Importance of Accounting and Finance Functions in SKANSKA PLC
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This report evaluates the significance, roles and duties of accounting and finance functions in SKANSKA PLC, a construction and project development company based in Sweden. It also highlights the financial performance of SKANSKA PLC by applying ratio analysis and provides examples related to the company.
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TABLE OF CONTENTS INTRODUCTION...........................................................................................................................1 TASK 1............................................................................................................................................1 Critically evaluating the importance of Accounting and Finance functions, duties and roles within SKANSKA PLC and also include the examples related to this company.......................1 TASK 2............................................................................................................................................5 Describingperformance ofSKANSKA PLC results by giving emphasis oncauses, effects and improvement action..............................................................................................................5 CONCLUSION..............................................................................................................................10 REFERENCES..............................................................................................................................11
INTRODUCTION Financial decision making may be defined as the process of analyzing two or more alternative for making selection of best one. In business, it is an accountability of manager to develop competent framework which enhances shareholders wealth.In the context of business unit, main focus is placed on borrowing and allocation of funds which in turn required for investment decisions. The present study is based on the case scenario of SKANSLA PLC falls under the category of construction and project development company, based in Sweden on expanding its operations to other countries in Europe in next ten years. The present report will provide deeper insight about the significance, roles and duties pertaining accounting as well as finance functions. It also highlights financial performance of SKANSKA PLC by applying ratio analysis. Furthermore, this report will cover the examples related to the company. TASK 1 Critically evaluating the importance of Accounting and Finance functions, duties and roles within SKANSKA PLC and also include the examples related to this company. Accounting-It is the process in which includes keeps the record of financial aspects and also the recordingof any organization and financial transaction in the written form . It does evidence of taking or giving money then qualify and make the solution after that they show on that way by which they may analysis. Importance of Accounting Keeps a record of business transactions- It is one of the best importance of accounting in the SKANSKA which includes as it keeps a systematized record of business transactions (Smith and et.al., 2018). It also includes the current records which may help to users to compare the financial information with historical data. Facilitates decision making for management- Accounting is an important for internal users may include people that plan, perform and run the companies. The management of SKANSKA needs accounting in making the significant decisions. It helps in improving operational efficiency like it depends on objective, reliable data. For example, problem solving, creativity and team work. Evaluating different sources of funds: 1
With the help of accounting & finance function, a company can assess and evaluate various sources through which it can raise finance like shareholders' funds, preference shares, debentures, long–term loans and advances, etc. (Farj, Jais and Isa, 2016). Finance function will evaluate all sources considering the risks and returns associated with each alternative and then finally opting for a perfect mix of owners' funds and borrowed funds. Facilitate comparison: Accountingfunction facilitates easy comparison of financial data and information. Comparing it with previous years' information, that is intra firm comparison, acknowledges a company about its improvement in performance (What is Accounting,2021). On the other hand, inter firm comparison allows it to know where it stands in industry and for setting benchmarks. Communicate results- Accounting helps in communicating to SKANSKA for appropriate results to various users. There are some external users of accounting information like investors, lenders and creditors. It is important to establish credibility for companies and on the other side lenders need to examine the risk. Meets legal requirements- A proper accounting helps to SKANSKA to make the faithful reporting of the financial assets and liabilities. Most of the company use standardized financial statements to evaluate a company'sannouncedrevenue.Theaccountingsystemhelpsthecompany'sinfinancial statements to check that are legally and correctly reported (Strough, Wilson and de Bruin, 2020). For example, in the year 2018 the loan was 1500 but it was increased 1500 in the year 2019. Finance- Finance is term as the management of money in which include activities like borrowing, budgeting and forecasting etc.It is a statement for matters about management, activity, study of money and investments and tells about how they consume or invest that money. Importance of Finance Generate profit- The main motive of this company is to generate profit from various sources. When start a business a company's may need of capital investment to generate business effectively (Bangma 2
