understanding about the relevance of accounting and finance functions with respect to the organization. It also carries out ratio analysis of the financial statements of the company.

Report

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
TASK 1......................................................................................................................................3
Evaluating the importance of accounting and finance function within an organization........3
TASK 2......................................................................................................................................6
Part a: Calculation of the financial ratios for the two years...................................................6
Part b: Analysis and interpretation of the financial ratios......................................................8
CONCLUSION........................................................................................................................10
REFERENCES.........................................................................................................................11

INTRODUCTION
There are various roles and function played by the accounting and finance
department of an organization which helps in effectively carrying out the financial decision-
making process pertaining to the business. In this report, SKANSKA PLC is taken as an
organization which is a construction company located in UK. It was established in the year
1984 and is having locations in most of European countries which can be considered as its
key strength. The company is looking to expand its business in the other nations as well in the
coming 10 years. This report provides an understanding about the relevance of accounting
and finance functions with respect to the organization. In addition, it carries out ratio analysis
of the financial statements of the company.
TASK 1
Evaluating the importance of accounting and finance function within an organization
1. Accounting department: Financial accounting
The accounting department’s major role is to keeping track of the financial
transactions of the business. It is mainly focused on recording the monetary business
events in the books of accounting which is further utilized by the organization in
respect to decision making. In case of SKANSKA PLC, accounts team works on
creation of different types of financial reports which is useful to the top management
in terms of communicating and stating about the financial health of the company to its
stakeholders (Farhi and Gourio, 2018). On account of this role played by the
account’s division, the users of the financial reports of the company can easily take
decision in respect to whether to make an investment into the company or not. In
addition to this, it can be used in carrying out the comparative analysis with the firms
within the same industry which helps in gaining better insight over the business
performance. On the other hand, it is essential to note that the company requires
employing highly experienced and proficient employees having relevant knowledge
in the field of financial accounting. Management accounting (MA)
The MA is also a branch of accounting in which the management takes the
accounting information from the accounts department and then conducts deep analysis
of the same in order to gain a meaningful information. This information collected is
shared with the internal managerial team who based upon this takes the decision

which will advantageous to the company. It is mainly useful in the planning process
and the formulation of the business strategies. It involves creation of estimated
budgets along with other useful reports which provides assistance in the planning and
execution of the business activities. SKANSKA PLC by effectively making use of the
MA techniques and reports, can undertake meaningful business-related decision
which will be beneficial for it in long run (Cockcroft and Russell, 2018). This
function is more useful while expanding the business or launching new product in the
market. It will provide assistance in various stages of panning till the time it is
properly executed. It provides complete breakdown of the production capacities.
Therefore, this function of accounts team is important pertaining to decision making.
In contrast to it, in order to make it accurate, the company requires skilled
professionals having relevant qualification and work experience. Tax function
The taxation function of the organization helps in making sure that the
company is effective in complying the legal and statutory requirements. The core role
of this department is to properly determining, analyzing and meeting with the legal
aspects of the business, for instance, filling the tax return on time, conducting
accounting practices with honesty, consulting, appropriately determining the income
tax obligation and so forth (Accounting department responsibilities. 2020). In respect
to the organization like SKANSKA PLC, this function will involve tax filling along
with meeting with the other legal requirement of the business. This helps in ensuring
that the entity is operating as per the set standard. On the other side of this, for the
purpose of proper tax functioning, the employees of the company should be having in-
depth knowledge about the taxation as it is a difficult task which everyone cannot do.
 Auditing function
Under this function of accounting, the company can identify the areas where
there is any error or mistake which will help in preparation of the reports in a true and
fair view. This function assist in determining those areas or weaknesses of the
business which requires additional time, money and efforts for the purpose of
improvement (Osadchy and et.al., 2018). Through this, the management can get to
know the categories or parts which is a complete waste for the company as it is not
generating any revenue for the busines so that funds can be shifted to the profitable
areas. It also helps in identifying the frauds or misappropriation of the resources of the
entity by the employees. For example, SKANSKA PLC an internal audit will involve

