Financial Decisionmaking

This report discusses the essentials of duties, functions, and roles of finance and accounting in financial decision making. It also includes a financial analysis of SKANSA PLC and the computation of ratios to evaluate the company's performance.

Financial Decision-
making

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Critical evaluation of essentials of duties, functions as well as roles of finance and accounting:
......................................................................................................................................................3
TASK 2............................................................................................................................................7
Computation of ratios by utilizing financial statements of SKANSA PLC and commenting on
the performance of company:......................................................................................................7
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial decisions refers to the decisions made by management of an organization in
relation to allocation of funds. Financial decision making process incorporates evaluation of
various investment alternatives and selected of most appropriate investment opportunities for the
purpose of maintaining risk factors associated with it. Further, costs and risk involved in raising
funds for business is evaluated through financial decision-making and level of control is imposed
accordingly (Antonietti, Borsetto and Iannello, 2016). This report is based on financial analysis
of SKANSA PLC. This company operates in construction sector and was founded in 1984. Firm
is focusing on expanding its operations in other countries of Europe in upcoming ten years.
Further, importance of duties, roles as well as functions of accounting and finance department is
evaluated. In addition to it, financial statements of company is analysed by calculating its ratio
analysis, which enables management of on organization to investigate about financial
performance of an entity.
TASK 1
Critical evaluation of essentials of duties, functions as well as roles of finance and accounting:
Accounting: It can be explained as a procedure of recording, sorting, summarizing as
well as presenting the transactions entitled in an enterprise that is related to finance. Accounting
is also termed as a language of business. Hence, accounting department of an organization is
responsible for recording of financial information of business (Caruana and Farrugia, 2018). This
information plays a vital for for enhancement of strategic planning process regarding
management of finance by internal management of SKANSA PLC. Financial information of an
entity serves as a tool for showcasing financial position of company. Functions, duties and role
of this department in a company is described below:
Roles, duties and functions of Accounting department: Following are some roles,
duties or functions which is performed by accounting department of an entity along with its
importance:
 Auditing: Auditing refers to activity of examination and inspection of financial records
of an entity for the purpose of determining if this information is accurate or whether it is
in accordance to standards and regulations of accounting (Eniola and Entebang, 2017). In

other words, auditing activity of accounting department of SKANSA PLC indicates
evaluation of company's financial statements.
 Taxation: Another vital role that accounting department plays is to analysis of tax
liabilities of an enterprise. Accounting department manages tax matters of SKANSA
PLC. Its role is to manage file returns, making representations in front of tax authorities
and settling of tax liabilities of an organization in accordance to stated laws. Further,
accounting department provides planning advice related to tax or investments.
 Maintaining books of accounts: It is one of the most vital role of accounting
department. It pinpoints maintenance of systematic records in relevance to financial
transactions of SKANSA PLC. This is essential for evaluation of financial information
enterprise during a period of time. Books of accounts is maintained for the purpose of
enhancing planning for business operations for upcoming period (Garg, 2018).
 Recording Fixed Assets: for effective functioning of an organization, maintenance and
record keeping of its equipments and other fixed assets is essential (Huang, Yang and Tu,
2020). Accounting department plays a role of recording information related to fixed
assets of SKANSA PLC.
 Management of inventory costs: Accounting department manages the cost or expenses
that company pertains on purchase and management of inventory over a period of time.
The purpose is to ensure that expenditures on purchase of raw materials and overhead
expenses does not impose negative impact on cash flow of SKANSA. Hence, balance is
imposed between level of inventory that should be purchased with the motive of
satisfying company requirements (Romiszowski, 2016).
 Payroll: Payroll function of accoutring department indicates its responsibility to pay
salaries and wages to workforce of an organization accurately. It also involves payment
of bonus, monetary benefits, as well as commissions (Rothman, 2017). Hence,
accounting department overviews and records about vacations of employees, time off and
sick days took by them etc. This department is responsible for ensuring that employees
are paid on time and in accordance to their working hours. It also covers monitoring of
payroll taxes and proper reporting of salaries paid and outstanding.
 Cash receipts or payments: Positive of incoming flow of cash is termed as cash
receipts, while, on the contrary outflow of cash from business to another individual or