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and et.al., 2017). Even the most constituted business may depend on finance and there are purchasing materials, developing new products may rely on adequate funds. For example, in the year 2018 the gross profit was 1350 and it was increased 300 in the year 2019. Enable operations- Business give large amounts every day which must include pay bills, pay to employees, a business does not carry off its income and expenditure, it may hard to allot funds. Attaining long term goals- It is very necessary to have long term goals in any business to provide targets for all departments towards united front (Kim,Gutter and Spangler, 2017). To achieve the objectives inSKANSKAmayhelpthebusinesstoincreasealongwiththisincreasingcustomer satisfaction. For example, of a long tern goal would be becoming an attorney. Reporting on financial health- Business generally focus of keeping accurate records of finances along with providing reports. It includes the reports of shareholders which shows the detail of return and security along with tax returns. It also shows the person private financial situation includes savings, retirement planning and financial gain spent on non-discretionary expenses. Roles and duties of Accounting in SKANSKA PLC Control of financial policy and formation of planning- SKANSKA main aim to control the financial policies and formulates planning about future activities. It is provided the significant financial information available for preparation of the budget. Financial planning strategies help the whole financial management procedure for an organization. Cost Control- Company may control cost through the comparison of actual and standard cost for evaluating efficiency of work (Lichtenberg and et.al., 2018). It includes an order of activities that start with preparation of budget, evaluation of effective performance and last with apply the significantactionsthataremandatoryinfindoutdiscrepanciesifany.Forexample, procurement, financial controls, cost reporting and performance reporting. Prevention of errors and frauds- Company may check to prevent errors and fraud through the accounting system and to use various methods of detecting errors like check total of trial balance (Stewart and et.al., 3
2018). The information of books and accounts may be compared with amount of balance after that auditors check carefully in some areas where the chances of fraud in increased. Evaluation of employee’s performance- SKANSKA evaluate the performance of employees and assigned the task to employees of department are evaluated, for this accounting render the important information (Forcellati and et.al., 2021). It performs an important role because it provides feedback to their employees on the basis of their performance which may improves their overall productivity. Preparation of budget- The company first to prepare the budget to achieve the maximum objectives and the preparation of estimated statements of income and expenditure is supported on future activities. To do effective preparation of budget they use the specific method of comparison when they evaluate the actual results concluded the next year. Roles and duties of Finance in SKANSKA PLC Bookkeeping- The main role of finance in this company is bookkeeping in which include day to day recording, analysing and representation of company's financial transactions. (Yue,Gizem Korkmaz and Zhou, 2020) It may include the following of all expenses and incomes of finished products. Management of company's cash flow- The duty of this company is to manage company's cash flow into and out of company and assure funds are enough available to meet day to day operations of company and to check that vendors and creditors are compensated correctly. Budgets and forecasting- In the context ofcompany works with managers to set up company's budgets, prediction and also give response with regards to financial standing of company. It uses the past records to find out the positive results from respective departments to form best budget and predict over long and short term horizons. Advising and sourcing longer term financing- The next role of finance in SKANSKA is to advise companies on best financing mix that may yield the company best profit. It also helps in source longer term finance at low cost like that there is income level of liquidity. For example, that funds are raised via NBFC named Neo 4
GrowthCreditPrivateLimitedthroughprivateequityroutesfromleapFrogInvestments amounting to rs 300 crores. Management of Taxes- It is the duty of this company to solve tax issues and includes create great corporate relationswithgovernmentthroughremittingPAYEtorelevantauthorityandassuring enforcement of tax matters done within framed policies (Greenberg and Hershfield, 2019). It involves deal with timely filling of tax returns, regular financial audits and compliant with deducting tax at source etc. Assist managers in making key strategic decisions- The company assist managers in making key strategic decisions like as markets and projects to engage payback periods, to provide sufficient training to increase the efficiency of employees. Strategic decisions are based on long tern goals and vision give the opportunity to adjust shorter term plans with this profound, wide mission. Management of company's Investments- Thiscompanymanagescompany'sinvestmentandit isalso theduty of finance department to carry off company's existent assets (Valaskova, Bartosova and Kubala,2019). The company's working capital is managed effectively in such way to maximum profitability related to amount of funds. The best approach to investment management goal at achieving certain investment objects for the advantage of clients. Financial Reporting and analysis- The company takes raw accounting entries and transform into meaningful and usable financialstatements.Thefinancialdepartmentsimparttoorganizationalgrowththrough measuring and covering on everyday bases, key numbers that are essential to success of company. TASK 2 Describing performance of SKANSKA PLC results by giving emphasis on causes, effects and improvement action. (i)Return on capital employed ParticularsFormula20182019 Operating profit750975 5