different tasks apart from the fraud identification. In addition to this, it will also
review and measure the credit lines which is being provided to the clients in order to
decrease the chances of losses which is mainly done through internal audits. On the
other side, it is fundamental for the association to guarantee that the business entity is
having exceptionally qualified staff who is eligible for directing the audit by the
highly experienced, professional and experts. Along these lines, this role of accounts
department is vital for an association for checking and improving the association's
operations.
2. Finance department: Investment function
This function is considered to be the most important function of the finance division
in an organization as it works on effective allocation of the financial resources of the
business. It is in simple terms also called as capital budgeting decision, in which the
decisions are undertaken pertaining to where to invest the funds. It involves proper
evaluation of the available investment proposals with the help of various investment
appraisal techniques and that option is selected which will give higher profits in the
future (Bakhodirovna, 2019). For example, investment function will assist
SKANSKA PLC in taking decision about the allocation of capital to the various
sources in order to generate better return in the future. It likewise includes the choice
in association with the depreciable assets which isn't enhancing the business and can
be utilized for using those assets to get other advantageous resources. But this requires
the personnel having greater knowledge and understanding about the investment. Financing function
The role of finance department is mainly in concerned with the financial management
of the company. It is involved into the control and planning of the organizational
financial resources. From the perspective of the business, finance function works on
ensuring that the company is acquiring the right sources of funds and utilizing the
funds which is essential for the efficient business operation (Gartenstein, 2019).
Finance is considered as the lifeblood of the business and ineffective and
inappropriate management of it will result into business failure. For instance,
SKANSKA PLC having a highly talented and skilled finance team who are having
deep understanding about the finance and its various prospects. The main aim of the
financing function is that to make sure that the investors of the company get better

and timely return along with reducing the chances of risk. On the other side, it is
important to understand that there are different sources of financial instruments each
having pros and cons which is essential to be taken account for in order to avoid the
situation of risk and this is the most difficult task. Dividend function
The dividend function involves the decision pertaining to the decision which
incorporates the level of income delivered to investors in terms of dividend, it states
about the determining the stability of the absolute dividend in respect to the trend and
the repurchase of stock. The dividend payout ratio of the company decides the which
has been retained into the business and should be assessed in the light of the goal of
expanding investor wealth (Hope and Vyas, 2017). Procuring higher earnings and a
positive return is the main aim and objective of every business organizations.
However, the major role and function of the finance manager is to determine the
amount which is to be distributed as dividend while retaining the remaining the profits
into the business. In addition to this, SKANSKA PLC is needed to comply with the
various legal and contractual responsibility and criteria in order to avail the funds
from the desired sources. Therefore, the dividend distribution policy should not be
formulated such that it affects the terms and conditions pertaining to procurement of
finances.
 Working capital (WC) function
The WC function of finance division makes sure that the company is having
enough funds for meeting with its daily and short-term requirement of the business
(Baker and et.al., 2017). In respect to SKANSKA PLC, finance team has made sure
that there is sufficient amount of funds which is being available with the company for
the purpose of carrying its daily business activities. In contrast to this, SKANSKA
PLC has to regularly monitor its working capital in order to make sure is maintaining
the minimum amount so that timely remedial measures can be taken to overcome the
problem of insufficient working capital.
TASK 2
Part a: Calculation of the financial ratios for the two years
(i) Return on capital employed
Particulars Formula 2018 2019
EBIT 750 975

Total assets 4470 8070
Current liabilities 645 2220
Capital employed
Total assets - current
liabilities 3825 5850
Return on capital
employed 19.61% 16.67%
(ii) Net profit margin
Particulars Formula 2018 2019
Net profit 600 675
Sales 4800 6000
Net profit ratio
Net
profit /
sales *
100 12.5% 11.25%
(iii) Current ratio
Particulars Formula 2018 2019
Current assets 1515 2070
Current liabilities 645 2220
Current ratio
Current
assets /
current
liabilities 2.35 0.93
(iv) Debtor’s collection period
Particulars Formula 2018 2019
Trade receivables 900 1200
Sales 4800 6000
Debtors’ collection
period
Trade
receivable
s / Sales
*365 68 73
(v) Creditor’s collection period
Particulars Formula 2018 2019
Trade payables 570 2100
Purchase 2700 4800

Creditor’s
collection period
Trade
payables /
purchase
*365 77 160
Part b: Analysis and interpretation of the financial ratios
(i) Return on capital employed (ROCE)
The ROCE ratio is used for determining the ability of the company in generating
greater profits from the capital employed into the business. This is the most important
financial metrics which is being used by the investors and creditor in order to determine
whether the company is right for making an investment. High ratio is considered to be
favorable for the company. In respect to the SKANSKA PLC, there is a decrease in the
ROCE from 20% to the 17% in the year 2019 which is point of concern (Adjirackor and
et.al., 2017). The cause behind this decline can be increase in the amount employed by the
organization with little or no change in the operational profits of the company. In simple
terms the change in the ratio is not adequate or equivalent which ahs consequently lead to
decline in ROCE. Therefore, it is suggested to the SKANSKA PLC to implement corrective
steps which will assist in increasing the effectiveness of the entity in effectively making
utilization of its capital employed. This will lead to attaining greater profits and leading
increase in ROCE.
(ii) Net profit (NP) margin
Under this, the proportion of net profit of the company in respect to the net sales of
the business is determined. This ratio is useful in evaluating the capability of the company in
earning higher profits by its revenue from the operational activities. This is a very good
indicator of the financial health of the entity and is mostly mad use by the investors and
creditors which helps in determining the ability of the firm in converting its sales into profits
(Rawan, 2019). Pertaining to the case of SKANSKA PLC, there is a drop in the NP margin as
in the previous year it was 13% while in the year 2019, it was 11% and this decrease in
percentage indicates that there is company is not able to properly manage its business
expenses which ahs resulted into reduction in profits. In order to improve this situation, the
company is required to implement relevant strategies like reducing the price of its product or
services or by the way of implementing better marketing and promotional practices for
grabbing the attention of the clients. In addition to this, the company can work on identifying
the areas where the major cost is incurred so that actions can be taken to reduce it.