entity is termed as cash payment. It is the function of accounting department to record
transactions related to receipt or payment of cash. It helps management of SKANSA PLC
in analysing the position of cash flow in company.
 Accounts receivable and payables: Maintenance of accounts of accounts receivable and
payable is another function of accounting department. Account receivables indicates
those amounts that SKANSA PLC have to collect from debtors, while, accounts payable
indicates that monetary value which firm have to pay to creditors. Recording of this
information by accounting department of an organization helps company in identifying
receipts and payments that should be made. Further, by recording of these transactions,
accounting department also plays a role of identifying payments that should be received
from customers and payments that is to be paid to suppliers (Inani and Gupta, 2017). It
eliminates chances of bad debts and ensures proper management of cash flow in an
organization in such a way that business operations are not hindered.
Financing: Financing activity indicates management of funds in an organization. It
further covers allocation in an enterprise in such a way that monetary value of business increases.
Finance encompasses of creation and management of finance as well as monitoring of financial
activities incorporated in an enterprise (Keohane, 2018). Hence, financing department is
responsible for acquisition of funds for business and its management and planning.
Functions, roles and duties of financing department: while evaluation the functions
and responsibilities entitled with the financing department of an organization, following factors
were identified:
 Estimation of capital requirement: One of the foremost function of finance department
of an enterprise is to estimate the requirement of capital in business. Capital can be
required for various purposes such as for purchasing fixed assets and meeting
requirements of working capital (Schwarzbichler, Steiner and Turnheim, 2018). Hence,
financing department evaluates long term as well as short term strategies of SKANSA
PLC and aligns it with the requirement of fund by evaluating whether expansion plans, or
implementation of advance equipments are vital for achieving business targets.
 Sources of fund: It is the duty of finance department to evaluate sources of fund which
should be utilized by SKANSA PLC. Sources of funds are of various types such as
through equity, banks, financial institutions, public deposits, venture funding or

debenture-holders. Finance department evaluates various sources of funds and classifies
them on the basis of time period, risk factor and controlling power associated with it.
 Cash management: Management of cash involves estimation and monitoring of cash
inflows as well as cash outflows. This is done to evaluate whether SKANSA PLC is
about to face any shortage of cash flow in business. Because insufficiency of working
capital or cash flow in business leads to hindrance in activities of business and effects its
sustainability.
 Evaluating financial performance: It is a responsibility of financial department to
analyse financial statement of SKANSA PLC and investigate financial performance of
company accordingly. By evaluation of financial status of an enterprise, finance
department can implement various techniques related to financial control such as, break
even analysis, ratio analysis, budgetary control etc. This ensures achievement of financial
sustainability by business (Khan, 2017).
 Fund procurement: It pinpoints role of finance department in issuing prospectus,
negotiating with financial institutions, etc. along with evaluation of expenses involved in
activity of funds raising, various other activities such as investment choices and
conditions of market is also analysed by this department.
 Profit disposal: It involves decision-making process regarding the amount of money that
should be kept as reserves for future investments as well as the amount of profit that
should be reinvested in company doer expanding scope and operations of SKANSA PLC.
 Dividend distribution: Finance department of an enterprise takes decisions regarding
dividend value that should be distributed among shareholders. It is one of the most vital
decision that financing department makes (Martin and Gomez-Mejia, 2016) . Amount of
dividend should be decided in such a way that expectations of shareholders are met and
probability of SKANSA PLC is not affected negatively. Hence, implementation of
optimum dividend policy is ensured by finance department.
 Decision regarding investment: Finance department of an enterprise have to make
decisions related to allocation of capital in various departments. Hence, finance
department have to check reliability and risks associated with investment alternative with
the use of capital budgeting for the purpose of providing maximum yield to SKANSA
PLC in future.

Importance of accounting and finance department: There are several essentials of
accounting and finance department in business which are described below:
 Helps in performance evaluation: Finance and accounting department provides record
of financial information of SKANSA PLC which serves as an indicator of financial
position of business.
 Statutory compliance: Incorporation of proper accounting system by this department
helps in ensuring statutory compliance of business (Mukhametzyanov and Nugaev,
2016). Hence, it enables SKANSA PLC to properly address legal liabilities such as
payment of income tax, sales tax, VAT, pension funds etc .
 Future projections: Accounting department keeps track record of financial transactions
incorporated in SKANSA PLC. This helps management of company in analysing
financial performance of an organization and formulating strategies for increasing
productivity in future.
TASK 2
Computation of ratios by utilizing financial statements of SKANSA PLC and commenting on the
performance of company:
Return on capital employed: Return on capital employed helps in finding the company
profitability and the efficiency and helps understanding how well the company is generating
profits from the capital (Mumtaz, Saeed and Ramzan, 2018). This ratio is used by the managers,
stakeholders to analyse the company for the investments and for the better results in the near
future and it is similar to the return on invested capital.
Formula: EBIT/ Capital Employed
Return on capital employed
Particulars 2018 2019
EBIT 750 975
Capital employed 3825 5850
Results 19.61 16.67
Total assets 4470 8070
Less: Current liabilities 645 2220