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Capital employedTotal assets – current liabilities 4470-645 =3825 8070-2,220 = 5850 Returnoncapital employed Operating profit/Capital employed*100 1916.66 (ii)Net profit margin ParticularsFormula20182019 Net profit600675 Sales revenue48006000 Net profit marginNetprofit/Sales revenue*100 12.511.25 (iii)Current ratio ParticularsFormula20182019 Current assets15152070 Current liabilities6452220 Current ratioCurrent assets/Current liabilities 2.340.93 (iv)Debtors collection period ParticularsFormula20182019 6
Trade receivables9001200 Sales revenue48006000 Debtorscollection period Trade receivables/Sales*365 68.4373 v)Creditorspayment period ParticularsFormula20182019 Trade payable5702100 COGS34504350 Creditorspayment period Trade payable/COGS*365 60176 Return on capital employed is one of the significant ratio which has been determined to ascertain company's efficiency of using capital to provide return to its shareholders. It is expected to be 15% which indicates that company is capable of providing appropriate return by utilizing capital. From the computed result for the two years of performance is 19 & 16.66% respectively. On the basis of obtained figure it can be interpreted that organization performance is in decreasing trend which reflecting reducing capacity of using capital for generating higher return which maintain with bench marking of industry (Dayıoğlu, 2021). This downward falling position reflects that company may face situations like less ability to attract & retain investors, bad reputation, losing competitive advantages, etc. this can result in reduced efficiency and progress of company to accomplishment of objectives. This is indicating that SKANSKA PLC (SP) should payattentionon takingsuitableactionsinturn greaterabilitymake better performance of company to achieve objective of expanding operational practice in industry. The methods that can be applied by firm for improving the organizational growth and productivity comprisesreducing cost of production, eliminating irrelevant aspect, proper allocation and utilization of resources, diversifying r capital raising method to mitigate risk, etc. These techniques will share in modifying organizational growth & productivity. 7
NetprofitMarginisconcernedwithascertainingefficiencyofcompanytoearn profitability from sales so that greater liquidity can be derived. These helps in assessing how an organization generate revenue by declining cost of goods sold, etc. On the basis of derived output regarding net profitability for the present and previous year involves 12.5 and 11.25% respectively. From the 2018 to 2019 net profitability margin has been declined which is as well higher than ideal margin of 10%. From making comparison it can be articulated that company's efficiency has been reduced as per the previous margin. It may influence decision-making criteria ofvarious stakeholders like investors, suppliers, financial institution, competitors, etc. The decreased margin may affect firm by shifting the attention of investors towards competitors organization (WANASIDA and et.al.,2021).The negative results include less liquidity, less workingcapital,inabilitytomeetunforeseencircumstances,etc.Therearevarietyof approaches which can bye utilized by firm in order to modify the prevailing situations. It becomes essential for the enterprise to take some serious measures for taking firm towards success. These methods include lessening cost of goods sold, utilizing suitable pricing strategy, selling more goods, covering larger market share, obtaining raw material at cheap expenditure, etc can result in making changes in current performance. These approaches can help in improving SKANSKA PLC's net profitability margin in turn greater stability in sector can be achieved. SP can concentrate on forecasting demand so that proper operational practices can be conducted to meet market forces. This will contribute in attaining greater liquidity through higher profit s that can provide opportunity to accomplish object of expansion in Europe. Current ratio is associated with estimating efficiency of firm to overcome short term liabilities with help of assets. Current ratio of SKANSKA PLC for the year 2018 and 2019 is 2.34 and 0.93 times respectively. From the analysis of current ratio it can be identified that 2.34 times outcome of 2018 which is greater than ideal ratio of 1.2 -1.5 times. As compared to this, the current performance of enterprise in 2019 is 0.93 times that is lower than the standard bench marking.This is negative indication of organization that need to be improved in order to get sustainable position in industry. It can adversely influence processing of company by creating bad image in industry that can impact trustworthiness and credibility (Kee, binti Juseef and binti Shamsuddin,2021).Stakeholders like creditors, lenders and suppliers may make unfavorable decision for the SKANSKA PLC that can outcome in non accomplishment of objectives. The maincausefortheachievedoutcomeisimproperinventorymanagement,inappropriate 8