(iii) Current ratio
This ratio measures the ability of the company pertaining to effectively meeting with
its short-term obligations through the help of its existing current assets. Along with liquidity,
this ratio also provides for the efficiency ratio and this ratio indicates that the firm is limited
amount of time in order to raise the funds for the for meeting with the requirement of the
sudden liabilities. This ratio provides assistance to the management and investors for the
purpose of gaining knowledge and understanding about et liquidity position of the entity
(Ahmed Abdul-Aziz and et.al., 2019). It is desirable to have greater proportion as it is more
ideal for the business which validates that the association is having adequate amount for
settling its present charges. Likewise, note that a lot higher proportion is additionally not
satisfactory as it implies that the business is having overabundance money which isn't
increasing the value of the entity. In respect to the SKANSKA PLC, the current proportion is
0.93 in 2019 when contrasted with 2.35 in 2018. In the wake of assessing this proportion, it
very well may be said that SKANSKA PLC is required to undertake the restorative remedial
actions which can be either to expand its present resources or for diminishing its present
accountabilities to meet with the desired proportion (Zinkevičienė, Stončiuvienė and
Juočiūnienė, 2018). The lower ratio conveys that the association isn't having adequate
amount of money to take care of its present obligation and is needed to work adequately to
keep away from the circumstance of money crunch. Likewise, SKANSKA PLC needs to
guarantee that its present proportion doesn't reach the more higher value, that is, above 2.35
which implies that organization is having a very sizable amount of money which has stayed
inactive adding no worth to the business.
(iv) Debtor’s collection period (DCP)
The DCP is the ratio which is determines the amount of it will take to recover the
due amount from the customers to whom the company ahs sold its products or provided
services on credit. It is highly desirable to have shorter duration as the longer duration
indicates that the business organization is not having the capability to recover the due amount
from its clients within the given time frame (Sergeev and Chaplinska, 2017). In addition to
this, it also conveys that there is a greater chance of the company to face higher bad and
doubtful debts. In respect to ratios of SKANSKA PLC, in the year 2018, the DCP was 68
days which increased to 73 days in 2019, therefore, there is an increase in days which is
concerning situation for the entity. There can be various reasons for this increase like
improper formulation of credit terms of the company which has led to providing credit to the
customers for the longer term. In addition to this, there can be the reason like the economic

slowdown or recession which has resulted into influencing the cash inflow of the entity in
order to overcome this risky situation, the company can make modification in its sales credit
terms and condition and along with this, the company should focus on providing training to
its collection team so that can be hard and effective in recovering the due amount.
(v) Creditor’s collection period (CCP)
The CCP ratio is the opposite of DCP as in this the business entity is required to
make payment to its creditors from whom it has purchased goods on credit. In comparison to
DCP, it is favorable to have higher CCP ratio but it is also restricted to a certain limit.
Organizations generally really like to have high payable days so it can utilize the accessible
money for other various usage like putting it in profitable venture and furthermore expanding
its working capital (Pret and Carter, 2017). As beyond this limit, it might look like the
company is facing problem pertaining to making timely payment of its due amount. Along
with this, it might indicate to its creditors and vendors that the company is intentionally not
willing to pay and this affects the reputation and image of the organization. In regard to
SKANSKA PLC there is a huge rise in the CCP from 77 days to 170 days in the year 2019
and it can be considered as beneficial for the organization as now SKANSKA PLC can retain
its cash for a longer term and even can make an investment for short duration over which it
can earn return as well (Jia and et.al., 2020). But in contrast to it, it is important to understand
that the much higher ratio is also not good for the company because of the reason stated
above. Therefore, it is important for SKANSKA PLC to implement strategic actions and plan
in place for repaying the money to its creditors on time otherwise, it might upset or
disappoint the creditors or vendors.
From the above, it can be inferred that the financial health of SKANSKA PLC is not
good and attractive and thus, it is recommended to not invest funds in the entity.
CONCLUSION
It can be summarized from the above that the current financial position and health of
the company SKANSKA PLC is not sound and therefore, it is recommended to Camden
Limited to not invest into the company as its ROCE along with the current ratio and debtor
receivable period is not good enough which result into making the company risky. Apart
from this, it is important to note that the company facing challenge in overcoming its liquidity
crisis and needs immediate action for exercising control over the situation. In order to do this,
the ole of accounts and finance department is crucial.

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