Capital Employed 3825 5850
In this ratio, asset in the 2018 of SKANSA PLC is 4470 and in 2019 the asset is 8070
which is more than the 2018. As, company has profit before tax is 750 in 2018 and 975 in 2019,
that shows higher in 2019. But Using this ratio it is determine that Company has 16.67 in 2019
and 19.61 in 2018, which shows that company is able to generate the revenue from its capital
efficiently in the year of 2018 which is more than the year 2019. Company has use its capital
more effectively in 2018 year as despite of lower asset it manage to achieve higher revenue in
2018 year. As this ratio interpret that how effective company is generating the profit out of
capital invested in firm, that comes with proper execution of its assets and liabilities together. It
shows efficient use of capital employed and higher the ratio is more favourable condition of firm.
At the last it is interpreted that company has good capital deployed ratio in 2018 that depict
company has effectively use their capital to increase their profit.
Net profit margin: It helps in identifying the percentage of the profit the company has
generated from its total revenue. It can be divided by calculating net profit by total revenue
which can be expressed in term of percentage. It helps in representing that what percentage of
the sales has turned into the profits and what results we get from that.
Formula: Net Profit/ Sales
Net profit margin 2018 2019
Net profit 600 675
Total revenue 4800 6000
Results 12.5 11.25
Ratio figure shows in SKANSA PLC that in 2018 net profit is 600 and in 2019 net profit
is 675. Revenue is 4800 in 2018 and 6000 in 2019 that shows sales is higher in 2019 as
compared to 2018. But net profit per sales amount is greater than in 2018 which 0.125 and 0.112
in 2019, which depict that net profit margin in 2018 is greater in 2019. It measures how
effectively company operates its sales and converts into profit. In 2018 company has earned net
profit ratio of 12.25% and in 2019 ratio is 11.25% which shows that in 2018, company more
effectively turn its sales into profit and able to achieve more percentage of profit out of revenue.
It is important ti calculate this ratio as it help in determining company's financial stability and
better performance in order to archive desired objective. Company has overall perform very well

in the year 2018 and maintain its efficiency despite of having operating expenses. It will impact
positively in the image of organisation, as this ratio is important to evaluate its performance and
efficiency. If company has higher net profit margin ratio than it will show positive sign or
company' performance and other investor will able to invest in their organisation.
Current ratio: It is a ratio which helps in determining the firms ability to pay all its short
term debt within a year. It helps in telling how we can maximize the current assets so that all
debts can be paid easily (Proctor, 2018). It is also known as working capital ratio and helps in
determine the debts in near future. It can be calculated by dividing the current assets by current
liabilities.
Formula: Current assets/ Current liabilities
Current ratio 2018 2019
Current assets 1515 2070
Current liabilities 645 2220
Results 2.35 0.93
In this current ratio SKANSA PLC has 2.35 in 2018 and 0.93 in 2019, which shows that
company has more current asset than current liabilities in 2018 and less current asset than current
liability in 2019. That shows company has better liquidation position in 2018 and able to pay its
short term obligation within short period of time and better position to meet its current liabilities
and maintain efficiency in shorter period of time and ability to pay its liabilities. This ratio
indicate good position of company and how much risky condition related with its non payments
of receivables (Shapiro and Hanouna, 2019). As, in 2018 company is in good position to pay off
its obligation to the comparisons in 2019 year.
Debtors collection period: It helps in calculating the amount of time requires to collect
all the trades. If the company is taking the less time to collect the debt the company will be more
efficient but if the company takes time to collect the debt which means the company financial
position is not good in near future.
Formula: Debtors/ Sales *365
Average receivable Days 2018 2019
Debtors 900 1200
sales 4800 6000
Results 68.44 73.00

In this ratio, SKANSA PLC is able to collect its receivables in 2018 in approximately 69
days in a year and in 2019 company is able to receive in 73 days. This indicate that in 2018 the
company is more likely to collect its invoices than 2019, it take more time in 2019 as compared
to 2018. So, in 2018, company has able to collect its receivable and invoice and shows how
effectively firm get this short term period of time. It depicts that this will be benefit for
organisation to recollect its invoices and maintain its financial stability. It also how much debtors
can influence the performance of company and way it impact it.
Creditors collection period: It represents the time in which the current liabilities of the
company remain outstanding . It can be calculated by dividing the Trade payables by the total
revenue generated in 365 days (Ren, Xu and Gou, 2016). Higher the days it is beneficial for the
company position in the future.
Formula: Trade payables/ Sales *365
Average payables days 2018 2019
Trade payables 570 2100
Sales 2700 4800
Results 77.06 159.69
In this ratio SKANSA PLC the company is able to pay its obligation in 77 days in 2018
and 160 days in 2019. This depicts that company is taking very long time to pay the amount in
2019 and lesser in 2018, this shows that organisation has very financial performance in 2019 as
compared to 2018 and it will impact negatively on supplier has they do not meeting the condition
(Schreyer and Martin, 2020). This ratio is helpful for creditors point of view as if company is
able to pay fast, than it will be benefit for them. If company is unable to pay as per the time
then, it supplier will not lend money to company. So, there should be moderate speed of firm to
pay obligation, if company is paying late than it shows worsen financial performance of
organisation. This is also known as creditors day and important ratio for the point of view of both
company and organisation.
CONCLUSION
By concluding this report it can be stated that financial decision making is the method
that is utilised for evaluation of business funding and assessment of financial situation of an
organization. Decision making process in relation to finance comprises of decisions regarding
best suited investment proposals for an enterprise, dividend payment policies and management of

working capital. In addition to it, this report states that accounting and finance department have
various roles, duties and functions in business. This functions plays an important role in
managing funds of business and ensuring its smooth flow of business operations. It also provides
financial sustainability to entity. Ratio analysis is a method of evaluating financial statements of
company and identifying core competencies as well as weak areas. Therefore, it serves as a
financial performance indicator of business and helps finance department in formulating
effective strategies for performance enhancement.

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