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strategies and methods to continue operational practices. These results can be improved by bringing certain changes in company which can be cash & equivalent & decreasing liabilities. It involves pay off liabilities, selling off unproductive assets, rising shareholders funds, cutting overhead expenses, etc These will contribute in inclining ability to overcomes short term liabilitieswhichmayinclinesustainability.Itwillmakestakeholderssatisfiedandhelp enterprise to retain investors for longer duration. This will increase capability of enterprise to meet organizational objectives in turn better performance of enterprise. Debtorscollectionperiodhelpsinassessingthathowanorganizationeffectively achieve due payments (Holzer and Ballard, 2021). This play significant role in maintaining liquid position in effectualmanner.These account is created by firm for selling the goods on credit basis. From the calculated ratio it can be interpreted that for the year 2018 and 2019 performance of company is 68.43 & 176 days respectively.It is one of the crucial indicator of organizational performancethat can be measured with help of availability of funds through declining chances of bad debts. There are several non favorable aspects that can rise due to enhancing days of collecting payments from the customers. This can be outcome in lower availabilityoffunds,higherriskofdefaultpayments,lesscredibility,ineffective accomplishmentoforganizationalobjectives,etc.Thesecancreateadversebusiness environment which may tend to impact financial condition of firm. For making improvement there are various techniques which can be applied to execute changes (Strough, Wilson and de Bruin,2020.). It comprises paying attention ob credit policy which is responsible for deciding the terms & conditions for dealing with debtors.The few other course of action which can be taken into consideration includes providing discount & combo offers, altering payment terms, comprisingdiversemethodofcollectingpayments,establishingautomaticcreditcontrol, externalcreditcontrol,improvingstockcontrol,etc.Havingthesemethodscanlargely contribute in achieving leading position in industry by increasing liquidity. By applying this pattern of payment collection firm will become able to improve organizational performance. Creditors payment period as calculated in the table has increased from 2018 to 2019 that is, from 60 days it has drastically increased to 176 days. It is an important ratio to evaluate the efficiency and liquidity of company as it indicates how much time a company takes to settle their dues with creditors on time. A longer payment period can be beneficial to organization because it means a company is having surplus funds in hand to invest it in short term ventures. 9
However, SKANSKA plc is taking 176 days which is quite a longer time, and it can adversely affect the credibility. It indicates that firm is not having enough money to make cash payments on time. Suppliers can impose credit restrictions and can describe it as a bad customer. Organization needs to maintain a healthy payment period by keeping adequate funds in hand to meet its short term obligation on time and have cordial relations with suppliers and creditors. It can also improve this ratio by drawing budgets according to market analysis and spending only what is required. Another way to reduce payment period is by maintaining stock levels which can be done by following LIFO, FIFO and HIFO method. CONCLUSION From the above report, it can be summarized that accounting and finance function are the most important function in any company to survive and grow in competitive market. These two functions assist in planning, organizing and controlling the financial activities of organization. It can also be articulated that these function provide financial data that is required in preparing budgets, strategies, policies, etc. The report also concluded there are various duties and responsibilitiesassignedtoaccounting&financefunctionsuchasmaintainingfinancial statements and interpreting them to all stakeholders. Report further calculated various ratios to evaluate the financial condition of SKANSKA Plc. After analysing ratios, it can be depicted that there is a need to take several measures in order to improve the overall financial performance of company. Organization can improve its current ratio by employing unproductive assets to better use, reducing collection period by making faster collections from debtors or by accepting online payments (Wadhwa, 2019). Another way to enhance performance is to enhance the return on capital employed by increasing net income of company. It can resort to social media marketing practices for enhancing sales of company. 10
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Valaskova, K., Bartosova, V. and Kubala, P., 2019. Behavioural aspects of the financial decision-making.Organizacija.52(1). Wadhwa, B., 2019. Financial ratios: The precarious core of fundamental analysis.Frontiers Journal of Accounting and Business Research.1(1). pp.33-35. WANASIDA, A.S. and et.al.,2021. Millennial transformational leadership on organizational performance in Indonesia fishery startup.The Journal of Asian Finance, Economics, and Business.8(2),. pp.555-562. Yue, P., Gizem Korkmaz, A. and Zhou, H., 2020. Household financial decision making amidst the COVID-19 pandemic.Emerging Markets Finance and Trade.56(10). pp.2363-2377. Online WhatisAccounting?2021.[Online].Availablethrough: <https://corporatefinanceinstitute.com/resources/knowledge/accounting/accounting/> 12